US trailer market: American revival

When US president Barack Obama was re-elected to a second term last November, he said he was returning to the White House “more determined, and more inspired than ever about the work there is to do, and the future that lies ahead”. Will the trucking industry follow suit?

The past half decade has been somewhat of a roller-coaster ride for the commercial trailer industry in the United States of America. The post-Lehman downturn resulted in US commercial trailer production sinking to just over 80,000 units in 2009. For perspective, that was the lowest annual volume for the industry since 1975.

But the recovery finally began in 2010, and it still continues today. US commercial vehicles hauled more than 9.4 billion tonnes of freight in 2012, marking the third straight year of industry growth. Total commercial trailer shipments were just over 240,000 for the past year – three times as much as at the cycle low-point.  

No wonder US information company FTR is now expecting a ‘good environment’ for the industry, indicating that road transport volumes, prices and margins are likely to plateau at ‘favourable’ level in the time to come. In line with FTR’s cautiously optimistic appraisal, consulting firm ACT Research reported that 2012 trailer shipments grew almost 13 per cent year-over-year, an increase of 2.4 per cent from 2011.

“Although the growth rate of shipments has slowed as the recovery has matured, our analysis indicates that the current recovery still has momentum. Our outlook is for growth rates in the single digits both this year and next, before a minor decline in 2015,” says Frank Maly, Director of CV Transportation at ACT Research. James 'Jim' Sharkey, Director of Strategic Initiative at Pressure Systems International (PSI), adds, “Currently our market is steady at best.”

In the race for recovery, however, the US market is still ahead of crisis-shaken Europe, which won’t see growth in trailer demand until the second half of 2013 or the beginning of 2014, followed by more solid growth through to 2016*. And the momentum is likely to last, now that the electoral battle is officially over and Mr Obama prevailed despite lingering dissatisfaction with the economy and a hard-fought challenge by Mitt Romney.

One widely accepted business indicator used to help determine the state of the industry is the performance of the dry van segment. Dry vans, the most popular trailer configuration in the US, have historically accounted for almost 60 per cent of shipments. According to ACT historical data, the category dropped to less than 40 per cent of industry volume in 2009, but returned to about 55 per cent of total market share in 2012, with approximately 130,000 dry vans shipped.

“Specialty trailers, such as liquid tanks, bulk tanks, flatbeds and dump trailers, have had their own unique market factors,” says Maly, revealing that flatbed trailers saw the best annual growth rate for the industry in 2012, up almost 50 per cent year-over-year.

The trend of manufacturing returning to the US due to rising transportation costs and wages overseas – termed ‘on-shoring – has been a key factor to ensure the recovery of the flatbed segment. Business analysts agree that the improved auto market contributed to that development, just as increasing demand for domestic steel transportation. “Growth in housing, although coming from extremely low levels, and the resulting need to transport construction materials such as wood, gypsum board, roofing, and other related materials, has also been beneficial,” according to Maly.

But, no discussion of the US market can be complete without a mention of the impact of natural gas and oil exploration in the US. Hydraulic fracturing, or fracking, has been the buzzword of the 2011-12 season. The flatbed, liquid tank and bulk tank segments have all been significantly impacted by the much talked-about exploration method, which requires “sand, water and a little bit of chemicals,” as Bob Costello, chief economist and vice president at American Trucking Associations (ATA), explained during a speech at the US Chamber of Commerce in February. “It all goes in tank trucks, and it all is very heavy freight.”
As a result, it is hardly surprising the large run-up in hydraulic fracturing through 2011 and into early 2012 resulted in strong demand for both liquid and bulk tank trailers.

However, the dramatic success of the hydraulic fracturing process became somewhat detrimental as the resulting surge in natural gas availability drove gas prices downward in 2012. “Those reduced prices made it uneconomical to expand exploration, and equipment demand evaporated,” says Frank Maly. “The boom went as quickly as it came.”

The impact was particularly severe for the bulk tanker industry, which is specialised in the equipment needed to haul sand or other granular materials – a major component of hydro fracturing. Maly says that the reduction of drilling investment resulted in a stream of order cancellations in mid-2012. “Net bulk tank orders were actually negative for seven consecutive months before returning to positive territory in November.”

A cursory look at the figures now suggests an industry that is shrugging off uncertainty and ramping its numbers back to pre-GFC levels in order to meet demand. And according to ACT’s Frank Maly, the natural pattern for commercial trailer orders will play into the industry’s hands.

“Fleets normally begin to place orders in November, and commitments continue to be booked through the first quarter of the following year. That build-up of orders is worked down through higher levels of production from spring through calendar quarters two and three before the next annual order cycle begins again.”

Considering that the December 2012 order volume was the highest since March 2006, the current cycle is likely to produce new record numbers towards the end 2013 – bolstered by pent-up replacement needs and improved financial performance in the fleet sector, as well as improved credit availability for well-qualified clientele.

