I recently interviewed John Morris from Cushman & Wakefield who shared his views on where the trucking industry is headed.
I have heard some concerns in the trucking industry about the future, what is the issue here?
Obviously, the biggest concern here is the economy. If you believe that the economy is recovering or will recover in the near future, this means more goods and services will ship via truck. 75-80% of the goods shipped in this country do ship via truck as compared to planes and trains.
At some the demand for those services will rise, perhaps even significantly. In the trucking industry today it is really an industry in disarray. It has always been a low margin industry. The inflation rate on trucking pricing, or what a carrier can charge for a load since 2000 has been zero. Surviving in an industry where prices haven’t gone up in 11 years is not easy. Because of this as well as 3 years of a recession it is an industry where rates remain depressed, margins remain zero or negative in many cases.
What is happening now is that the equipment and people shortages that the industry is facing are leaving some risk for all of us who shop and buy. It may at some point in the future take a lot more money to get those items to our stores.
What are the major variables involved?
There are 4 major variables. Overall, the trucking industry since the heyday back during an economic boom in 2006 has lost about 20-25% of its capacity. This has been due to the fact that freight tonnage, or things shipped since 2006 has dropped 30%. The decrease in capacity or supply, while significant at 20-25% has not even kept up with the plunge in demand. Many people think that supply and demand are just about at balance at this point.
But the major variables involved which many see as a risk over the next few years are a risk to pricing and a risk to service. The first major variable would be equipment. When all of that equipment went dormant much of it was sold and much was scrapped. Many of the carriers in business went out of business. The assets are now owned by banks and sitting idle and not likely to be readily available to be turned around for capacity quickly.
The second major variable is drivers. Driving a truck for some people is not an appealing career. Much of the generation coming into the workforce would not consider it to be a job option. Because of this, in the middle of the last decade the industry was already short about 200,000 drivers to meet demand. That figure is a little lower at about 125,000 today, according to the American Trucking Association (ATA).
However, it is expected to balloon, if and when economic recovery is sustained, to as many as 400,000 drivers. If we are in a market that has 30% less capacity and 400,000 fewer drivers than needed you would expect a lack of stability in pricing and service.
John thinks the other major variable is regulation. There have been significant carbon and engine regulations over the last few years. This means that much of this equipment that is dormant or retired and dormant is no longer eligible to travel. As the economy was softening many carriers had delayed the investment required in new engines and tractors to meet new Federal regulations.
They haven’t kept up and this is another reason why capacity will be slower in responding. There are also other kinds of compliance and Safety & Accountability Initiatives, such as Hours and Service, state reporting of crashing, greater carrier scrutiny, and certainly as you would expect and hope higher standards for drug and alcohol testing.
All of this means what some people call a ‘perfect storm’. Wakefield & Cushman’s practice has been predicting an upward rise in truckload pricing for a year and a half now. They have all been surprised with the recover-less recover. However, John thinks at some point it will be quite a shock to the system.
What do you see happening as a result of this?
In the economic boom of 2006 truckload pricing was averaging long haul roughly $1.65 per mile, before fuel. Fuel prices have gone up, down and up over the last few years. One could expect with fuel, which makes up 25-30% of over the road cost, to be constrained along with drivers and equipment. One could expect that over the road costs could at some point over the next 24 months reach over $2.25 per mile, with significant price increases.
There was a period last year when the recession was in principle over. People were returning to shipping. Inventories had been replenished. There was one of the sharpest rises in truckload pricing over a 3 month period which the industry had never seen.
John and his team talk to clients now who tell them that in some parts of the country they can’t get equipment. The carriers they are working with have little or no capacity to offer. It is making them seriously consider where they are and who they are using.
This points to regional networks and national networks. John thinks there are impacts to the overall cost of transportation and what we all pay for goods. As the economy returns to some level of normal GDP growth everyone believes there is a risk of inflation. This along with fuel and gasoline is one of the major risk factors involved in contributing to what could be significant rates of inflation over the next 18-36 months.
About John Morris
John Morris is head of Cushman & Wakefield’s global consulting group, a privately held real estate services firm. The management consulting company within this firm does most of their work with clients of the larger company. They help tenants and landlords who have questions about their real estate and their facility network. They conduct all of the strategic and tactical analysis around what to do before they take a specific decision regarding their real estate.
John’s primary area of focus is supply chain and logistics. He works on things such as network modeling and site selection, labor studies and incentives. He has been with Cushman & Wakefield since 2005. Prior to this he was doing similar work at another consultancy in Chicago.
John C. Morris
Senior Managing Director
Global Business Consulting
Cushman & Wakefield
6133 River Road N., Suite 1000
Rosemont, IL 60018