TL rates stronger to start 2012

Truckload pricing continued to come in above expectations in January, despite the sizable drop in freight during the month. January rates saw a year-over-year gain of 5.6%. Year-over-year growth has been above 5% for 14 of the last 15 months. Rates will increase in 2012 on pressure from freight demand and increasing regulations. Low year-over-year rates early in 2012 are from tough comparisons, not slow growth. If January’s pricing strength continues into February and March then we would be ahead of our current expectations and could see double-digit gains by the end of the year.

Outlook stays strong
The surprise of this recovery is the ability of the industry to sustain increases well above inflation despite the slow growth in freight demand in 2011. After dropping 10.9% in 2009, industry rates (excluding fuel surcharges) rose 4.4% in 2010. The rebound continued in 2011 with growth of 5.8%. Rate growth will stay strong through 2014. We anticipate seeing growth of 5.6% in 2012, followed by a strong 7.1% in 2013 and further acceleration to 8.7% in 2014. The strength in 2013/2014 is due to the inclusion of the HOS rules. That will help move pricing higher until at least mid-2014.

There is considerable upside exposure given the chance of strong freight growth and fuel price volatility. Pressure on most cost elements will keep rate increases well above inflation in 2012. The prime exposure is upward from fuel “politics.”

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 pushed rates higher, up 10.3%. Fuel costs should still growth in 2012, but not nearly as strongly as in 2011. We expect to see growth of 6.0% in 2012, 6.0% in 2013 and 8.2% in 2014.

Analysis
This uptick in fuel prices has, so far, produced less increase in ‘all-in’ rates because prices had not fallen near as much in late 2011 as they did in 2009 and early 2010. We expect diesel prices to remain above the $4.10 level in 2012, reflecting our conservative view of Middle East politics.

The current capacity utilization level is enough to sustain above-inflation rate increases. It needs to get back towards the 95% level to indicate that pressure for much higher rates is building. That pressure will increase substantially in 2013, when HOS regulations change.

Excepting early 2011, fuel prices and freight growth have not moved together during this upturn. As one slows, the other accelerates. This is, so far, in contrast to the situation during the last upturn when freight growth, fuel pricing, and regulatory drag all moved upward together in 2004 and 2005.

The fuel price situation will determine whether 2012 is a year of dramatic or merely substantial price increases. Before fuel, rates will come in above 6%, more than twice the rate of inflation. This could be higher if the economy accelerates. The recent diesel price increases will bring the first quarter run rate over 10% for ‘all-in’ prices. Our current forecast assumes some moderation in political pressure and only modest further increases, with diesel prices maxing out near $4.25/gal and then falling back towards $4.15.

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.