Trucking earnings hit by weak demand

By Dave Hannon -- Purchasing, 4/23/2008 9:33:00 AM

Trucking carriers are reporting continued signs of weak demand ahead as more freight buyers renegotiate their contracts. For example, Covenant Transportation says in its first-quarter earnings report: “Trucking capacity continued to exceed demand, which allowed shippers to remain reluctant to increase freight rates or fuel surcharge reimbursement programs. Many shippers used bid processes to maintain downward pressure on freight rates.”

In the first quarter alone, Covenant participated in 245 freight bid packages compared with 52 in the first quarter of 2007 and 595 in the entire year of 2007. Covenant projects that freight demand and trucking capacity will become more balanced later this year because “new truck orders have remained below the long term industry replacement rate for several quarters and difficult operating conditions have increased the likelihood of trucking company failures.”

Last week, Douglas Stotlar, CEO of trucking and logistics firm Con-way said “Given the weak demand environment and the inflationary effect of unprecedented energy costs, we believe pricing will remain under pressure for some time. We're operating in a challenging and uncertain economic environment, which continues to restrain demand and place pressure on pricing and margins.”

Truckload carrier Marten Transport’s president and CEO, Randolph Marten, focused on decreasing fleet size in 2007 and now is focused on growing its logistics services business. In a statement, Martens says he still expects industry-wide capacity to exceed demand at least into the second quarter of 2008. “In light of those general economic assumptions, our goal is to continue to maintain our rate structure by focusing on profitable freight,” he adds.

Meanwhile, many truckers are taking vehicles off the road in an effort to balance capacity and low demand. Commenting on first quarter activity, USA Truck’s CEO Clifton Beckham says business “was characterized primarily by sluggish freight demand, industry-wide tractor overcapacity and rising fuel prices.” So, his firm reduced its fleet by 2.1% in the quarter. JB Hunt Transport Services’ CEO Kirk Thompson argues that the logistics industry is in the middle of “what may be recorded as the worst freight recession in a long time.” That’s why JB Hunt is moving away from an asset-based truckload model to a more variable cost structure model.

Truckload carrier Werner Enterprises says in an earnings statement that ongoing soft freight market combined with high diesel fuel costs will eventually correct itself but not before many carriers go out of business. “An acceleration of trucking company failures combined with a low level of class 8 truck builds may gradually improve the supply and demand balance in the truckload industry over the next few quarters,” Werner says.

Credit Suisse analyst Jason Seidl predicts in a recent note to clients that demand for trucking and freight may slow even further before it picks up again. He says “unprecedented fuel prices, poor winter weather and a barrage of broad-based negative economic indicators during the first quarter suggest that conditions could deteriorate further.
1Q LTL tonnage takes a tumble

Carrier                         1Q08 vs. 1Q07

Saia                              Down 4.4%

YRC                            Down 9-10%

ABF                             Down 1.2%

FedEx Freight               Down 3%

ODFL                          Up 8.3%

Con-way                      Up 3.1%

Source: Company financial statements

To read a detailed analysis of what’s taking place in the trucking markets, read Trucking Update: What goes around comes around