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Transport Companies Re-Evaluating Business Model

The U.S. freight transportation industry as a whole – and the trucking sector in particular – is undergoing a massive “re-set” of sorts in reaction to the global economic recession and unpredictable fuel costs, alongside shipment volumes that remain below what’s considered nominal levels for growth.

John Conkin, senior vp of GE Capital’s transportation finance division, told Fleet Owner that the firm’s recent CFO survey of 539 mid-market companies in seven distinct industries across the U.S. found that many transportation companies are completely re-evaluating how they do business.

“The transportation industry is much like the other industries where 48% of the CFOs surveyed saw the financial crisis as a fundamental reset in the economy. In other words, they don’t see the economy returning to pre-crisis conditions,” he said.

“The biggest difference is that the transportation industry has been feeling this downturn for nearly three-and-a-half years,” Conkin stressed. “The net result is a move back to basics, a reliance on their core competencies where they can add the most value to their customers. Transportation executives have had to make tough choices around cost management and expense control, and they have concentrated on deleveraging, paying down debt and maintaining a more conservative balance sheet.”

Other trends GE Capital sees include: fleets shrinking their size; overall length of hauls decreasing; and trade cycles are being extended. “Regulation continues to influence change in the transportation environment and its forcing companies to reinvent the ways they serve their customers,” Conkin noted.

In particular, the ongoing reduction in fleet size may be permanent – meaning the trucking industry is re-setting itself to a much smaller size.

“There is just so much capacity coming out of the market right now,” Lana Batts, managing partner at Transport Capital Partners, LLC, told FleetOwner. According to data compiled by industry analyst John Larkin, Batts noted that in the truckload market alone, capacity has been reduced 18% – with 15% of that reduction being permanent.

“The bigger piece of this is the capacity that didn’t get purchased,” Batts added. “Last year, what, 92,000 to 95,000 new [Class 8] trucks we’re bought. That’s way, way below nominal replacement demand, which is around 240,000 units per year.”

GE Capital’s Conkin noted that the aftershocks of the recent recession are also affecting the mix of issues transportation firms focus on. While fuel costs of course remain a top priority, it has to share space with other concerns, such as cash flow.

“Yes, fuel costs are definitely a major issue but not the only one according to our CFO survey,” he noted. “Some 46% said they were most concerned about cash flow, 45% said safety and truck accidents, and 34% said freight availability. Frankly, I’m surprised that ‘fuel price volatility’ didn’t score higher as a concern. That was the fourth-highest answer at 32%.”

Yet concern over fuel prices – and, by extension, overall energy costs – is not falling off the trucking radar by any means. Conkin noted that 84% of transportation CFOs said that energy costs – including oil and natural gas – would be a factor that impacts business performance in 2010.

“The primary method of matching fuel costs remains fuel surcharges, which has been an effective strategy in most instances, with the exception of the 2008 oil spike when the velocity of change outpaced the indexes,” he said.

That’s all due to the rapid disconnect between fuel pricing and supply-and-demand factors over the past few years, explained Denton Cinquegrana, editor-west coast spots for the Oil Price Information Service.

“I can’t stress this enough: take everything you know about supply-and-demand’s impact on diesel prices and, while not necessarily throwing it all out, make room on the shelf for other factors,” he told FleetOwner. “Oil prices – and the prices of the fuels refined from it – react more and more to other economic trends than pure supply-and-demand factors.”

For example, crude oil priced jumped 2.1% to $86.62 a barrel Monday – an 18-month high – largely due to the results of the U.S. Department of Labor monthly jobs report, noting that the economy gained 162,000 jobs in March compared to a revised reading of a 14,000 job loss in February.

“That’s why truckers need to take a ‘macro-economic’ view of fuel pricing now,” Cinquegrana stressed. “Because things such as a rise in the Dow Jones or a positive jobs report can cause oil prices – and thus diesel costs – to rise.”

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