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Trailer outlook: slow road ahead

The outlook for trailer demand, while extremely positive long term, will be stunted short term by pressure on trucker profits and underlying structural issues, according to Ken Vieth, founder of ACT Research Company in Columbus, Indiana.

When trailer customers do not profit, they do not buy, and trailer customers have not been as profitable as they have been in recent years.

“One thing for sure, the economy will grow, and fleets will need tractors and trailers,” Vieth said in his presentation to the National Trailer Dealers Association convention in Tucson. “That's a given. The question becomes a matter of timing.”

The current picture is not rosy. Trailer orders in August were 60% below the levels of August 2006, according to ACT Research reports.

“August was not a good month,” Vieth said. However, he pointed out that June, July, August, and September typically are the worst of the year.

Vieth said the economy is not in recession, but things are not as clear as they could be in the second half of 2007. According to Vieth:

  • Industrial output will rebound in the second half of 2007, but consumer spending will slow.

  • Breakdown in the bond market and the credit crunch will add new levels of uncertainty.

  • Sharp sub-prime losses and corporate bond risks have taken a toll on credit markets worldwide.

Rising fuel prices are another concern. At the time of Vieth's presentation, oil was priced at $80 per barrel, suggesting that fuel prices could rise to $3.10 to $3.20 per gallon.

“In summary, though, there are more positives than negatives in the economy,” Vieth said.

State of trucking

Trailer customers are changing, and trailer demand is changing with them.

Vieth said that at the present, too many truckers are chasing too little freight. It's a trend that goes back to last year when overall volume of freight began to soften.

Buying patterns also are changing, Vieth said. Traditionally, about 50% of the freight in the United States is shipped in the last 4-5 months of the year as retailers gear up for the Christmas season. Several factors are at work to change that, however.

  • With the increase in imported goods and past problems getting goods through some ports, retailers are ordering earlier in order to reduce the likelihood of being out of stock. Products that previously arrived in September are now being ordered to arrive in May or June.

  • The growing popularity of gift cards is extending the buying season as recipients of the cards wait for post-Christmas sales in order to redeem them.

Making money

Traditionally big orders for trailers begin being placed in October, and these factors may chip away at seasonal swings. The big factor, however, remains trucker profitability, and a lack of profits may cause this traditional upswing in trailer orders to be delayed a few months. Following a prolonged period of declines, trucker profits recently have stabilized, indicating the worst may be over.

“The profitability of the trucker has really come down,” Vieth said. “My guess is that we will see the October upswing delayed a quarter.”

One reason for the decline in profits: 2007 engines. According to ACT Research analysis, the 2007 Environmental Protection Agency emissions rules will add four cents per mile to a fleet's cost of operation. Here's how:

  • The regulation adds $8,000 to the purchase price of the tractor. If the tractor is driven an average of 100,000 miles per year, at the end of four years that $8,000 higher purchase price has cost the fleet an addition two cents per mile.

  • If the new engine technology reduces fuel economy by 2%, fleets must buy an estimated 1,350 gallons of diesel. If the cost of diesel averages $2.90 per gallon over the course of 400,000 miles, that is an additional $4,000 that must be spent on fuel — another penny per mile.

  • Maintenance costs are estimated to be $1,000 more per year, or $4,000 over the four years that it will take for the tractor to travel 400,000 miles. Tack on another penny to the cost per mile.

Vieth pointed out that another round of EPA emissions regulations is coming in 2010. This will require additional new technology, higher purchase prices for tractors, unknown effects on fuel consumption, maintenance costs, reliability, and parts availability. These variables may remain unknown as 2010 approaches. The first engine to be certified to comply with the 2007 emissions received its certification in November 2006, Vieth said.

Changes in freight

Vieth pointed to a shift away from platform trailers, the result in part of the continued growth of imported goods. Dry-freight vans, reefers, and platforms continue to account for 80% of the trailer market, but increasingly, the shift has been toward vans and away from platforms.

The reason is in the nature of the freight being hauled. More finished goods are being imported, products that are shipped in dry-freight vans. Had the same goods been produced in the United States, Vieth argues, platform trailers would have shipped the raw materials to the plant in the U S where the goods were manufactured.

When viewed over the past 26 years, platform trailers had their peak year in 1981 when they represented 16.7% of all trailers on the road. The most recent figures indicate that platforms are now only 9.3% of the trailer population.

Dry-freight vans have taken most of that share. In 1981, dry vans had 54% of the trailer population. That share was up to 60% in 2006.

Changes in the industry

The population of trailers continues to grow, Vieth said. The growth could be even greater, but efficiencies and quality improvements are enabling customers to use their trailers for longer periods of time. For example:

  • Advancements in trailer technology are helping trailers stay on the road longer.

  • Higher tractor to trailer ratios are equating to fewer miles being placed on trailers in a year.

  • Increased use of trailer tracking systems is improving the utilization of trailers.

  • Lower miles per year helps trailers last longer.

The third quarter is typically the slowest of the year for trailer orders, but the economy is soft in the third quarter, too.

Orders are down sharply in the third quarter as economic uncertainty and seasonality take their toll, Vieth said.

“The sky isn't falling,” Vieth said. “I don't think that orders are going to fall any lower. They may go flat for a while, but they will pick up.”

Wait until next year

Trailer manufacturers are expected to ship about 230,000 trailers this year, down 18% from the 280,000 trailers shipped in 2006.

The latest ACT Research forecast has been lowered about 4,000 trailers from the company's previous expectation. That is because backlogs have continued to shrink, as manufacturers try to maintain relatively stable production levels in spite of declines in orders. With backlogs reaching historically low levels, however, reductions in build rates are likely.

Currently ACT Research expects shipments next year to begin a multi-year recovery phase. Vieth expects the industry to ship 245,000 trailers in 2007. However, he cautioned that the industry probably would not reach that level in 2007 if the year starts with a build rate much below 230,000 for the year.

Beyond the next few months, however, Vieth is optimistic about the future.

“The nation needs more productive trailers,” Vieth said. He expects to see legislative changes to accomplish that objective by 2014 if not in 2009-2010. When changes are made to federal size and weight laws, expect a major surge in demand for truck trailers.

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