Everybody wants a quick climb out of the hole into which the devastating recession has forced the industry — a V-shaped recovery. But Noel Perry, managing director and senior consultant for the FTR Consulting Group, doesn't see it happening.
“We haven't had one since 1975,” he said.
Instead, he forecasts a U-shaped recovery — gradual and labored — as we had in 1982, 1991, and 2001.
“We think GDP is going to go positive in the next quarter and slowly grow through 2010, when it gets to 3%, then grow more rapidly the rest of 2010,” he said during a Webinar. “Flat GDP doesn't make flat freight — it makes negative freight. We don't get to 1% growth in freight until the economy approaches 3% GDP growth. So we're going to be in the bottom for the next three quarters. The good news is that sometime in the summer, profitability starts.”
He said the industry's ability to change its supply lags the change in freight.
“There been a change in demand, which requires 60,000 fewer vehicles per quarter,” he said. “And the industry averaged taking out 5,000 per quarter, so it has fallen behind. There's a surplus of 55,000 vehicles. When the economy changes, there will be a pretty dramatic increase in the need for trucks. The last recovery generated a 50,000-per-quarter need, and the industry only accelerated at about 7,000 per quarter.
“This is why following the economy is so important. It's the change in freight that drives trucking profit, because the industry is slow to respond. The way that the industry is slow to respond is twofold: There is an increase in the number of parked trucks. But the big change we're learning about in this cycle is that truckers lose productivity for a number of reasons. And they also take freight they wouldn't take in other times to keep trucks moving. So there is a productivity loss, which is a surplus of capacity because those trucks always compete for freight. We're seeing a truck productivity loss of 9%. It peaked early in ‘09 before the actual bottom of the recession.
“Truckers run their trucks in circuits. In stable times, it's easy to optimize those circuits. When traffic is falling rapidly, you lose a portion of that circuit. It takes awhile to catch up and find a load for that particular circuit. That doesn't happen until demand stabilizes, which we expect in the third and fourth quarters. Profit is at its nadir. Even though demand will fall a bit more as ‘09 finishes, margins should creep up before then because demand is going to be relatively stable and truckers can finally optimize their adaptations, and that means profitability.“
He said because construction and equipment have been hit so hard, platform and dump trailers “lead the parade in terms of pain.”
“Reefers always are healthier in a recession because people keep eating,” Perry said. “I'm not quite sure what's going on with tanks, but they've done better than expected.”
Fleets have generated a significant amount of excess capacity, Perry said, starting with an over-buy in 2006, which had made overcapacity worse.
Larry Gross, senior consultant for the FTR Consulting Group, addressed the rail-car and intermodal industries, saying that April was the worst month yet in terms of year-over-year rail-car loads, down 23%.
The index for overall car loads is now 88 after peaking out at 112.5 in mid-2006.
“We need to focus on month-to-month, rather than year-over-year to determine when the bottom has been reached,” he said. “It's likely we are at that point.”
One positive: “As traffic on the rail system goes down, train speeds improve. The system is as fluid now as it's ever been. From the rail-car builders' standpoint, they have to be aware of this from the compounding effect. Not only are fewer cars required, but the cars on the system have been more effective because they're moving faster.”
Gross said there was no slowdown in terms of rail revenue per ton mile during the early phase of the recession,
“They were able to sustain improvements in rates per ton mile until the catastrophe of the fourth quarter of '08,” he said. “Railroads are now feeling the effects of the slowdown in traffic. In terms of projections on carloads, we're looking to gradual improvements in terms of the month-over-month picture going into 2010, but not moving into the black on a year-over-year basis until the middle of 2010. In our view, the most likely scenario is that it will be a slow recovery. There would be a 40-50% chance on that scenario.”
In the intermodal industry, he said the weakness is biggest on international side — a 20-25% decline. Once again, some good news: “Anecdotally, we're hearing from intermodal customers that service has never been as speedy or as reliable as it is right now.”