Good times, for a long time

“I'm upbeat.”

With that self-proclaimed summary of the commercial truck and trailer market, Ken Vieth with ACT Research in Columbus, Indiana, gave his thoughts on what the future holds for trailer manufacturers through 2008.

The industry, Vieth believes, is heading for better times — for a long time. Here's why:

  • The economy. The economic cycle is on the upswing, resulting in more freight that will need to be hauled. With the increased freight will come the need to replace and/or expand fleet capacity.

  • Trucker profitability. Large and small fleets are getting higher rates and better profits.

  • Aging equipment. The trucks and trailers that fleets operate are getting older. And even though the quality and durability of equipment has improved, the equipment is beginning to wear out.

ACT Research study routinely surveys fleets and trailer manufacturers. The companies that participated in the study represented approximately 55% of the trailers shipped last year.

Vieth expects the industry to produce between 230,000 and 245,000 complete trailers during 2004. Next year promises to be even better, with 280,000 complete trailers in the forecast.

Demand for trailers, Vieth said, will continue into 2006, but he expects actual shipments to slip somewhat as fleets buy more tractors ahead of tighter diesel engine emission regulations in 2007.

“They will come back to the same level in 2008 and 2009, reaching around 300,000,” Vieth said. “That's barring any economic catastrophe.”

According to Vieth, 51,700 trailers were built in the first quarter of this year, and he projects that between 54,000 and 55,000 trailers will be built in the second quarter. If Vieth's prediction for the year is to hold true, the industry will need to produce 60,000 or 65,000 trailers during each of the last two quarters of the year.

Vieth also expects between 20,000 and 25,000 container chassis to be built in the United States in 2004. In addition, he expects the industry to produce 4,000-5,000 dollies and converter gear.

Backlogs are up 39% compared with last February.

“If we received no more orders and kept the current build rate constant, it would take about seven months to build out those orders,” Vieth said.

Rising commodity prices are forcing manufacturers to raise trailer prices, but that should dampen demand only temporarily.

“If a fleet has the opportunity to enter a contract with a shipper, and the fleet needs more trailers to meet demand, do you really think he will walk away from that opportunity because of the price of the trailer?” Vieth asked. “A trucker has to protect his shippers. Right now there is not enough freight-hauling capacity. Shippers are willing to negotiate in a way that they may not have been willing to do in the past. If there is a price issue, it will be with the smaller trucker who cannot afford to buy new equipment. In that case, he will buy used equipment instead.

“My concern is not the price of steel, but the availability. Prices can be absorbed. But if you can't get steel, that's a problem.”

Fleets earning more

Until recently, operating results for fleets have not justified investing in equipment, Vieth said. Truckers delayed buying new equipment during the recession because they were not making the money they needed.

Truckload carriers only recently have been able to increase their revenue per mile. Fleets will need to increase rates approximately 10 cents per mile this year in order to cover increased costs of fuel, drivers, and equipment, Vieth said.

“It looks like that might happen,” he said. “If there were a time to pass on higher costs, it probably is this year.”

The financial picture for fleets, however, is turning around — in spite of rising operating costs. The profit margin for truckers averaged 4.1% net during the fourth quarter of 2003. It will be that increased revenue that fleets will use to fund the purchase of trucks and trailers.

Trailer manufacturers can expect increased demand for trailers as the year goes on.

“Freight tends to peak toward the end of the year, which means that fleets have less incentive to take delivery on new equipment in the first quarter of the year,” Vieth said.

Checking the barometer

Vieth listed several factors that he termed barometers of the truck and trailer industry.

  • Business fixed investment. “If we look at the recession we have had and the slow recovery, one of the missing ingredients has been business fixed investment,” Vieth said. “Trailers track business fixed investment very closely.”

  • Truck transportation also tracks business fixed investment. Freight is growing on an absolute basis for the first time since the end of 2000.

  • Fuel costs. Vieth does not expect a significant decline in fuel price in the next year or two. “We are going to settle into a higher level for some time,” he said. “Truckers are getting better at implementing fuel surcharges, but there is always a lag between implementing the surcharges and collecting the money. The latest rise in fuel is worth about two cents per mile in operating cost. This is a major concern.”

  • Driver's pay. Truck drivers, in constant dollars, are not paid significantly more than they were in the early 1980s. “We don't have a driver shortage — we have a pay shortage,” Vieth said. “A lot of fleets thought that they would expand their fleets this year by bringing in owner-operators, but owner-operators are not there. A lot of truckers would buy more tractors if they could hire drivers.”

  • Hours of service regulations. Hours of service regulations have caused a 3-5% productivity loss, or approximately two cents per mile. With the new regulations, it has become increasingly important for shippers to get drivers in and out quickly.” “Truckers are adamant about charging shippers for excessive waiting time — approximately $60 per hour,” Vieth said.

Trucking companies have a limited supply of money to buy tractors and trailers, Vieth said. “Fortunately they are making more money.”

Typically, fleets buy 1.5 trailers for every tractor. In 2002, as the deadline approached for the most recent round of regulations for diesel emissions, the ratio dropped to almost 1:1. With an additional round of diesel regulations scheduled for 2007, Vieth does not expect another drop in the ratio until 2006. The ratio should return to 1.50:1 in 2004 after dropping to 1.04:1 in 2002.

Hours of service and the continued shortage of drivers are expected to encourage fleets to use more drop-and-hook operations, which also should increase demand for trailers. The effect will vary, however. Large truckload carriers, with a trailer to tractor ratio of 2.7:1 last year, already are using drop-and-hook heavily. Vieth does not expect much increase there.

Growing old

The U S has a trailer population of about 2,700,000. Vieth expects that population will increase as the economy grows.

On an average year, 180,000 trailers are scrapped. Vieth believes that figure will remain fairly steady, between 180,000 and 200,00 per year.

Fleets could nurse along their aging equipment, but not with today's growing economy.

“In summary, the key demand drivers point to a healthy market,” Vieth said. “Over time, you cannot separate the economy and trailer demand. The economy right now is growing at a healthy rate — between 3.5% and 5% annually, depending on the month. That growth generates freight, and that is what drives truckers to buy equipment.”

Did you know?

During the course of his presentation, Ken Vieth presented a glimpse of the detail his company accumulates on the trailer industry. According to ACT Research:

  • 79% of dry-freight and refrigerated vans are a minimum of 53-ft long

  • 13% have translucent roofs

  • 65% use hardwood flooring

  • 26% use steel-spring suspensions

  • 11% roll on aluminum wheels

  • 6% are equipped with trailer tracking capabilities.

For additional information, visit www.actresearch.net

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