Refrigerated Fleets Remain an economic bright spot for the trucking industry, said American Trucking Associations (ATA) economist Tavio Headley, and “is the best performing segment, growing substantially from the first quarter of last year.”

He made the observation in his presentation, Economic and Motor Carrier Industry Update, delivered to the Global Cold Chain Alliance Assembly of Committees meeting in late July in Washington, DC.

Looking at the entire trucking industry, tonnage volumes for both for-hire truckload (TL) and less-than-truckload (LTL) carriers was up 3%, while loads hauled was up 4.1%, this January through May, compared with the same period last year, said Headley.

On a year-over-year basis, tonnage volumes in May were up 3.2% from a year earlier. That was the seventh straight year-over-year gain, and “that's a very positive sign for the trucking industry, but it's still too early to call it a recovery. The economy is still very weak and there is a lot of uncertainty with housing and energy prices.”

In the first quarter of 2007, tonnage for both TL and LTL carriers was flat. For this year's first quarter, there's been “significant improvement,” with both segments expanding, and LTL outperforming the TL segment.

Total truckload loads — the majority of which is dry freight, have been relatively flat over the past several years, Headley said, due in part to structural changes in the industry. For one thing, products have been getting smaller. At the same time, packaging is also getting reduced. “Consequently, you can fit more products on a trailer, and as a result, TL shipments are reduced.”

However, since early 2004, “there's been a very sharp upward trend in refrigerated loads because there hasn't been that type of package consolidation.”

Truck capacity

The ATA has found that truck capacity is tightening quickly for two key reasons. One is that as business has slowed, motor carriers have trimmed their fleet size; by 2.6% last year. For the first quarter of this year, even with loads hauled up nearly 3%, carriers have reduce fleet size an additional 1.4%, “and we expect this trend to continue during the second quarter.”

The other reason is that economic conditions are causing trucking failures. During first quarter 2008, 935 trucking companies (defined as fleets with at least five trucks) went out of business.

“That is the most failures since the third quarter of 2001 — the last recession,” said Headley, adding that the number of failures has increased since the last quarter of 2006.

“With more carriers exiting the marketplace, and carriers trimming fleets, capacity is contracting quickly, even without a huge increase in demand.”

Fuel prices

Record level fuel prices are having a direct and indirect impact on trucking, he said. The indirect impact is through the consumer, as “the high cost of gas is leaving households with less money to spend on other items, so there is less demand for trucks to move loads.”

The direct impact is the cost of fuel, which is 60% higher than this same time last year. “The industry is on pace to spend $65 billion more on diesel this year than last year, when it paid a record $112.6 billion.” This is almost entirely due to price, as “consumption of diesel has been relatively flat since 2000.”

The main reason for the increasing price of diesel fuel is the high cost of crude oil, which “accounts for 65% of what we pay for diesel at the pump, and increased worldwide diesel demand,” explained Headley. “Diesel will remain a premium over gasoline for the foreseeable future as worldwide demand for diesel remains stronger than for gasoline.”

He noted that spare capacity of crude oil — the amount of idle production that can be brought on line quickly to meet demand, “is very, very low right now. The current estimate of worldwide spare capacity is about 2 million barrels per day, and that is a very thin supply cushion. So even a minor supply disruption could have a very huge impact on supply and, ultimately, price.”

There also is a risk premium on each barrel of oil because of the geopolitical instability in oil-producing countries — especially in the Middle East, which is a major oil supplier and “is extremely volatile,” and the possibility of weather related supply disruptions. One estimate is that the risk premium could be adding $20 to $25 to every barrel of oil.

A weak dollar is another reason for the soaring diesel prices in the US. So is the huge amount of speculators' dollars, up nearly 50% from 2003, being invested in crude oil holdings, Headley said. “We believe this increased speculation in crude oil is adding to the increase in oil prices.”

Looking ahead

There is no diesel price relief in sight, he said, citing the Energy Information Administration's latest forecast, which predicts the price for diesel will not fall below $4.73 per gallon through the end of the year

The economic stimulus tax rebate checks have provided a boost this year, but this is fading, and ATA expects a contraction in economic activity in the final quarter of this year, concluded Headley. The first quarter of next year “will be flat at best, with no sustainable recovery until the second and third quarters.”