How Much More Capacity Needs to Exit the Trucking Industry?

Implications

The persistent slump in U.S. industrial freight demand continues to take its toll on all modes of transportation carriers. Despite double-digit percent capacity coming out of various modes, there continues to be too many trucks chasing too little freight. When will the correct equilibrium arrive that will allow carriers to return to profitability?

Analysis

The slump in U.S. freight demand has reached 34 months, according to my charts. It's the longest slump since trucking was deregulated in 1980, and really shows no signs of a turnaround yet.

Begun in August of 2006, the slump continues as many carriers are reporting first-quarter losses as they continue to "feel for the bottom, " as one carrier executive said.

This is despite much capacity already exiting all modes of transportation.

An analysis by respected freight analyst John G. Larkin of Stifel Nicolaus, Baltimore, shows exactly how much short-term capacity has exited the market place, either voluntarily or through bankruptcies and closings of smaller carriers, mostly in the TL sector.

In TL, Larkin estimates that 18 percent of short-term capacity has left the market, with about 15 percent long-term reduction necessary. On LTL, the short-term figure is 8 percent, with 6 percent long-term needed. In rail and barge, 15 percent short-term capacity has left, but no long-term drop is needed, according to Larkin.

Express has lost 12 percent short-term capacity, with 8 percent long-term needed. Ocean has lost 11 percent, but needs no long-term reduction in capacity, Larkin says.

The anecdotal evidence supports Larkin's figures. There are more than 735 ocean vessels "parked" off the Singapore Coast because of double-digit drops in east-bound container freight from Asia. Ocean freight rates have collapsed, and may not recover for years. Chinese exports dropped 22.6 percent in April while in the Philippines, that level nose-dived nearly 31 percent from year-ago levels.

The American Trucking Associations' most recent for-hire Truck Tonnage Index shows a startling drop in March, usually a month when freight volumes tend to show an uptick. This year, ATA's index shows, March volumes fell 12.2 percent compared to year-ago figures. That is its lowest level since March 2002.

Rail freight volumes were off 22 percent in March. Overall intermodal freight levels dropped 16.4 percent, although domestic intermodal growth was up 4.4 percent in that period.

Air freight demand has evaporated, hurting the fortunes of both FedEx Corp. and UPS, despite the exit of rival DHL from the U.S. domestic market place. Shippers who formerly demanded next-day air freight services are discovering that second- and third-day ground services are serving their needs just fine, thank you.

The wonder actually is that losses have not been worse in transportation. Except for troubled U.S. trucking giant YRC Worldwide, where losses are approaching $1.9 billion over the last two-plus years, other carriers' losses have been rather mild.

Of course, most of the rest of the trucking industry is quietly hoping YRC's lenders get tough and perhaps cause a bankruptcy proceeding. At $9.4 billion, YRC has nearly a 27 percent market share in the LTL sector. Ironically, that may just be about the correct amount of overcapacity in that sector.