THE KEY DEMAND DRIVERS point to a stable trailer market, ACT Research senior partner and general manager Ken Vieth told the attendees in his “State of the Industry” presentation at the Truck Trailer Manufacturers Association (TTMA) Convention in April.
“The economy is generating the freight needed to justify fleet replacement,” he said. “Overall, it's very positive, unless you're of the belief that we'll have an inventory correction like we had in '95 or '85. Expectations are that we'll have a pretty decent rest of the decade.
“Trucker profitability, tightening capacity, level of freight, and rising rates make it easier to justify continuing investment. Barring a recession, I don't see pricing moving away from transportation companies. That's good. They'll be able to pay for the necessary cost increases you are incurring and still make a profit.”
Vieth said the forecast is for 262,000 trailer factory shipments in 2006 (138,000 dry vans, 36,000 reefer vans, 25,000 flatbeds, and 50,000 others) and 263,000 in 2007 (145,000 dry vans, 35,000 reefer vans, 25,000 flatbeds, and 47,000 others). That compares with 255,000 in 2005 (145,000 dry vans, 36,000 reefer vans, 26,000 flatbeds, and 48,000 others) and 236,000 in 2004 (138,000 dry vans, 33,000 reefer vans, 21,000 flatbeds, and 44,000 other trailers).
“The economy is one of the variables that affects demand,” he said. “Then we have built-in or happenstance events through the government that are not necessarily economy-related that also affect demand.”
He said rising trailer prices will cause truckers to use their trailers more efficiently before resorting to purchasing new trailers, and quality is continuing to improve, meaning they're lasting longer.
He said the age of fleets is getting older: The average age has increased from six years old in 2000 to 6.7 in 2005. He said a break-even analysis suggests that “at some point, it is more cost efficient to replace trailers than to maintain/repair them.”
“If you look back over the past 20 years, the average age has been as high as 6.9 (in '92) and as low as 6.0 (in 2000),” he said. “So there's nothing startling going on as far as average age as the demand is met and the economy moves forward. We're at 2.8 million units in inventory — three million at the end of the decade.”
Vieth said there is a disparity in equipment aging, with 21 months being the average age of a tractor in the TL carrier database in ‘05, while the average age of a trailer was 48 months. In '02, the average age of a tractor was 29 months, and it has decreased to 27 in '03 and 23 in '04.
Levels of freight healthy
He said carriers are reporting healthy levels of freight. There are rising costs and barriers to entry: hours of service reduced productivity; fuel prices and economy are still a factor; the driver shortage is not just a monetary issue, but also a quality of life concern; engine mandates mean more money up front, more to operate, and no increase in residual; and there are government security regulations and higher insurance costs.
But he said profitability is at an all-time high, justifying continuing investment. Excess capacity is unlikely, and the pricing power remains with truckers.
“If you go back and look at the ‘80s and ‘90s, basically the shippers controlled freight rates,” he said. “If you look at it since the recession in '01 and '02, the number of truckers who went out of business, and the rebirth of the economy after 9/11, there is insufficient capacity relative to freight to be hauled. So pricing today, both rail and road, rests with trucking community. And that's a good thing. Is that going to stay? Barring some kind of economic catastrophe where freight really slows up, it's unlikely that the shipper is going to regain pricing control over the trucker. The trucker is still in short supply relative to the need for transportation.”
The average miles per tractor increased every year from 2000 through 2004, with a slight decline last year.
“We've had very good years as far as tractor productivity,” Vieth said. “Along with that, truckers have been able to pass on their costs, and this has made for a good environment for the trucking community, as well as suppliers for the trucking community.”
Revenue per total mile has skyrocketed from $1.32 in the third quarter of '99 to $2.08 in the fourth quarter of last year.
Vieth said the “revenue just wasn't there” between '96 and '99, and that made it difficult for trucking companies to justify purchases.
“When we went through all of that cleansing of the inefficient trucker in '01 and '02, those remaining are business-savvy truckers,” he said. “Between the cost of hauling freight, surcharges and other revenues, it's over $2 a mile. It's what's allowing truckers to fund the purchases they're making.”
The net profit has risen from 1.2% in the first quarter of '01 to 5.8% in the fourth quarter of last year.
In analyzing the trailer market today, Vieth said order activity is spotty, with most trailer types enjoying stronger demand than in '05. Orders are likely to cool in typical fashion in May, with peak orders between October through April. Backlogs were up 7% in February versus the same period a year ago. Build rates were flat year-over-year in February, and were expected to remain flat to slightly up in the coming quarters, with factor shipments following suit. Inventories of complete trailers were 13% lower year-over-year.
He said the three-month averages for net orders and builds have been steady for the past few years and are unlikely to fall off.
Vieth said there is a strong historical relationship between Class 8 tractor and trailer demand, with 1.5 US trailers per 1.0 US Class 8 tractors through the ‘90s.
“They're competing for the same pool of capital, and we're seeing evidence of a disproportionate dollar shift to Class 8 this year, but not to the detriment of trailer demand,” he said. “Hours of service and driver shortage will continue pressuring freight shift to ‘drop and hook,’ which offsets a negative trend from tracking technology. The 2007 EPA emissions requirements are disrupting the Class 8 demand cycle, while trailer demand remains stable and cyclical.”
He said that over time, there is a strong relationship between trailer demand and economic activity.
“Demand tends to lag economic measures on the way up, and lead on the way down,” he said. “Truckers often see and sense a freight change of magnitude before it appears in the statistics.
“Short-term economic considerations are energy costs, interest rates and inflation, housing starts, the manufacturing sector, and commodity prices.
“Longer-term economic considerations are imports and foreign OEMs in the US, and commodity prices. It's going to generate more competition. When you start to talk about the global market, the trailer industry is not isolated in this country. Most people think, ‘I'm building a box with a lot of air,’ but that's not necessarily the case. Everybody's competing for commodities.”
He said non-economic factors and government regulation include: 2007/2010 EPA emissions standards; ultra-low sulfur diesel concerns; National Highway Traffic Safety Administration (NHTSA) braking regulations; trailer tracking technology (the demand impact is questionable); size and weight changes, perhaps by 2009; and the capacity of the nation's highways and railroads, along with security.
“The transportation network in this country has to be more productive,” he said. “When you look at the highway and rail network, it's insufficient for future growth. If you don't build more highways, you have to use your highways more efficiently.”