Carriers split almost 50/50 when asked if they are getting an adequate rate of return (ROR) on their investment to justify reinvesting in equipment in the recent Second Quarter Business Expectation Survey by Transport Capital Partners (TCP).
Only 53% of carriers responded that they are getting an adequate ROR, while 47% say they are not. Only 45% of smaller carriers (less than $25 million in revenues) believed they are receiving adequate returns compared with 57% of their larger counterparts.
Richard Mikes, TCP partner and survey founder, said, “Clearly there exists a hesitancy to purchase new equipment, and new orders are clearly oriented toward replacement needs, as the desire to add capacity is the same for the last four quarters of the survey.”
Another TCP partner, Lana Batts, said, “Even though 86% of the carriers in this quarter’s survey said they have access to reasonable credit, the concern over inadequate returns on capital is a choke point in adding capacity, and unless rates adjust to cover rising costs, capacity will be restrained.”
The survey asked what “operating ratio” is necessary to get a reasonable return on investment (ROI), and 82% of carriers said 87% to 94%. Operating ratio is defined as operating costs (excluding interest and income taxes) divided by freight revenue. For example, an operating ratio of 94% would mean a carrier has 6% available to cover interest, taxes, and earn a profit on its investment.
Mikes noted that publicly held carriers traditionally target an “OR under 90” and said, “The last few years have witnessed a significant drop in new equipment purchases, and the recent large increases in Class 8 orders are truly pent-up demand for replacements to mitigate maintenance costs and potential downtime.”
Another firm partner, Steven Dutro, said, “TCP has noticed more interest in reviewing trade cycles, new equipment economics, and strategically addressing alternative financing structures and leverage issues.”