Truck utilization modestly tight

Given continued conservative capacity management by trucking managers, the increase in freight demand will fund a steady rise in capacity utilization. The capacity situation continues to remain tight, but not critical. FTR’s estimate of truck utilization rose slightly in February, to 93.9%; however, the prior 4 months were revised significantly lower so we are now at least a full point below where we thought last month. The historical average is ~90% so we are still in a modestly tight capacity environment.

Outlook
Capacity utilization will stay in the strong, but not critical, 95% range until HOS implementation in 2013. The levels for 2012 should be high enough to create some additional price pressure, although the peak conditions for this recovery will likely occur in 2013, when the changes to Hours-of-Service regulations come into effect.

Aside from the near-term weakness, there is very little change in our outlook this month. Our forecast calls for utilization to get back above the 95% level by next quarter and to continue to rise during the rest of 2012. This puts us back to where our estimates were last month by the end of 2012. We then expect to be maxed out until the HOS impact comes in the middle of 2013. This will pull capacity significantly tighter over the second half of the year and will remain elevated through most of 2014. Utilization will approach the 100% mark – a level that indicates capacity shortages could occur.

This will be an event to watch because as we approach 100% the market will have to prepare for potential capacity shortages. We have previously noted that our chances for wide capacity shortages have lessened, but they are still possible in certain lanes and types of freight. It is time to prepare for that possibility.

Analysis
Utilization is currently stable and modestly tight, although Q4 freight revisions have moved the level modestly lower for the first half of 2012. Although the 2013 HOS changes are less than expected, their implementation in a year full of other regulatory pressures will push capacity utilization near the same levels as in the 2004 crisis. Barring a recession, capacity will stay tight longer this time due to more regulatory change.

When looking at the last year, order activity for new trucks indicates that fleets are not looking to add capacity into the system. At least not in sufficient quantity to impact overall utilization. There has been some additional weakness in order activity recently which we attribute to a reluctance to pull the trigger during a period of increasing costs (i.e. fuel) and especially when there is plenty of lead time available for ordering trucks and getting near-term production slots.

Utilization started rebounding at the end of 2009 and moved higher through the end of 2010. It has remained relatively unchanged since then. Slowing capacity growth is just offsetting modest demand and regulatory drag. Our forecast accounts for the July 2013 anticipated implementation of HOS rules. Changes to the expected pace of economic growth or a delay in HOS implementation are the keys to changing our outlook.

While we finally have a known date and ruling on HOS, including it in the forecast is still an educated guess of sorts –we don’t like to try and guess what politicians or lawyers will do. We do know that capacity will likely stay near its current level (~95%) until the economy changes pace or the HOS rules are finally in place.

Recent Revision
An after effect of last month’s major changes to the historical freight data is that it also impacted our capacity utilization estimates. The key points are that, compared to our initial estimates, utilization did not fall quite as dramatically in early 2009 nor did it rebound as strongly in early 2010. Wide swings in output are what tend to drive big changes in utilization. We have removed much of that volatility in the freight data. The data still shows that we remain in the solidly tight, but not critical, range that we have been assuming for the last year.

The reduction in the wide swings of utilization means that we are better situated to handle the upcoming HOS implementation than previously understood. We still anticipate that we will get into near-full utilization, but the prospects for industry-wide capacity shortages are lessened.

NOTE:
FTR’s Active Truck Utilization metric calculates the percentage of the population of active trucks that is required to move the U.S. truck freight. In general, a figure above 95% indicates a tight market where the majority of the truck population is at work. A figure below 90% indicates a weak market where a significant portion of the truck population is idle.