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2 How far is the fall when jumping from the basement window? You cant fall 20 feet from a 4-foot stepladder Before We Get Started…A Few Thoughts Cartoon.

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Presentation on theme: "2 How far is the fall when jumping from the basement window? You cant fall 20 feet from a 4-foot stepladder Before We Get Started…A Few Thoughts Cartoon."— Presentation transcript:

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2 2 How far is the fall when jumping from the basement window? You cant fall 20 feet from a 4-foot stepladder Before We Get Started…A Few Thoughts Cartoon from ATA

3 3 Short Duration Cyclicality, Similar to 1970s, Has Returned: Impacts Psyche & Planning & Vendor & Customer Relationships Source: BB&TCM; GDP figures from Bureau of Economic Analysis (BEA) Current environment is similar to highly cyclical 1970s environment Short-duration cycles predominate with fewer strong quarters Short duration also means fewer growth quarters between negative GDP periods Recovery periods are shorter and not as strong Strong quarters are defined as GDP growth 3% Weak quarters are defined as GDP growth between 0% and 1.9% 1970s: 12 out of 52 quarters with negative GDP (23%); 20 with strong (38%); 8 with weak (15%); 10 quarters on average between negative GDP quarters : 48 out of 76 quarters with strong GDP (63%); only 4 negative quarters; average of 32 quarters between negative GDP quarters

4 4 Four Indicators: Im Okay, Youre Okay Source: Calculated Risk; ATA Truck Tonnage: Up 39 of 42 months (NSA), but down 3 of 8 months Private residential spending: 55% below 06 peak, up 36% from low. Non-residential is 28% below 08 peak, up 33% from low. Public construction is 20% below March 09 peak.

5 5 4 More Indicators: On Balance Okay, but Nothing Special Source: Calculated Risk, Federal Reserve Board. EHS supply in April 5.2 months, up from ~4.5 months in late winter, but still good versus Note: ABI was below 50 in April after 8 months above 50.0.

6 6 Lending: Bottoming with Strength in C&I Source: Federal Reserve Board. C&I is commercial and industrial and RE is real estate

7 7 Housing (in red): Adding to GDP After 18 Quarters of Negative GDP Contributions; Positive the Last 8 Quarters Source: US Bureau of Economic Analysis; BB&TCM photo 300,000 homes razed each year 1.2M new households formed each year 7M households formed the last 6 years and 83% went into apartments; normal is 65% to 70% Housing starts will be up years in a row from 2009 trough and will impact driver supply more than trucking volumes Housings contribution to GDP was negative 18 out of 21 quarters from 2006-Q111. Q412 GDP grew 0.4% and housing added 0.41%; Q113 GDP grew 2.4% and housing added 0.30%.

8 8 Good Auto Production but Yr/Yr Changes Moderate Source: BB&TCM; Bloomberg Yearly changes in auto production moderate in 2013 Three straight years with annual production increases above 1.5M units Now good absolute numbers, but slower unit growth

9 9 Attn Flatbed Carriers!: New Home Sizes are Growing Again Source: U.S. Census Bureau; measures average square foot of new construction homes; median sizes are approximately 200 square feet smaller over the years.

10 10 But Why Does it Not Feel Better? Why is Freight so Inconsistent? Wasnt Housings Recovery Supposed to Create More Freight & Make us Feel Better? Source: BBTCM analysis

11 11 Freight has been Mediocre since June 2012Why? Source: ATA for truck data; US Census Bureau for housing starts; Bloomberg for intermodal and auto; Housing starts are annual, seasonally adjusted figures Housing starts rose 28% in 2012, or by 171,000 units to 781K units N.A. auto production rose 17% or 2.3M units to 15.8M units These were greater unit and percentage increases than in 2011 BUT… 2012 truck tonnage grew just 2.3% after growing 5.8% each in 2011 and 2010 Van loads (–0.7%) shrunk for the second straight year But N.A. intermodal (COFC) loads grew 6.1% after 6.0% growth in 2011 Housing starts in H212 (839K units) were 15.2% above H112 (728K); YTD13 starts up 11.4% vs. 2H12 So, what is the problem??

12 12 Is it an Inventory Problem? Not Really… Inventories are up in absolute dollars, but… Inventory-to-sales ratios are reasonable Inventory-to-sales ratios are up a hair, but not bloated compared to prior yr/yr months Source: U.S. Census Bureau and BBTCM analysis.

