This appears to be the best of times and the worst of times. With interest rates and unemployment low and with the stock market reaching record levels on almost a daily basis, one would think that this would be an excellent time for the transportation industry. This is not the message I am receiving as I speak with various folks in the industry.
Jim O’Neil, incoming chairman of the Truckload Carriers Association recently stated that “I think we are in a freight recession.” With U.S. economic growth slowing on the back of the housing sector slowdown and the woes of the automotive sector in Detroit, the U.S. trucking sector has seen weak freight volumes over the past six months. Another interesting element of the slowdown was the apparent lack of the traditional fall peak shipping season for some truckers. According to Mark Rourke, President of the truckload division of Schneider National, “it was the softest surge period I have seen in my 19 years in the business.”

What is a Freight Recession?

A recession is defined to be a period of two quarters of negative GDP growth. In the absence of a textbook definition of a freight recession, it can be defined as a period of two quarters of negative growth in freight volumes. The drop in demand for all trucking was clear when the American Trucking Associations’ advanced seasonally Truck Tonnage Index plunged 3.6% in November after falling 1.9% in October. “November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said Bob Costello, ATA chief economist. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear.” This trend appears to be continuing in 2007. It would appear that the conditions exist to support calling the current situation a freight recession. Economic and carrier financial results appear to confirm this statement.
Recent earnings reports from some of the major players such as YRC Transportation, Covenant Transport and CSX suggest that the financial results from trucking and rail companies are deteriorating as business volumes declined in late 2006 and on into 2007. Transportation companies are on the front line in the North American economy, among the first to benefit in an upturn, but also among the first to feel the pain of slowing economic growth.

How did we get there?

There appear to be several reasons. Trucking firms did a lot of equipment "pre-buying" in the second half of 2006 to beat the EPA regulations that went into effect in 2007 governing truck engines and fuel. The result has been a rapid increase in trucking capacity that met with an unexpected decline in demand for trucking late 2006. The upswing in interest rates has had a significant impact on the housing market in the United States. The decline in new home purchases has resulted in reduced demand for lumber products, appliances and other related products. Rick O'Dell, President of Saia stated that he has researched some theories on why the peak season did not materialize in 2006, including one that says “retailers are changing their inventory strategies to emphasize post-holiday sales, which spreads the peak season out more. And that's not a bad thing, because less dramatic spikes make it easier for carriers to plan capacity.” The lower peak demand may have been the result of better planning and advanced supply chain technology. These are all theories that need to be proven with some hard data.

How should Shippers and Carriers Respond?

It should be understood that a number of economic indicators suggest that we are at or near bottom and that an upturn is in sight in such areas as housing starts and retail sales. Some economists are predicting an upswing in freight volumes the latter part of this year or early next year. In a recent RBC Dominion financial report, Transportation stocks were selected as an area for an improvement in stock prices.

Strategies for Shippers

• Take advantage of the market today. Trucking firms are more eager for business now than they have been in a long time. Now is the time to conduct a freight bid to lock in savings over the next few years.
• Use the current market environment to build stronger relationships with carriers. Don't just focus on improved pricing—think about expanding services and collaboration with carriers.
• Meet with your carriers and understand how they mange their costs so you can determine how you can achieve an improvement in your costs.

Strategies for Carriers

• Maintain pricing discipline
• Maintain and improve services levels to retain and expand customer base.
• Expand service coverage (As an example, ABF Freight in January expanded its regional transportation network to include the Central and Southern U.S. and bring next-day and second-day service to two-thirds of the company’s North American service centers. The reason? ABF feels the regional market is currently stronger than the long haul LTL market. Sunbury Transport has expanded its geographic coverage in the United States.)
• Establish partnerships with new carriers to penetrate new markets (and generate new revenues) without making the capital investments.

It is likely that we will see further industry consolidation in the months ahead as carriers seek to spread more revenue over their base of fixed costs and as the weaker players leave the industry.