TL rates growing above 5%, outlook lower

UPDATE: We have updated our outlook to account for the officially released Hours-of-Service (HOS) rules. The start date is for a later date than our original estimates included. We had used a late 2012 start, but the final rules are for a July 2013 implementation date. Also, the full impact of the rules are now estimated to have only a ~3% drag on trucker productivity, compared to the nearly 5% hit that we previously estimated.

Truck pricing remains in the 5%+ range that it has showed for the last year and a half. The delay in HOS rules, combined with the continuation of decent freight growth in 2012, suggests to us that the current path is likely to be sustained for another year, when HOS pressures will finally start accelerating pricing upward. The only anomaly in our outlook is during the third quarter of 2012 when pricing improves to 8%, but that is mostly just an indication of some minor weakness in pricing during 2011Q3. Truckload rates from 2010Q1 to 2011Q2 rose at an average quarter-over-quarter rate of 1.7%. We expect the next 6 quarters to match that output.

Moderating fuel prices help reduce ‘all-in’ year-over-year rate increases. Costs are expected to begin accelerating in 2012 as new, expensive equipment makes up more of the fleet, and as labor shortages increase driver pay. Any major upside to rates will likely wait until HOS is implemented in mid-2013.

Outlook remains strong
After dropping 10.9% in 2009, industry rates (excluding fuel surcharges) rose 4.4% in 2010. Rate growth will stay strong through at least 2013 – barring an economic disaster. Rates are looking to grow 6.3% in 2011, 6.5% in 2012, and 7.0% in 2013. Our outlook for 2012 has improved slightly, but the 2013 forecast came down as we moved out the HOS impact to mid-2013. Even if the regulations aren’t implemented we still anticipate seeing a 5% growth rate for the next several years – until the economic cycle turns down.

If you add in the fuel component, we saw rates drop 17.8% in 2009 and then rebound 7.5% in 2010. The spike in fuel costs in early 2011 will push rates higher, up more than 10%, before slowing down to grow only 6% in 2012 and 6.5% in 2013.

Analysis
Truck pricing is in the midst of an upswing as carriers are recouping significant cost increases. Recent data suggests that carriers are reducing the normal lag between cost and price increases. Carriers are becoming increasingly aware of their pricing power – even amid the weak economic conditions that have existed for most of the year.

The impact of falling fuel prices will be to slow the growth rate of shippers full cost rate (includes fuel). However, driver costs increases, high new equipment prices, and a tight capacity environment will keep rates, less fuel, above the 5% mark.

Regulatory impact
We anticipate that rates will run near a 5% year-over-year rate until the regulatory impacts finally come. As noted in other posts, the actual start of these regulations will not come until at least 2013, or later. We currently have them occurring in mid-2013. When, or if, these rules come into play then pricing growth will start to accelerate again. We continue to anticipate a strong pricing environment for the next 2 or 3 years. Even absent the regulatory impacts pricing would still remain near the 5% mark for the foreseeable future – a more mild, yet reasonable, operating environment.

Despite the mild economic recovery we still remain bullish on transport pricing. Why? The quick answer lies in the driver issue. Even with the economic recovery that we are currently in, the driver shortage is nearly 200,000. If the economy stayed slow for the next year we would probably start to move back to equilibrium. That is if we didn’t have a new wave of federal regulations coming into effect during 2013. The timing remains uncertain, but if it occurs it could affect the driver supply by more than 300,000 drivers. That keeps more than enough of a market shortage to keep rates strong even in a soft economy.

NOTE:
Our truckload rates data is based on publically-available data from security analysts and trade organizations. We then forecast the cost and margin elements, factoring in inflation and industry conditions. The figures are for rate-per-loaded-mile (less fuel surcharge), seasonally adjusted and are indexed to 2003Q1.