Trucking Companies Face Modest Recovery

From Business Week:

Unlike air freight carriers, and intermodal companies that use metal containers that can be transferred from railroads to ships in place of trucks, trucking companies are entirely dependent on the domestic economy, which isn't expected to recover as quickly as the global economy.

Improvement in trucking revenues between the first and second halves of 2009 wasn't sustainable, says Larkin, since much of it was due to fiscal stimulus programs like "cash for clunkers" and the $8,000 tax credit for first-time homebuyers. Market optimism toward the sector will likely wane as the reality of still-harsh economic conditions sinks in, he says.

"The modest recovery, combined with current lean inventory levels, makes it less likely that we will experience the sharp increase in freight volume that we have experienced in previous recoveries," Larkin wrote in a Jan. 5 research note. Without a major reduction in capacity, the return to a constrained supply-and-demand balance that would drive stronger pricing could take longer than many investors are now discounting in freight transportation and logistics stocks, the note said.

How much capacity does the trucking industry need to shed? Little has been taken out in the past 12 months, as banks and leasing companies are reluctant to put trucking firms into receivership or bankruptcy because they don't want to own a lot of devalued truck assets they can't sell, says Larkin. With freight volumes down 22% from their peak in 2005 and rebounding slowly, he doesn't project a tighter supply/demand balance until at least mid-2010 and maybe not until 2011.

Over the longer term, the "new normal" level of demand is likely to be higher than the current level but still depressed relative to the demand boom in 2004 and 2005, according to the Keybanc note. Rising fuel prices, tougher safety, security, and environmental regulations, and inadequate funding for infrastructure or development of an integrated nationwide freight transportation plan will likely increase transport and logistics costs over the next decade, the note said.