Trucking market shifts gears

The years of the last economic boom were good ones for trucking companies. During that time, carriers held a strong position in terms of pricing and market control. But things began to change by the middle of 2007 as the economy slowed and motor carriers began to experience a decline in demand. Between 2008 and 2009 the industry lost US $66 billion (or nearly 20 per- cent) in revenues, according to estimates by my firm, AlixPartners.

At the same time, the slowdown allowed buyers to gain bargaining strength as carriers competed for a much reduced market. Competition was so stiff that by the beginning of 2009, truck-load carriers had seen a reduction of 15 to 25 percent in their all-inclusive prices. In some cases, carriers were even absorbing some fuel costs as well.

The issue of overcapacity and the subsequent downward pressure on prices has been even stronger in the less-than-truckload (LTL) sector. Early 2009 saw a number of LTL companies engaged in very aggressive pricing to gain market share in what some say was anticipation of the failure of a major carrier and the tighter market that would result. When this didn't happen, the entire segment was left with excess capacity and even lower pricing.

The situation for trucking companies, however, has slowly started to change. By the end of 2009 and into the first quarter of 2010, we began to see signs of an uptick in demand and a corresponding stabilization of prices. Still, with analysts projecting a 2010 industry growth rate of only 6 to 8 percent, there is a long way to go to make up for the loss in demand.

This doesn't mean that we won't see discrete pockets of demand pressure, however. On the U.S. West Coast, for example, there is a need for trucks to move imports from Asia out of the ports of Los Angeles and Long Beach but not much demand for return traffic. Carriers may be hesitant to move their equipment to California just for one-way trips, and the result may be a tightening of capacity in the area. Still, overall demand will have to grow steadily for some time before we see capacity pressure at the macro level.

One thing that could kick trucking demand into higher gear—and thus affect capacity—would be a revival in building and construction. The construction industry is one of the chief sources of trucking demand. If construction activity picks up significantly, it may create upward pressure on pricing as excess capacity is absorbed. A stronger construction industry will also probably affect the availability of truck drivers. While there isn't a short- age of drivers right now, those who left construction and took jobs in transportation may return to the building trades.

A changing landscape
In the meantime, we can expect some other changes in the trucking landscape if the economy continues to improve. As AlixPartners' 2009 Manufacturing Outsourcing Index showed, the pricing advantage of outsourcing manufacturing to China has shrunk significantly, and Mexico has become increasingly attractive as a manufacturing location. We expect that continued volume growth out of Mexico could put pressure on trucking services and equipment and therefore lead to an increase in intermodal traffic if motor carriers can't accommodate that demand.

An improved economy will also encourage shippers to pay more attention to their fundamentals: making sure that they are using the proper mode of shipping; consolidating loads where possible; and looking for other efficiencies within their logistics network, whether in North America or elsewhere around the globe. For the last several years, for example, freight rates were so low that some of these basics have been set aside. Rather than taking LTL shipments and combining them to make a full truckload, for example, companies often would just ship the partial load; trucking costs were low enough that they could absorb the extra expense. But as freight rates rise, shippers will want to address such operating inefficiencies, even if carriers bring more capacity online.

As the recovery moves forward, we can expect the trucking industry to feel the impact of compa- nies' continued need to reduce inventories and shorten the supply chain in the service of just-in-time deliveries. Concerns about energy costs and conservation will shape industry practices, leading trucking companies to continue exploring new, fuel-efficient technologies.

Finally, as demand increases, carriers may find it difficult to continue to provide the same level of service as was possible during periods of excess capacity. As a result, both shippers and carriers should begin to implement the types of operational improvements that will help them to adjust to changing conditions. This flexibility will allow them to emerge with a strategic advantage as the economy recovers.