FTR Associates’ Starks says pent-up demand could create some upside in the second half of 2013

Eric Starks delivered some positive news for trailer manufacturers in his “Trailer Industry Update and Outlook”: things are good and getting better.

Starks, president of FTR Associates, said that trailer total capacity utilization is sitting at 90%, which suggests that only replacements are needed until later this year.

“But the industry needs to be starting to add equipment to make up for that,” he said. “The closer we get to the 95% to 100% level, the more equipment needs to be added into the marketplace. So this is a positive thing for trailer manufacturers over the next several quarters. There will be pent-up demand as there’s pressure because of the availability of equipment.”

He said that recent trailers orders are down year-over-year, but he said the numbers are “fairly flat,” so it doesn’t suggest things are heating up or slowing down.

“That’s the best thing you can hope for—a flat environment at a decent level,” he said. “This suggests availability in the short term won’t be huge. Trailer production has been up a decent amount the last few months.

“Our view of this market has not changed noticeably. It’s where we could see some upside opportunity in the second half, but orders will dictate that, and that means orders have to start coming in at a time they don’t traditionally come in. As we get into the May-June-July time frame, orders will have to be at levels we don’t normally see. Once Hours-of-Service (HOS) rules come into play, it’s hard to ramp up and get more equipment into the marketplace quickly.”

Starks said that North American Class 8 truck orders edged higher in December, are up 10% year-over-year, and are expected to remain healthy through the summer. He added that truck utilization is expected to spike in the second half of the year. It’s been sitting in the 95% range, and has been starting to ease up recently.

“We don’t expect it to get to critical levels until later this year,” he said. “The closer you start to get to the 100% level, the easier it is to pass along rate increases. It’s been difficult recently to push along rate increases. We’re hearing more and more that shippers are looking for dedicated service. They’re freaked out that they’re not going to have capacity in the second half of the year, and they’re willing to lock in dedicated service. But they’re trying to lowball as much as they can.”

Starks said that trailer manufacturers need to better understand the freight market, because if they don’t, then they won’t understand their own business.

“You cannot be sucked into all these other issues,” he said. “When I talk to rail guys, the suppliers all understand the freight market in minute detail. In the trailer business, I don’t think everybody understands their market. You need to know exactly what customers are hauling and what their needs are.

“There isn’t one indicator that you need to be looking at to understand the economy, because one item is going to tell me about one particular sector, but all the data out there on individual capacity is enlightening. You need to understand what’s happening in the broader picture.”

Lean inventories

Starks said business inventories are relatively lean. From a trucking perspective, he said, inventories should be low, because the lower the inventory levels, the more pressure there is in the system to move freight.

Housing starts are steadily improving—up 29% year-over-year—and are no longer a negative for the economy or freight.

“Housing is here, and it’s here to stay,” he said. “If I told you your business was going to be up 30% year-over-year, you’d say that’s good. This in and of itself is not going to generate substantial freight, but it’s decent, and when you add what’s happening with multi-family homes, it’s even better.

“Existing home sales are strong. Most people typically buy an existing home. Even the sale of an existing house moves freight: You upgrade furniture, rip out the carpet, replace the roof.”

The auto sales growth trend continues to be positive and is “moving in the right direction. One thing that concerns me is that the number has flat-lined over the last few months. It continues to be a good generator of overall freight demand, but is not a true growth engine.”

Starks said he’s “cautiously optimistic” about where the economy is going in the next six to nine months, but there are things that require a reality check:

• Uncertainty over sequestration. “My gut tells me it’s not going to be a huge issue but I can’t be certain. FTR estimates the impact to be -0.3% off of GDP. That’s not a huge amount. I think we can overcome that. But what happens when we see a ripple effect?”

• Federal Reserve. “With rising interest rates, my sense is that it’s a mid-2014 to 2015 story, but it’s something you need to pay attention to. As you do planning for the next few years, you need to understand the dynamics. The base-case forecast is for 2% GDP growth in 2013, which is pretty decent.”

Fuel prices to stabilize

He said that the FTR Trucking Conditions Index is expected to be healthy for the balance of this year.

“We don’t expect a lot of bankruptcies,” he said. “The other thing that was a drag was fuel prices, and we think they will be pretty stable over the next six to nine months. We think this will be a fairly healthy environment for truckers.

Truck freight was “pretty flat in 2012,” Starks said, with an uptick in the market in November. He said the drop-off in the industry in 2008-2009 was huge, and to get back to where the industry was in 2006, they will need to see a much stronger growth rate than the current 3-5%.

“While this is healthy, it does not get us back to the peak level,” he said. “It will be at least 2016 until we get there, and that’s assuming we have healthy growth and no recession.”

In terms of freight loadings by equipment segment, he said the dry van market is around 4% growth. He is expecting 3.5% growth in the reefer market, with the flatbed market at 10% growth, driven by the housing-related sectors.

Breaking it down by commodity groups, stone/clay/glass/concrete are seeing 6% growth. Non-metallic minerals and chemicals will have modest growth, with transportation equipment experiencing 6% growth after hitting 16% in 2012.

The food segment dominates the market in commodities moves, with 23%. Transportation equipment is only 8% of the market, which “shows you how fragmented this market is. The only one that can move the needle quickly is food and non-metallic metals, and typically we don’t see food move the needle quickly.”

Regulatory drag

Starks said trucking regulations will continue to be a drag on the driver market and the industry will have to do a better job at driver recruiting and enhanced productivity to mitigate the shortage.

“If you’re a smaller fleet, can you handle all these regulations over the next several years and adjust accordingly?” he said. “It’s going to be difficult. We’ll start seeing larger ones being positioned to do it and smaller guys having a harder time. That doesn’t mean the owner-operator goes away. It’s possible that these guys will start teeing up with larger guys and help them to manage that.”

He said the main changes in hours of service rules that will be implemented on July 1 include: a 34-hour restart that must include two overnight periods from 1-5 am; and half-hour rest breaks. Starks said legal challenges are occurring and should be resolved by early in the second quarter, but productivity will take a hit of around 3%.

“The driver shortage has not been as large as initially anticipated, but the new HOS implemented in July will drive this number larger,” he said. “This shortage will be much longer and deeper than we saw in 2004-2005. That creates a structural issue. Over the next few years, that will be very difficult to solve. When you start seeing a driver shortage on average of 350,000 drivers, that creates problems in the ability to buy equipment. They will have to allocate resources from one area to another.

“Lower productivity will require more equipment to move the same amount of freight—75,000 more trucks will need to be put into service. A move to more drop-and-hook will require more trailers so as to keep drivers moving.”

Other regulations to watch:

• Electronic On-Board Recorders (EOBR). A regulation requiring 100% participation is expected. Starks is not sure of the timing, but anticipates something to happen within the next few years. “Full implementation would negatively impact productivity of the nation’s fleet.”

• Speed limiters. A mandate for all trucks is expected in 2014, with a speed limit of 65 mph. “Some of the fleets are already doing this, but it causes a drop in productivity. Every time you have a drop, that means you need more equipment in the marketplace to do the same amount of work you did before. So you have to either get a new driver and new equipment or you have to be more productive and overcome that productivity decline.”  ♦

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