November 2008, TruckingInfo.com - Cover Story
Better batten down the hatches and tighten the belts, motor carriers. This thing is going to get worse before it gets better. That was the message last month from economic experts speaking to trucking and transportation audiences.
The consensus is we're currently in the beginning of a recession that will last until at least the middle of next year - a recession that will look much more like the recession of 1981-1982 than the two less severe ones we've had more recently.
As the credit market fails and the economy slides into full-blown recession, trucking companies are being advised to tend to basics: Improve cash management and operating performance, and cultivate relationships with your lenders.
As the market came crashing down in early October, Wachovia Senior Economist Mark Vitner predicted during an panel discussion on the economy at the American Trucking Associations' annual meeting that a soft freight market will be further impacted by the credit crunch, causing businesses to pull back on production and freight demand. He predicted a "long, hard recession through 2008 and throughout 2009 that could be the worst in 25 years," noting he had revised earlier estimates of growth downward 2 percent.
ATA Chief Economist Bob Costello summed up the freight situation, saying that the first half of 2008 wasn't "absolutely terrible," but he said it will get worse before it gets better. Fleets are in for more woe, compounding the business failures that already have seen 1,905 fleets fail in the first half of this year. "It all depends on how long it will take to get credit flowing."
Vitner predicted a recession for as long as 16 months, nearly twice the length of the more recent downturns. Fox News Correspondent Stuart Varney, who moderated the panel, was less pessimistic, saying that in a year we will be looking at the other end of the trough.
As HDT went to press in mid-October, FTR Associates gathered a panel of experts for a conference call to discuss how the past several weeks of economic turmoil and the government's efforts to deal with it would likely affect trucking and intermodal business. Economic predictions had turned a lot gloomier than their previous conference call just three weeks earlier.
Bill Witte, director of the Center for Econometric Model Research, Truck, Rail & Intermodal Freight and Transportation Environment, said the predictions of even a couple of weeks earlier for a slow but positive GDP growth of around 1.8 percent had been downgraded to projections of a recession of 1.2 percent, with rising unemployment and the loss of 2 million jobs before the economy starts to turn around. In fact, said Witte, there's every indication that we will have at least four quarters of negative growth, indicating not only a recession but one that will be relatively long-lasting. It could rival the recession of 1981-1982, he said, deeper and longer lasting than either of the two more recent ones.
Adding to the gloom, Noel Perry, senior analyst with FTR, said the impact will be felt by both trucking and intermodal. "We're now in the third year of declines in truck, rail and intermodal freight. This has not happened since the early '80s." Over the last five years, he said, freight volumes have declined for trucking by 2.5 percent, or an average half percent each year. He's also concerned about the possibility of bankruptcies among large discounters or retail establishments in addition to the obvious stress in the automotive sector.
Jon Starks, FTR transportation analyst, said we may also see more bankruptcies among trucking companies. "Bankruptcies have tended to be a little guy phenomenon, but that may be starting to change as we keep lengthening this downturn," he said. "Recently Gainey Corp., the number 16 carrier in Transport Topics' for hire carriers list, filed for Chapter 11 and said it was specifically due to the credit crisis. This cash crunch is switching from fuel to financing, and we fully expect bankruptcies to be continue to be elevated throughout 2009 thanks to this weak freight and tight financing environment."
FROM CREDIT CRUNCH TO COMEBACK
For carriers that can weather the storm of thin freight volumes and tight credit, there are good times ahead. The major carriers are relatively well placed with sufficient cash (though a couple of heavily leveraged carriers recently taken private are possibly less liquid). But the credit problem likely will hit middle and small size carriers, and of course owner-operators. Fuel pricing issues have eased somewhat, the FTR panelists said, but the available cash sources for the small operator - the banks and other credit institutions, the cash from their own resources or from family - are just not there.
For companies with good credit that need to buy equipment, the captive programs of the OEMs will be available to finance deals, but even there, the cost of the money will reflect the tighter credit market.
"We had easy, easy credit for such a long time," says ATA's Costello. "Those days are probably gone, at least in the near term."
Costello and others observed that while the credit crisis has so far been confined mainly to lending among banks, the impacts of that event are affecting the availability, price and terms for borrowed money. The Federal Reserve reports that credit standards have tightened across the board, but as of mid-October, credit was still available to borrowers who could make the grade.
"We're OK for a couple of years," said Daniel Ustian, CEO of Navistar International Corp., of the truck builder's ability to provide financing for its customers. "We put our facilities in place some time back that will take us through the next couple of years."
He added, however, "It's not free. There's more interest now."
A spokesman for Daimler Financial, which provides lending services to Freightliner, Sterling and Western Star, among others, agreed. There have been no big changes in credit availability, he said.
And there was a similar view from the sales floor. Todd Sipe, a sales rep for a Freightliner dealer in Wichita, Kan., said he has not seen a problem with credit yet. "I don't see where anybody's been turned down for financing because credit's not available."
It's the freight slowdown that's putting a lid on Sipe's business. His customers are mostly owner-operators and are hesitant to move in this market. His message to them is to cut back on expenses by slowing down to conserve fuel and try to hang in until things turn around.
"I think there's going to be a shortage of trucks next year to haul freight, and I think their rates will go up."
Costello's take is that while the credit situation is not catastrophic, carriers are finding that credit is more of an issue than it used to be.
"Fleets [say] that while they used to buy heavy-duty trucks from three suppliers, now they get them from only two [because] it's harder to get financing," he said.
The impact is harder on smaller fleets, he said. "Some smaller fleets are not getting credit at truckstops any more. They used to be able to pay later but now have to pay on the spot."
