State of the Trucking Industry: Mostly Smooth

Although the trucking industry is improving along with the U.S. economy as a whole, trucking companies still face a number of challenges, a recent GE Capital, Transportation Finance survey found.

According to GE Capital’s “Trucking Industry Economic Outlook Survey,” the trucking industry has experienced very strong revenue and employment growth, and this upward trend is expected to continue.

However, companies reported that a number of factors are affecting their profit margins, including healthcare costs; government regulations; and hiring, training, and retaining employees.

Growing Industry

According to the survey, business leaders in the trucking industry reported solid revenue and employment growth during the 12-month period covered in the survey (stretching from the third quarter of 2013 to the third quarter of 2014). The companies surveyed also had an extremely positive outlook for the following 12 months, as 3.5-percent margin growth was expected for the industry for that time period.

The survey — which included 37 middle-market trucking companies, with 55 percent of the surveyed companies reporting annual revenue of less than $50 million — specifically found that more than half of the surveyed firms expected to add jobs over the next 12 months, while overall employment in the field was expected to grow an average of 5.1 percent year-over-year. In particular, the surveyed companies were more optimistic about their local economy than the U.S. or global economies.

Survey respondents also noted that demand for financing was likely to remain strong as businesses borrow to add vehicles and other equipment. Specific survey findings included:

• A total of 49 percent of respondents believed the sector would expand in the year ahead.
• Thirty-five percent expected to have greater capital expenditures for the upcoming year.
• Nearly half of respondents planned to increase the percentage of new equipment they would be adding.
• Of respondents, 39 percent considered additional financing for company vehicles in the coming year, while 40 percent considered equipment financing.

A major driver of this growth is the adoption of new, more fuel-efficient technology to replace older, less-efficient equipment that is particularly prevalent in smaller and mid-size fleets, according to John Conkin, senior vice president of sales for GE Capital, Transportation Finance.

“Sales of used equipment have held fairly steady, but there’s not a big availability of quality used equipment in the marketplace. Buyers that typically have purchased used equipment are now purchasing new equipment,” Conkin said.

Seeking Opportunities

Survey respondents cited reducing the number of miles covered without loads, increasing tonnage from existing customers, and regional expansion as the greatest business opportunities for middle-market trucking companies.

According to Conkin, trucking companies have improved optimization of their existing resources to reduce expenses.

“There’s not the number of idle trucks available for capacity, so trucking companies have gotten smarter about the contracts and the routes that they take, and how they match those with the businesses available,” he said.

Conkin particularly cited the increased use of route optimization tools by trucking companies so that they can operate as efficiently as possible.

“They review all of their lanes more systematically to make sure that the freight that they’re hauling is profitable. We’ve seen trucking companies that are willing to walk away from customers that aren’t as profitable right now, just because they don’t have the excess capacity to haul freight that’s not profitable,” Conkin said.

Only 14 percent of survey respondents said they were interested in acquiring other businesses. A big reason for this is the replaceable nature of the trucking industry, according to Dan Clark, president and general manager for GE Capital, Transportation Finance.

“The main thing is, when you look at it, what are you buying? You’re buying a contract which is not a long-term contract, so you end up buying the equipment that is out there that can be purchased elsewhere, so why pay a premium for that? The other thing you get with buying another company is drivers, but drivers have the ability to leave and go someplace else. They’re economically ‘soft’ things that you’re buying, so it’s hard to be very confident that you’re going to get the return for your investment,” Clark said.

In addition, the industry’s good economic health over the past four years — especially compared to the U.S. economy as a whole — has hindered mergers and acquisitions (M&A) activity among trucking companies.

According to Conkin, much of the industry’s M&A activity took place when the sector was still economically struggling.

“Those companies were more attractive at that point than they are now. The desire to sell is not as great. I think that, as more companies use electronic logs, and with upcoming regulation requiring drivers and fleets to use electronic logging devices, you’ll see some people that will be more inclined to sell and exit the industry,” Conkin said.

Facing Challenges

Despite the optimistic economic forecast, though, a number of challenges lie ahead, the survey found.

Middle-market leaders in the trucking industry cited business costs such as healthcare costs, government actions and regulations, and maintaining a well-trained workforce as challenges, with healthcare named the No. 1 concern.

Government regulations and increasing insurance costs were also named primary concerns. In particular, hours of service was cited as a high-ranking government regulations concern.

“There’s been a lot of volatility around hours of service. The Federal Motor Carrier Safety Administration (FMCSA) changed their regulations, and a lot of the data was questioned by the trucking industry. It caused, from what we’ve heard, a 3-percent to 4-percent degradation in productivity. Now, that’s recently been reversed for a short period of time, but there’s just not a lot of continuity in what the regulations are and what the trucking companies can expect. The things that affect them most are the things that they don’t have any control over or don’t know what to expect,” Conkin said.

