Nation’s Freight May Push Capacity Limits, Helping Boost Carrier Profits, Experts Say

Even as expectations for the nation’s economic growth remain subdued, trucking may be on the cusp of one of its most profitable rides ever as freight demand in 2012 pushes against the limits of industry capacity, according to industry experts.

The new year also could be historic in terms of regulatory changes, as federal officials continue to push for a ban on texting and cellphone use as part of a campaign against distracted driving. The Federal Motor Carrier Safety Administration is expected to issue new rules on driver hours of service and require the use of electronic onboard re-corders, while the National Highway Traffic Safety Administration is expected to implement a proposal to require electronic stability control systems on new heavy-duty trucks.

Congress will have to deal with highway funding legislation and may tackle proposals to increase truck weight limits and to provide federal oversight of bridge and tunnel tolls.

And, of course, it’s a presidential election year.

That makes Bill Graves, president of American Trucking Associations,“somewhat pessimistic” that much will get done in Washington.

“I think the die is pretty much cast as to what the relationship between Republicans and Democrats is going to be. So in that regard, if there are things that you want to see get done, you may be disappointed; 2012 may not be a very productive year.”

From a business perspective, the view is much more positive.

“The domestic freight market remains remarkably resilient,” David Tamberrino, an analyst for the investment firm Stifel, Nicolaus & Co., said in a report published Dec. 5.

“Supply and demand in the trucking sector are in balance, even though demand has recovered only about two-thirds of what it lost in the Great Recession,” he said.

Tamberrino said he expects freight rates to rise faster than inflation in 2012, and for both truck and rail operators to enjoy expanding profit margins.

A survey by Transport Capital Partners found that 61% of trucking executives surveyed in November expect volumes to increase in 2012, up from 45% in August, with only 2% of carriers expecting volumes to decrease, compared with 7.5% in August.

Three out of four executives surveyed said they also expect freight rates to increase.

“Most economists are seeing growth in the economy,” said Richard Mikes, a partner in Transport Capital Partners. “This is pushing more freight onto a very limited truck base, with shippers and brokers scrambling for trucks.”

Economists Nariman Behravesh and Nigel Gault of IHS Global Insight, an economic forecasting firm that provides data and analysis of freight trends to American Trucking Associations, said they expect the rate of gross domestic product growth to rise from 1.4% in 2011 to 1.6% in 2012.

“It remains a very muted expansion,” Behravesh and Gault said in a report published in November.

“We expect at least a mild recession in the eurozone, starting in the current quarter,” the economists reported. “That hurts export demand and corporate earnings, but not enough to tip the United States into recession.”

The risk of recession rises if Greece defaults on its debt “in a disorderly manner” and disrupts European and global banking systems, the report stated.

Another note of caution was struck by Andreas Renschler, head of Daimler AG’s truck unit, who said waning confidence, if it persists, could turn a modest slowdown in the global economy “into an outright recession.”

“We are monitoring the developments very closely, but we don’t see any reason for panic,” Renschler said in remarks prepared for the Tokyo Motor Show on Nov. 30.

ATA Chief Economist Bob Costello said he expects production and sales of new trucks and trailers to remain strong in the next year, as fleets continue to replace older equipment while at the same time keeping a lid on fleet expansion.

“There will be small capacity additions,” Costello said in a briefing for industry executives in late October. “But it looks like companies are doing it only where they have business.”

Other factors — including a possible reduction in the number of hours each day drivers can be behind the wheel and higher costs for equipment and fuel — will make it difficult for many trucking companies to expand.

“I don’t expect an oversupply of trucks anytime soon,” Costello said.

To stay ahead of rising operating costs, officials at GE Capital said fleet operators will need to continue to push up pricing in the year ahead.

“A lot of fleets like to compare rates to pre-recession levels,” said Dan Clark, head of GE Capital’s Transportation Finance Group. “They see they are at or above that level and are reluctant to go over. They need to use that old price and add ‘X’ amount. They cannot be satisfied where they are at.”

A survey conducted by CK Commercial Vehicle Research also shows solid demand for commercial trucks.

Company spokesman Chris Kemmer said 84% of survey participants who operate heavy-duty Class 8 vehicles and 33% of operators of medium-duty vehicles said they plan to purchase new equipment in 2012.

The orders for new equipment represent about 16% of the current population of commercial vehicles, and only one in four fleets said that they plan to add some capacity, Kemmer said.

Transport and logistics companies continue to invest in technology in order to make operations more efficient and respond to customer requirements.

A survey of chief information officers by the London-based media and event organizer eyefortransport.com found transportation management systems to be the most common area for investment, with 53% of respondents looking to buy in the next year, followed by mobile technology (44%), business intelligence (43%), customer relationship management (41%), electronic data interchange (39%) and track and trace (36%).

New labor management systems also are expected to gain favor, as fleet operators struggle to recruit and retain enough qualified drivers and mechanics and comply with new hours-of-service and safety regulations.

Mike Maris, senior director of transportation for Motorola Solutions, said he expects to see more consolidation among technology suppliers and greater use of hands-free devices in the truck cab.

The need for investment in technology, along with the improving financial position of motor carriers, is expected to spur mergers and acquisitions in 2012.

“Banks are still very reluctant to loan small trucking companies money,” said Andy Ahern of transportation consulting firm Ahern & Associates in a newsletter published in November. “So, there will be a substantial consolidation of trucking and logistics companies.”

A proposed change in how leases are accounted for on corporate balance sheets, however, could have a widespread detrimental effect on the U.S. economy, triggering a $10 billion reduction in GDP and 60,000 fewer jobs by 2016, according to a report issued by the Equipment Leasing and Finance Association in December.

The Financial Accounting Standards Board and the International Accounting Standards Board plan to issue a final draft of the new accounting rules in April.

The rules would require companies to record virtually all leases as debt rather than an operating expense on their balance sheets.

Such a change would add an estimated $2 trillion in debt to balance sheets of companies in a wide range of industries, including transportation, retail and manufacturing, utilities and construction firms.

“Many businesses do not object to having to record leases on their books,” ELFA officials said. “Rather, they object to how the proposal would require them to account for and report lease transactions, contending that aspects of the proposal are too complex, impose burdensome regulation on businesses and do not accurately reflect the economics of the lease transaction.”

ELFA said that it wants the accounting boards to preserve a distinction between capital leases and operating leases and to offer relief from some of the reporting requirements in order to reduce the negative consequences of the proposal on the U.S. economy.

Staff Reporter Michele Fuetsch contributed to this article.