Also, shippers going through the same wringer are starting to extend their terms - payment in 45 days instead of 30, for example. A carrier whose cash flow has been affected by this sort of thing no longer can be sure that the bank will approve a short-term bridge loan to cover payroll, Costello warned. "Those are the sorts of thing that I think will start to pop up."
Like Sipe of Wichita, Costello believes that the carriers who can get through this will enjoy a bountiful rebound.
"There is so much capacity going out of the market - has gone out of the market and will continue to go out of the market - that those who are left standing at the end are going to be in a very good position," he said.
"I can't forecast when it will turn around. I would say at this point that the turn [will be] later rather than sooner," Costello says. "But when it does turn, it's going to turn so unbelievably well."
The FTR panelists offered similar light at the end of the tunnel. But when will this happen? Likely not until 2010 or maybe even 2011.
The credit situation has some predicting the demise of the owner-operator, a prediction we've seen off and on for the last 20 years or so, says Jon Starks. But he points out that the owner-operator is the "swing" capacity these days. "While they are undoubtedly going to have to weather a pretty rough road, when trucking comes around - likely in 2011 - the owner-operators will be back to provide the short-term capacity increases that will be necessary."
At that time, rates will also harden, predicted the FTR panel.
HOW TO SURVIVE
Which raises the question: How does a carrier get through to the expected good times ahead?
The Truckload Carriers Association provided assistance recently with a webinar on the capital markets featuring experts from the banking and investment community.
"My expectation is that unless there is a dramatic turnaround in the capital markets, we're going to see lenders become increasingly selective in approvals - particularly for new clients," said David Thomas, senior vice president of the Specialized Industries Group of Bank of America.
Thomas emphasized the importance of cultivating a long-term relationship with a bank. "Lenders never like surprises," he said.
Lenders are getting stricter about the information they require from borrowers, and are focusing more intensely on cash flow. "It's not unusual to ask borrowers to prepare a fairly detailed cash flow projection over the near term, from perhaps one month to three months."
This projection typically will have to be accompanied by a plan for improving operating performance. And the plan will have to be more detailed than a statement such as, "We think that the next four to six months will improve because capacity is going to shift," Thomas warned.
"I really don't think that's going to be viewed as an acceptable response."
Thomas suggested that carriers beef up their financial staff, or get outside help to put together a detailed cash flow plan. "Look for help from a firm that has experience with what the bank wants, in the right format."
He also said that banks will tend to support clients who are using ancillary services, such as cash management. "Those will be the ones that the banks will say, we must continue to support these clients at all costs."
Conversely, banks will find it easier to turn away from the type of transaction in which a carrier puts out a request for proposal to multiple banks for a loan, with no ancillary business attached. "Banks will be extremely selective with new clients, and when they do take them on they will commit smaller dollars than in the past, and will place increasing focus on ancillary business opportunities."
David Ross, vice president, Transportation & Logistics Equity Research, Stifel, Nicolaus & Co., agreed that in this climate the barriers to entry into trucking are higher than ever. "There are not a lot of people out there wanting to finance a trucker in this market."
The challenge will be hardest for small carriers and owner-operators, Ross said. Carriers that do not have sales and marketing capability and must deal with brokers are at a disadvantage. "They are leaving money on the table because the shipper is paying not only the carrier but [also] the broker."
And the only thing owner-operators can do more cheaply than a company is drive. "They can't buy fuel cheaper, they can't buy trucks cheaper, they can't buy insurance cheaper, all they can do is pay themselves less than a company would pay a company driver."
Ross' counsel: Focus on day-to-day pricing and make sure that fuel economy is good and getting better. Echoing Costello and Sipe, he said that for those who make it through these tough times, "it's going to be very good in [a] year or two."
WHAT THIS MEANS FOR TRUCK SALES
The slowing of freight and the credit crisis do not spell good news for the truck manufacturers. Analysts say that earlier predictions for a Class 8 market for 2009 of close to 240,000 (ACT last report) or 225,000 (Ward's) are no longer tenable.
Eric Starks, president of FTR Associates, puts North American factory shipments for 2009 closer to 150,000, after allowing for 20,000-25,000 fewer units due to lower expected freight volumes and as many as 40,000 units that will not be pre-bought against the 2010 EPA emissions mandate. His point: Basically no one is going to buy trucks to park next to the trucks already parked against the fence.
More optimistic analysts have been predicting that normal replacement cycles would drive some demand next year, but Starks expressed doubts. While it is true that many long-haul operations will be running 2005 and 2006 trucks that according to more recent wisdom are ripe for replacement, he said, in historical terms, that is not such an old fleet - and the real measure should be miles, not years. Many of these old, new trucks still have a lot of useful miles, so fleets can delay replacement until the economy rebounds.
Starks was also depressing about trailer sales, which look on track to be under 100,000 units for the first time since the early 1980s. Currently the news is even worse, with sales running around 78,000 at an annual rate. And rail cars will do no better, with the current backlog disappearing to canceled orders or running out to the delivery dates and no new orders to support the manufacturing. Next year will see only 20,000 units, off from the 50,000 plus of a more normal economy.
Medium trucks sales are also set to suffer, with a predicted forecast of 135,000 for 2009, according to FTR Associates.
"I think the one positive is as we come out of this, the longer we're in a freight recession, the quicker we start coming out of it on the equipment side," Starks said. "So all of a sudden you have extreme tightening of capacity and we'll see some very strong and healthy builds for all segments of equipment demand. I think we'll see near record levels as we get out into 2012."