13 13 What Else? Industrial Production Slowed (Fiscal Cliff Worries); Few Animal Spirits Source: Bureau of Economic Analysis for GDP; Federal Reserve Board for IP; ATA for truck tonnage; BBTCM for other comments Business investment slowed in H212 Factory output slowed Even though things have bounced a bit so far in 2013, every month is inconsistent Truck tonnage has declined 2 of last 4 months; the 2 months of growth were each over 7%.

14 14 Other InfluencesNo Easy Road Ahead Source: BB&TCM; backhaul figures from ACT Research ; JBI LOH data from J.B. Hunt TMS Systems Packaging Revolution The growth of intermodal highway conversion in the East On-line shopping growth, creating more parcel, LTL and less TL (proportionate to LTL & parcel) Aggressive effort to lower deadhead by private in-house fleets (down 8 points in 6 years); this has created 2 points of truck capacity Broader supply chain changes Truck capacity growth (up ~1.5% in 2012) after shrinking 15% from 2007–2011 JBI LOH Has Shrunk ~ 15%

15 15 Can Housing Turn 2% GDP Growth into 4%? Even if housing is double its historical average, GDP growth would be aided by 0.6% rather than 0.3%; housing wont generate 4% GDP by itself Source: US Census Bureau; BB&TCM From (exc mini-bust) housing represented about 8.3% of annual GDP growth or 1/12 of the economy 1983, 1984, 1986 & 2004 are the only years GDP added more than 0.4% to GDP growth 1983 was the only year housing added 1% or more to GDP at 1.3% Housing historically added 0.3% to GDP growth or 30 bps Q412 added 0.41% (GDP grew 0.4%); Q113 added 0.3% (GDP grew 2.4%)

16 16 Whats More Important to GDP-Housing or Energy? Housing starts rose 28% in 2012 to 785K and are expected to rise 27% to 30% in 2013 to ~1M units Starts broke out of a 3-year average of ~585K over a year ago, but havent improved freight anecdotes; Why? Energy is much bigger and drill rig counts are down 12% the last 9 months Other industrial trends have been sloppy, too Source: Bureau of Economic Analysis, Energy Information Administration and BBTCM analysis.

17 17 A Tale of 2 Sectors: Van (Decay), Reefer (Growth) Dry van loads are in decay despite successes in dedicated, cross-border, DSD, etc. The 4 best years ever for van TL pricing and profits, , saw loads shrink each year Van load changes: 2003 (- 1.2%), 2004 (-3.3%), 2005 (- 1.3%) and 2006 (-0.3%) were special only because supply was tight and HOS complicated things In the last 10 years reefer loads have declined one year -4.4%), while van loads have grown twice 1.0% and 2010 at 1.4%) Reefers annual acceleration reflects an active FDA, aging population demographics, focus on fresh foods, etc. Sources: BBTCM analysis of ATA data. Commentary is BBTCM. CAGR: : 6.5% YTD: -3.96% CAGR: : 1.29% YTD: 2.98%

18 18 Key Load Trends Since Peak & Trough Sources: ATA TRAC report and BBTCM analysis. Flatbed loads are off 26% from the 2006 peak but are up 10% from trough through 2012; YTD 2013 they are up 1% Refrigerated loads have grown 17% since 2006 through year-end 2012; YTD 2013 they are up 5% Tank loads are up 28% since 2006 (think energy and chemicals); food grade, aviation fuel, etc., have had nominal growth LTL shipments are 14% below the 2006 peak through year-end 2012, but they are up 15% from the mid-2010 trough; YTD 2013 they are down 1% Dry van loads shrank 19.4% from end of 2006 through 2012, including shrinkage of 3% in 2011 and 1.4% in YTD13 they are off 5.0% and are 9.3% below the 2009 great recession

19 19 Van Loads Continue to Shrink; Off 19% from Source: ATA TRAC report

20 20 U.S. Merchandise Trade with Mexico by Truck U.S. truck exports into Mexico have grown 7.8% annually since 2005 and at a 16.4% clip since 2009 U.S. truck imports from Mexico have grown 7.2% since 2005 and at a 15.7% since the 2009 trough Sources: Department of Transportation BTS and BBTCM analysis. Measures value of goods moved, not number of loads.

