Aftermarket

FTR Economist Predicts Recruiting-Driven Capacity Crunch

April 08, 2010

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Despite a "very, very conservative" forecast for the economic recovery as a whole, an FTR Associates economist says we're facing a capacity crunch driven by a shrunken recruiting infrastructure and new government restrictions on drivers.
(Photo courtesy of Con-way Truckload)
(Photo courtesy of Con-way Truckload)


In an FTR webinar Thursday on "The State of Freight," Noel Perry, FTR managing director and senior consultant, said freight demand has already reached equilibrium with active capacity.

Perry predicts that we will see a shortage of 104,000 drivers before the end of 2010 and 215,000 next year.

Using a base case forecast from the University of Indiana, Perry explained that they expect the economy to experience a mild upturn, similar to the 2003/2004 recovery, which came after a mild downturn. "If we compare it to 1982, the last time we had a deep cycle, this forecast is well below what's normal after a deep recession."

However, he said, "Even with those conservative forecasts, there's a very good chance of significant truck shortages."

Improving Economy

Perry pointed to several key factors that show freight is already recovering.

Air freight volume, he said, is a leading indicator - people will pay the premium for air freight when they are short on inventory. "Air freight volumes have been rising very rapidly, both domestic and international; that tells us retailers are running out of stock, which tells us they underestimated demand."

Another factor Perry discussed was cross-border trade between the U.S., Canada and Mexico, which is showing good growth and another sign freight's recovering.

A U.S. ton-miles chart for all modes bottomed out in the second quarter of last year and has been increasing steadily ever since.

"One of the things to remember about this recovery is that it has a higher than normal manufacturing component," he said. "And when manufacturing is strong, so is transportation."

FTR is predicting that intermediate goods, a measure of manufacturing, will grow more rapidly than finished, or retail, goods over the next 10 years.

The FTR forecast for freight growth is a 3.8 percent growth year-over-year in 2010, then about a 4 to 5 percent growth rate over the next three years. "Those are good growth numbers compared to the average, which is 1 percent over the last 30 years, but they are conservative compared to previous upturns. So this is a very modest forecast we're looking at."

"Despite that conservative forecast, we are explicitly forecasting capacity problems."

Active Fleet vs. Total Fleet

When talking about capacity, many analysts talk about the actual number of trucks in existence. FTR goes a step further and looks at what it calls the active fleet.

If you are someone selling trucks, you're interested in that total number, Perry said. That heavy truck capacity utilization number, taking the total number of trucks required, divided by the total number available, is about 75 percent. So about a quarter of the trucks are parked along a fence or sitting in a used truck lot. That ratio needs to get up to at least 85 percent before the industry sees significant new truck sales, he said.

The active fleet numbers, however, tell a different story. The capacity utilization numbers for the active fleet, Perry said, "have recovered pretty spectacularly over the last nine months, because since the market bottomed out in March of last year, the fleets have been able to right-size, and their right-sizing has got us right back to about equilibrium."

"It is surprising to most people to figure out we are back to equilibrium already," he said.

Spot market prices are also improving. A chart from Baird in Milwaukee showed that 2010 numbers so far are tracking right along with those from 2008, which was a strong year for spot prices, Perry said. "We are in essence back to a normal seasonal pattern in 2010 as part of the recovery."

The Driver Pipeline

While there are still plenty of idled trucks out there that theoretically could be put back into service as the freight demand grows, FTR says, there's a big problem: You have to have drivers for those trucks. While the industry was busy right-sizing the number of trucks in its fleet, it was also cutting back on its recruiting infrastructure, because the demand for drivers was lower than the supply.

"As the requirement for drivers rises, as it always does in an upturn, it's rising above the capacity of the system to supply drivers," Perry explained. "And we're not talking about the availability of candidates; we're talking about the ability of the industry to process those candidates. The industry has been very careful to cut that overhead during the downturn and is being very conservative in re-adding it. So it is almost certain that as the marketplace expands, even slowly as we're forecasting, there will be a driver shortage."

Making matters worse, Perry says, is that the federal government is tightening regulations governing commercial drivers in a number of ways.

Because of the resulting capacity crunch, Perry said, we will see rates begin to recover rapidly. He predicts we will see truckload carriers back to normal profit margins by the end of the year.

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