Lo and Behold, Some Shippers Taking Longer View on Trucking Capacity

Implications: The current depressed market in trucking services will not last forever. Many shippers, painfully aware of the last boom market and tight capacity, are eying the lessening of over-the-road capacity warily. Continuing consolidation in the industry will eventually mean higher rates for truck services.

Analysis:    When you're in the middle of something, it's hard to see the beginning and end. But one must remember nothing goes on forever.
  Such it is with today's freight recession. It started around August of 2006 and most likely will carry on through the spring of 2009, making this decline one of the longest of the last 20 years.
  But investors and others looking at the trucking industry should remember this current condition will not always last. Freight will rebound, demand will soar and capacity will be constrained -- perhaps more so than ever.
  That's the gist of this excellent article in Purchasing Magazine. It quotes a number of large, savvy shippers who say that consolidation and constraints in trucking eventually will lead to higher rates. That's why many are making moves today to firm up contracts with their preferred carriers.
  "I think clearly we are in a loos capacity environment in the short term," says Mark Whittacker, vice president of transportation at Pepsico Transportation, Plano, Texas. "But changing LTL providers can be a significant business change in some cases and as this industry continues to consolidate, long-term pricing will be in favor of the carrier."
  That's an important point to remember. Artificial constraints on capacity -- particularly in the truckload sector where drivers can be hard to come by -- is keeping the lid on over-the-road capacity. It's hard to realize that now, but it is.
  Furthermore, moves by nearly all the large TL carriers -- J.B. Hunt, Werner Enterprises, Knight Transportation, Swift Transportation, among them -- to park significant portions of their over-the-road fleets will only exacerbate this situation. Privately held Schneider National seems to be the exception. It has added up to 7 percent more truck capacity in the past year, both company drivers and owner-opeators.
  Dennie Carey, an official with LTL giant FedEx Freight, is warning shippers that they "have to focus on the long term  as much as possible." That's because carriers have long memories. When good times return, they will reward those shippers who have maintained long-term relationships during the slack periods.
  "When we allow customers more insight into our costs and focus o how we can reduce each others' costs, we see customers go the extra mile to help us and we're willing to do the same when we can," says Tony Albanese, vice president of sales and operations at Saia, the LTL carrier. "Those are the relationships that will last through various market cycles."
  Although it's definitely a shippers' market today in trucking, the nature of the business is that trucking is always a cyclical market. While it's challenging today for the carriers -- after all, nobody forecast $4.50 a gallon diesel or $120 a barrel crude oil -- that cycle will not last forever. Shippers know that. Investors should too.