Fleets will benefit from improving economy

July 1, 2003
IN MANY respects, tank truck carriers are outperforming other trucking industry sectors in the United States. Further, business conditions should continue

IN MANY respects, tank truck carriers are outperforming other trucking industry sectors in the United States. Further, business conditions should continue to improve through the rest of 2003 and into 2004.

Jerry Leonard, chief economist at Martin Labbe Associates, tempered his generally upbeat economic outlook with a warning that the recovery could stall for any number of reasons. Leonard presented the annual tank truck industry economic forecast May 19 during the National Tank Truck Carriers annual conference in New Orleans, Louisiana.

“Over the next four months (June-September), we believe business investment will increase, the labor market will stabilize, and consumer confidence will continue to rise,” he said. “Freight levels should grow in the third and fourth quarters, and overall freight growth for 2003 should be in the 1.5% range.

“The good news in this economy is that incomes are growing, and consumers are still buying. Consumer confidence has been higher since the end of the war in Iraq and should stay strong enough to keep the recovery on track. The Bush tax cuts are working. The housing market continues to beat expectations. The slide in business investment has been halted, and the pace of layoffs has slowed.

“The bad news is that consumer debt is very high, and pent up demand is low. Market confidence remains at historic lows, and there has been little improvement in demand for fresh business investment.”

Mixed signals

Mixed economic signals aren't surprising in light of the difficulties faced by the trucking industry over the past couple of years. Carriers experienced one of the worst recessions in the history of the trucking industry.

Many fleets were caught by surprise, because they had benefited from the massive business growth of the 1990s. Tank truck carriers were among those capturing significant amounts of railroad business.

All of that came to a rather abrupt end, starting in mid-2000. Overall freight volumes shrunk for about a year and a half. Leonard estimated that nearly 5,000 carriers with 15 or more power units failed just in the past year alone.

Freight began a slow recovery through 2002 until jitters related to the looming war in Iraq caused the economy to stall again. Fortunately, the war-related slowdown was very brief, and the US economy is growing again.

The recession was just one challenge facing the trucking industry, though. Carriers were beset by massive increases in operating costs with minimal traffic growth. At a time when many fleets were trying just to survive, managements had to meet the administrative challenges of new security requirements.

Fuel prices rose by nearly 50%, but are expected to decline somewhat over the summer. However, Middle East uncertainty should keep crude oil prices high for the rest of this year, which should keep diesel prices from falling too much. In addition, more states are looking at higher fuel taxes as a way to offset other lost revenues.

Insurance pressure

Insurance cost and availability continue to threaten tank fleet survival. Some carriers have reported insurance rate increases of 3,000% over the past couple of years. Leonard attributed the rate increases to unprecedented domestic security risks, losses in the stock market, and the sharply rising cost of health care.

“The major problem is not with trucking,” he said. “It is with everything else that is insured and exposed to catastrophic loss. Some relief will come when equity values improve. In addition, there has been some movement to cap jury awards, which will help in the future.

“However, we expect to see double-digit increases in health insurance rates for the next five years. The continued rise in insurance rates across the board will leave large numbers of carriers at risk. We can expect more fleet bankruptcies. To survive, carriers will have to continue forming self-insurance groups.”

Used truck values are another major concern that hurts both large and small tank truck fleets. The oversupply of used trucks will continue to burden the industry until at least 2004. Used truck prices should improve over the next year, but Leonard said no one should expect 1998-level residuals anytime soon.

So why is Leonard guardedly optimistic? For one, higher operating costs, a tight insurance market, increasing security requirements, and other factors have formed barriers to entry that are limiting the establishment of new tank truck carriers. That should help moderate downward pressure on freight rates.

Tank truck carriers should find that there are more loads to be hauled. Domestic travel, moderating fuel prices, pent-up need to get away, and improving airline utilization will support stronger petroleum demand. Manufacturing will grow faster than the rest of the economy, which means chemical demand will be on the rise for all but automotive- and housing-relate goods.