The GFC brought to mind that replacement demand is a key variable in a mature market like North America. During a downturn, replacement is usually postponed, as the slowing economy generates lower freight demand, and fewer trailers are needed. That effect has hit the US trailer market hard during the last downturn, when replacement was delayed due to financial restraints and reduced demand. As a result, trailers were removed from operation, slowing down the replacement need and equipment investment.

“The number of trailers in operation in the US peaked in 2007 and declined through 2010. Our analysis shows that over 250,000 trailers were removed from operation during the downturn, almost 10 per cent of the total fleet,” says Maly. “The number of trailers in operation didn’t increase again before 2011.”

As part of that replacement slowdown, the fleet got older as well. Average trailer age peaked in 2011 at about 8 ¼ years – a record high – and only began to slowly decline in 2012. That drop in average trailer age was the first in 6 years in the US.

“Eventually, however, delayed replacement catches up to the fleets. Trailer age becomes a significant factor for fleet operations, as older trailers are inefficient trailers,” says Maly, pointing out that age is particularly important in the refrigerated transport market, where an older trailer becomes thermally inefficient.

“But age influences other trailer types as well. In general, older trailers are less reliable, and the required maintenance to offset wear and tear negatively impacts operation cost as well as scheduling efficiency. In fact, in the US market, some major shippers have a rule that prohibits their products from being carried on trailers that are older than eight years.”

Regulatory changes have impacted trailer demand as well. The US Federal Government has recently implemented a new initiative to measure fleets, called Compliance, Safety, Accountability, or CSA. The programme’s objective is to reduce accidents, injuries and fatalities through improvement of motor vehicle safety. One of the major components of CSA is the condition of the vehicle. “Again, older trailers are more difficult to maintain in safe operating conditions, and these types of regulatory measures help encourage replacement of older equipment,” says trucking expert Maly.

Sometimes, such regulations also come at a state level. California, through the ‘Air Resources Board’, referred to as CARB, has been a driving force in that regard. Two areas of regulation have been particularly important. Firstly, CARB implemented rules preventing the operation of refrigerated trailers with refrigeration units that were older than seven years, mainly because of the negative impact on air quality in North America’s centre of vegetable and fruit production.

Secondly, CARB addressed trailer efficiency in general. Aerodynamic ‘side skirts’ must now be installed on trailers along with low-rolling resistance tyres, for example. While such modifications can achieve a five to seven per cent improvement on fuel efficiency for the truck and trailer combination as a whole, they also come at a cost to the fleet. “Again, the decision is whether to make the investment on an older trailer or just acquire new equipment,” says Maly – indicating that the current upturn is not just a ‘natural’ rebound, but also the result of regulatory change on every level.

Speaking of legislation – after the recent presidential election, the Republicans kept control of the House of Representatives, which analysts say will likely result in more of the gridlock that characterised Mr Obama's first term, with the House and the president at loggerheads on most legislation.

The upcoming Mid-America Truck Show in Louisville, Kentucky will now indicate if that situation has affected business sentiment, or if there is some sort of post-election impetus in the industry.

“We may have battled fiercely, but it’s only because we love this country deeply, and we care so strongly about its future,” Obama said in his victory speech to a crowd that roared its approval, seeking to get off on the right foot for his second term in the oval office.

To his credit, North America has weathered the most recent turbulence in the global economy with relative strength, but Mr Obama is well aware that the country now faces important medium-term risks beyond the short-term global uncertainty. For instance, shipments by small trucking companies decreased 6.3 per cent last year, making equipment replacement less likely, according to the ATA’s Bob Costello. Just like in other sectors of the economy, small businesses in the trucking industry “are having a difficult time,” he said in Washington. While financing is tougher to get and leasing has increased, equipment has not become any more affordable. The result

Meanwhile, Jonathan Starks, Director of Transportation Analysis for FTR, commented: “Despite recent commentary from some in the industry, we believe that the fundamentals for growth remain intact and continue to expect a significant event occurring in July when the Hours-of-Service changes are set to be implemented. The amount of capacity that will be affected by the rules is enough for us to expect an impact on rates.” If the economic recovery would continue during 2014, the industry might even see a ‘very strong year’ for rate increases, he added, also including the struggling small business segment.

Regardless of political orientation, one success enjoyed by the Obama re-election team could help industry in more than one department – the effective use of social media. “While very few trucking companies would have the budget to undertake a … marketing initiative of this nature, there are still many powerful tools that are currently available to help achieve successful results,” transportation management consultant Dan Goodwill blogged after the election. “Hopefully the success enjoyed by the Obama re-election team, particularly in making such effective use of social media, will encourage business leaders in industry, particularly the trucking industry, to give social media more focus in their marketing strategies.”

Again, the Mid-American Truck Show in March will show if and how the industry has chosen ride the wave of confidence triggered by optimistic year-end data, or if scepticism will continue to dominate.

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