21 21 Carrier Dynamics: Death by a Thousand Cuts! (Not the two other theories) Source: BB&TCM Not tons of carrier failures Not tons of repossessions as used equipment values recovered Instead, death by a thousand cuts

22 22 Tractors: $40,000 More Expensive Since 01 but Nothing Added to Residuals; Late-Model Equipment Shortage Will Hurt Many Carriers Sources: Tractor values from Navistar from ; from BB&TCM for 1990, 1995, and 2012; Class 8 tractor sales from A.C.T. Research. Value After 1 Year* $87,000 Lots of late-model used trucks in last two downturns; fewer now 5 years, not 4 *First-year D&A is ~ $38,000, meaning value is $87K after one year.

23 23 Costs and Mileage Productivity–Not Exactly a Barrel of Monkeys Source: BB&TCM estimates; ATA Atri division Carrier costs per mile (excluding fuel expenses) have risen 12.6% since 2008 Numerous fleets have bought used tractors and trailers to offset the higher costs of new equipment Annual cost inflation has averaged 3.02% However, driver wages fell in 2009 and were flat in 2010 Driver pay and benefits could be entering a highly inflationary period

24 24 Depreciation Costs Rising with Newer, More Expensive Equipment Source: Carrier data. Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of Fleet age: yrs; 2011: 2.4 yrs; 2012: 2.3 yrs Fleet age: yrs; 2011: 2.4 yrs; 2012: 2.3 yrs Fleet age: yrs; 2011: 2.3 yrs; 2012: 2.7 yrs Fleet age: yrs; 2011: 2.3 yrs; 2012: 2.7 yrs

25 25 Maintenance Costs per Mile Rising, Even for Young-ish Fleets Source: Carrier data. Carrier A has >5,000 tractors, Carrier B has ~2,000. Carrier A does not provide trailer ages; Carrier B average trailer age was 3 yrs in 2006; 5.9 at end of 2011; 6.4 at end of 2012.

26 26 Productivity Down, Rates up Modestly, Input Costs Up Source: BB&TCM analysis; Transport Topics cartoon Analysis of a composite of carriers. Trailer tractor ratio was 1.7; 2.0; 2.5; 2.8 and 2.5, respectively. All four data figures began at in 1990.

27 27 What Some Carriers are Doing to Minimize Rate-Focused Customers Source: BB&TCM analysis; Carrier A is top chart and Carrier B is bottom Top chart occurred even as loads grew 15% Carrier A focused on mid-sized accounts that are less rate sensitive Went from 80 to 150 customers in Chicago alone

28 28 TL Dry Van Carriers: Not As Many Carriers as You Might Think Source: ATA, Federal Motor Carrier Safety Administration; Office of Motor Carriers; BB&TCM ~600,000 fleets with operating authority, but ,000* can be eliminated due to oddball categories 70% of the remaining 194,000 operate Class 3-7 trucks This leaves 58,000 fleets Approximately 30% of those are private or not-for-hire fleets Of the 41,000 remaining fleets, 58% are dry van More than half of those 24,000 fleets operate 5 or fewer trucks About 8,000–10,000 fleets are in the dry van, for-hire market with more than 5 trucks Top 250 control approximately 35%–45% of the trucks *Excludes selected categories (migrant, unspecified, US mail, exempt, government, Indian tribe, private property, private passenger bus, private non-passenger bus, road repair and other classifications totaling 406,000 fleets) that do not compete in the OTR truckload market

29 29 Drivers and Intermodal Source: ATAs Transport Topics

30 30 Intermodals Impact to LH Trucking is Greater than Truckers Realize Source: BB&TCM; JB Hunt for intermodal chart Long-haul trucking remains very vulnerable to rail intermodal Truckload market greater than 700 miles is a $40B market Intermodal is a $14B market Intermodal should be at $20B by 2019–2020 At least 15% of the long-haul (over 700 miles) TL market will vanish ACT Research estimates that every 1M intermodal loads reduces the Class 8 tractor population need by 10,000

31 31 Intermodal is Definitely Gaining Share from Van Trucking… Source: BB&TCM; ATA data in chart Domestic intermodal has posted load growth 11 straight years, including 2009 Van TL loads have contracted 8 of the past 11 years, including last two years Van loads are ~19% below 2006 levels Domestic container growth has averaged 9.1% annual growth since 2007 (versus GDP growth of ~1.5%)

32 32 Why Drivers Leave Their JobsIts a Shipper Problem not Just a Carrier Problem Source: BB&TCM (photo, analysis and survey); comments on right from BBTCM Does the shipper value a drivers time? Bathrooms, phones Wifi availability Helpful staff Parking availability Clear signs Paper work handled courteously & simply 3 rd Gate- Do they share your view? 3% rate hike-~1% goes to driver

