MorrisAnderson

Steven Agran, Managing Director

2011 was a very busy year in the trucking and transportation industry. Fuel reached all time highs, truck fleets continued a 3-year contraction, and a federal transportation funding bill continued to languish in Congress. On the positive side, new hours of service legislation was approved, the Safety Compliance Measuring System was in full force, new target fuel efficiency standards were finalized, and the overall economic health of the industry continued to rebound.

Economic Outlook and Key Industry Drivers

The overall economy grew during 2011, though at a modest rate coming out of a deep recession. The trucking industry expanded at a greater rate than the overall economy as economic growth together with low inventory levels increased trucking tonnage by 5.9% over 2010. There is no reason to believe that the trucking industry will not continue to outpace the overall economy.

2012 should see continued strengthening of shipping rates and improved profitability as the industry continues to contract capacity as demand remains strong. Trucking failures dropped drastically to 180 companies and 2,000 tractors in Q3, 2011, but the overall fleet size continued to decrease to 3.4 million in 2011 from 3.7 million units in 2008. From 2007 to 2010, the industry experienced 8,500 company failures, reducing tractors by 325,000 units, peaking in Q2, 2008 with a reduction of 45,000 units. Large amounts of used equipment were shipped out of the country and the replacements have not kept pace.

Drivers and Safety
There is also pressure to find qualified drivers as the new Compliance, Safety and Accountability (CSA) tracking is used to monitor overall fleet safety, and high turnover returned. Driver turnover rose to 89% in Q3, 2011, after decreasing to 39% during Q1, 2010. Maintaining a safe and consistent workforce is always a challenge for any trucking company. In order to increase capacity, healthy trucking fleets may look toward acquisition as the only option.

Fuel
Fuel reached all time highs, increasing 50 cents (15%) to $3.78 per gallon at year end. 2011 continued the constant creep of fuel costs. There is no reason to believe that prices will not continue to increase in 2012. However, between the issues in Europe and the instability of the Middle East, uncertainty does prevail.

Equipment
The number of new Class 8 tractors on the road rebounded in 2011, and new orders are still very strong. Sales exceeded 171,000 new units in 2011, a 60% increase from the 107,000 sold in 2010 and an 80% increase over the 95,000 sold in 2009. New orders soared 69% in 2011 to 305,000 units. But the new high cost of tractors, together with new accounting regulations requiring all leases to be capitalized, is resulting in a high number of new purchases being offset by a higher number of sales of old equipment. The overall fleet size should continue to shrink in 2012.

Federal Regulation

The federal government was busy approving and negotiating new regulations of the trucking industry during 2011, but continued to avoid passing a new transportation spending bill.

Federal Funding
Heading into an election year, there is no expectation that a new spending bill will be approved. Therefore, expect more fighting and temporary extensions of the current spending limits. There is an issue that the Highway Trust Fund will run out during the second half of 2012. If the Trust Fund cap is not increased (as the FAA Funding Cap that expired in 2011 was) no funding would be available. Once again, in an election year, expect the cap to be increased.

New Hours of Service Legislation
In December the Federal Motor Carrier Safety Administration (FMCSA) approved the status quo of an 11-hour daily limit of driving. While the daily limit number of hours has been contentious since the original increase from 10 hours in 2004, the FMCSA confirmed that it did not believe there was clinical data proving that a return to the 10-hour limit would improve safety. The FMCSA did change the 34-hour rest period requirement. Previously, any 34-hour rest period could be used to re-start a driver’s weekly hour maximum. The current change requires two 1 a.m. to 5 a.m. stretches in the 34-hour rest period.

The re-start provision change will have an impact on the industry. It reduces the maximum potential hours available to be driven in a given week to 70 hours from the current 82 hours. This will require companies to hire more drivers and purchase more equipment, while potentially getting less out of both. There is a definite concern amongst trucking companies that the new requirement will prove costly. Additionally, by having drivers finish their rest at 5 a.m., drivers will be re-starting trips during the morning rush hour, resulting in slower commuting and higher potential accident risk.

Safety
The FMCSA passed the Compliance, Safety and Accountability (CSA) program in 2010, and the measurements were in full force for the first time during 2011. There are bugs in the measurement criteria that the FMCSA continues to work on, but the basis for measuring a fleet’s safety record is undeniable. The measurement guidelines grade drivers and fleets on seven safety performance measurement areas, called BASICs. The BASIC score must exceed required standards or the fleets could be fined or shut down (in the worst case situation). The scoring weights the severity of the violation and duration since the violation. The FMCSA maintains 2-year history for carriers and 3-year history for drivers.

The CSA program has fundamentally changed the regulation of safety within the trucking industry. It has formalized the process and made it is easy to measure compliance. Trucking fleets are definitely hiring drivers to minimize potential violations. There is also a much better repository of data than ever existed before.

Fuel Efficiency Standards
New fuel efficiency and emissions standards were approved in 2011, increasing fuel economy 20% and decreasing emissions by 23% by 2018. The new standards are based on the design and purpose of a vehicle. While it is estimated that heavy-duty truck costs will increase by an average of $6,220, the new standards will reduce fuel usage by $73,000 over the life of the truck.

2011 was a busy year in trucking as it emerged from the recession. Profitability returned, and failed businesses diminished. There are many external forces that could impact the economy, but at this point 2012 is looking like another strong year of growth.

Steve can be reached at sagran@morrisanderson.com.