Overcapacity Question Not Settled
But there’s no clear consensus on whether overcapacity looms in 1999, according to two analysts who explored the question during an Oct. 27 session.
The last time the industry found itself awash in trucks and short of cargo to haul was in 1995.Carriers were forced into layoffs, and poor earnings rippled through the stock market, causing investors to flee and stock prices to plummet.
But whether all the new equipment simply is replacing outdated fleets or actually creating an excess supply of bottoms to fill is difficult to determine because there’s no real consensus on what current industry capacity is, said James Valentine, trucking analyst at Morgan Stanley Dean Witter in New York.
He recalled the deterioration in dead-head miles during the 1995 industry slump, noting that stocks only perform well when companies appear headed in the direction of meeting earnings expectations.
“The problem is the trucking industry doesn’t have a central conscience to throttle it back to prevent overcapacity,” he said. “We will continue to see volatile swings.”
Mr. Valentine estimates the trucking industry needs about 18,000 new trucks a month to replace retired vehicles. “When orders for Class 8 trucks reached new highs in early 1995, we did see it coming,” he said. That year, almost every truckload carrier fell short of earnings expectations.
That’s why investors became concerned last July when new orders for Class 8 vehicles topped 35,000, he said. But other theories persist that the industry could dodge an overcapacity bullet next year.
One theory predicts an inadequate number of drivers will prevent any overcapacity from occurring, he said.
“If carriers have to cancel orders because of driver shortages, their stocks will still be hurt. Any order cancellations will be viewed negatively by Wall Street,” Mr. Valentine said.
Thomas Albrecht, vice president and senior analyst for transportation at ABN-AMRO in Chicago, doesn’t expect any 1995.
“I think as long as the cancellation rate versus the percent of gross orders doesn’t exceed 10%, the industry is okay,” he said. However, “it was 17% in August and 11% in September,” he said.
“Does it raise a red flag for the industry?” Mr. Albrecht argued that while new orders are high, so are truck order backlogs.
“The van and tractor backlog are going in different directions,” he said. “We are expecting a slowdown in the last two months of 1999.”
He also said the van trailer backlog is only 60% of its former peak and heading up, with 40,000 of the 242,000 units on order scheduled for delivery in 2000 or later. Conversely, the truck backlog of 130,000 orders is heading down.
“I just don’t think that truck sales are out of line with demand,” he said. “The freight economy today is 35% higher than it was in 1990-91. We have a higher level gross domestic product and freight. This year, there are 1.73 million Class 8 trucks in the fleet, a growth of only 1.7%.
“We anticipate total demand at 215,000 units, which would suggest that excess capacity this year will be 360 trucks,” Mr. Albrecht said.
“The wild card is freight-ton miles. We could be talking about 4,500 too many trucks coming into the market next year.”
If that happens, the industry could experience a slowdown. But as long as the economy grows 2% to 2.5%, excess capacity won’t occur, he said.
“Now, if we have only 1% growth, then we may have a problem,” he said.
Janet Plume is a New Orleans-based free-lance journalist.