33 33 Annual Change in Construction Jobs (000s)Negative Implications for Truck Drivers from 2013 Onward Source: BLS, May 2013 report for left table; ATA TRAC report for driver turnover; BLS for unemployment; US Census Bureau for housing starts Year Total Construction Jobs Residential Construction Jobs Non- Residential Jobs , YTD Construction hiring picking up in 2013 Lots of cash payments in 2012 and absorption of late 11-early 12 hiring Drivers will be targeted for hiring

34 34 HOS May Determine Which Scenario A Microwave, or a Crock Pot, Crunch? Source: BB&TCM

35 35 Shippers, Lets Talk Strategy and Big Picture Source: BB&TCM photo You are not buying transportation, you are buying capacity…make sure your bosses know the difference Dont let truckings economies of scope mask its diseconomies of scale

36 36 1.Payments in 30 days or less (70% of carrier expenses due inside of 8 days); fair FSC (no BTF) 2.Weekend freight!!!!!!! 3.Bids: talk to key partners on key lanes 4.After awarding lanes give sufficient time to implement 5.Honor bid commitments 6.Bring new opportunities to partners first 7.Have driver friendly facilities and people 8.Velocity improvement in shipper network 9.Avg. daily volumes from Q1 to Q4 so as to set up surge capacity; lane flow seasonality; minimize end of period gymnastics 10.Use EDI; also timely resolution of claims & payment issues 11.Use multiple service offerings 12.Publish competitive metrics 12A. Access to top management 1x-2x a year 12B. Windows in lieu of appointments to make driver productive in HOS world 12C. Constant communication about carrier and shipper networks; networks can change weekly and carriers are not always hiding capacity 12-Step Program to Become a Shipper of Choice Source: BB&TCM

37 37 Procurement Mentality Run competitive bids Seek the lowest price Dont discount overall value but price is a big component Useful for inventory, planning and operations Allows a Co to periodically test where the market is Can be a good thing, but… The Problem Businesses: tend to be saddled with fixed costs and capital investments OR people challenges related to intellectual assets-rarely both Ex: steel and software Trucking is the worst of both worlds, i.e., large fixed costs and capital needs with very high people turnover (inc. non-driver turnover, e.g., getting chewed out for failing on 15-min delivery windows) Q: is your organization left with procurement professionals or transportation specialists? Shippers: Be Wary of the Procurement Trap Source: BB&TCM

38 38 Shipper Tips Source: BB&TCM You are not buying transportation, you are buying capacity…make sure your bosses know the difference Next-day lane service is shorteningwhat does that mean for your network? Fleets are tiering driver pay: What tier of drivers are you getting? Slip-seating: if HOS gets cut [again], ask what fleets are doing to promote this from 1%-2% of trucks to 20+% Floor loading vs. pallet loading…opportunities? Ask: what percent of your fleet do you withhold for market opportunities vs. pre-booking? 5 levers to pull: (1) dedicated; (2) intermodal; (3) brokerage; (4) increase core carriers; (5) grow in-house fleet. Ask: what lever(s) make sense that we have not pulled? Fix: Only 70% of shipments are unloaded in less than two hours Fix: ~80% of van loads are drop and hook, but 85% of reefer loads are live load/unload Fix: Penalties for early deliveries and/or no acceptance Address: Shipper/receiver focus upon inventories and dock door management, cutting into flexibility when more flexibility is needed

39 Backdrop 00-02: 3 years of record carrier failures Bush tax cuts May 2003 HOS announced July 2003 (effective ) Many shippers took capacity for granted IP growth rate doubled Auto 16M+ units and 1.8M units 2013–2014 Environment Modest carrier failures (07-11) Tax increases in Obamacare and other regulations and costs Shippers anticipating next capacity squeeze since 2007 mini-downturn Shippers: 5 levers pulled regularly Auto 16M and 1M+ units Pending HOS change? (July) Is There Another 2004 Out There? Maybe

40 40 Shippers Capacity has been relatively loose since June, but be wary… Capacity could tighten on a dime; dont be penny-wise and pound foolish Positive economic surprises would make it clear there are not enough trucks HOS will hurt productivity and accelerate failures Between housing and HOS balance could shift in H213 or in 2014 to carriers Carriers Engage shippers about productivity hit on HOS Show your costs, but also recognize that supply and demand drives rates Focus on the 660 (soon to be 600) challenge Determine customers that hurt you the most when HOS changes Know your costs per hour and remember not all hours are created equally Summary Source: BB&TCM analysis

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