Reauthorization of the federal highway bill was another regulation-related concern cited by trucking companies.

“On the highway bill, they’re expecting and need to have a longer term view of that instead of the one-year-at-a-time approach they’ve been taking. The congestion and general condition of the roads is obviously not a good thing. It costs the industry money and, quite honestly, safety. They just need to have, or they’re looking for, some kind of a long-term view on the highway bill that goes out. They are looking for a plan and see some continual improvements instead of the see-saw that we have been seeing,” Clark said.

In addition, Clark said that, although he expected healthcare costs to be cited as the biggest concern among trucking companies, the high ranking of uncertainty about government regulations surprised him.

“Regulation is something that they deal with continually, and I don’t foresee new far-reaching changes in the industry, but I think that the past regulation changes are causing undue concern,” Clark said.

The lowest-ranking concern in the survey was cash flow, chosen by 23 percent of respondents. Increasing competition was also not a major factor, chosen by just 28 percent. The availability of freight to haul was the third lowest-ranking concern, chosen by 35 percent.

Boosting Hiring

According to the survey, one of the biggest challenges facing the industry is retention and recruitment of top talent, although labor difficulties ranked only seventh among respondents’ concerns.

“I would have thought that would have been higher with the issues that companies have had trying to find drivers and fill their trucks,” Clark said.

As a result of the industry’s hiring shortage, the size of trucking fleets nationwide has actually contracted instead of expanded since the last economic downturn, according to Clark.

“Normally, a year or two after a downturn, you start to see some pretty big spikes in new equipment sales as equipment is being replaced and additions are being put into the market. Because there’s a lack of truck drivers, you’re not seeing it. It’s acting as a muffler on the industry,” Clark said.

Clark added that the hiring taking place in the industry has mainly been to fill existing driver slots left by an aging workforce. The average age of a commercial truck driver in the U.S. is 55, according to the Bureau of Labor Statistics.

“You’re starting to see a lot of retirees getting out of the industry, so once again, it’s more of a replacement-heavy field rather than one with a lot of additional people going into it,” Clark said.

Although the industry is taking steps on the equipment side to increase the pool of potential drivers, such as increasing the number of trucks equipped with automatic transmissions in trucks to attract younger drivers who may not have experience using manual transmissions, there still appears to be a hiring ceiling, according to Clark.

“Quite honestly, you see all different kinds of reports out there as far as what number of additional drivers could be hired today, and it’s substantial, but there’s just not enough of the population,” Clark said.

Clark cited working conditions as a major reason why the industry has had a hard time finding and attracting drivers, as well as technicians and mechanics.

“We’ve been asked, ‘How do we put drivers in better equipment that is more comfortable and more ergonomic?’ ” Clark said.

Also cited as a concern is the overall perception of the industry among the general public — a “lack of understanding of the professionalism of the industry and a truck driver,” as Clark put it.

However, efforts are being made to improve the image of the trucking industry. According to Conkin, this is the goal of the industry organization Trucking Moves America Forward, of which GE Capital, Transportation Finance is a founding member.

“It’s geared toward advocacy, education of the general public, and education around the trucking industry itself to show what a critical piece the trucking industry is to the nation’s economy and well-being,” Conkin said.

Proceeding with Caution

According to Clark, trucking companies are generally optimistic with the economy as far as it pertains to trucking, noting that the industry’s economic upswing began earlier than it did for the general economy in the U.S.

“If people are feeling pretty good about the industry’s economy, it shows that they’re able to pass on rates, and capacity remains tight,” Clark said.

However, Clark added that trucking companies are much more mindful of the financial-statement-driven side of things than they were a decade ago, and that, even if they wanted to expand aggressively, they couldn’t because of the hiring shortage.

“At this point in the cycle, with capacity like it is, you would normally see almost every fleet saying, ‘I’m going to add capacity.’ Now, less than 50 percent of fleets are adding capacity. While the survey doesn’t get into a lot of detail, our market perception of that is, talking to the fleets, when they’re talking about adding equipment, it’s small, single-digit percentage, not double-digit percentage increases like you might expect,” Clark said.

In addition, Conkin noted that, despite the industry’s hopeful economic outlook, trucking companies are generally more optimistic about local economies than the national economy.

“When they look at their own business, and their local scene, they’re very optimistic. The further away their focus is, the less optimistic they become, so, as they shift their focus from a local environment to the U.S., their optimism decreases, and, as they focus more globally, then their confidence level drops even further. This group has been optimistic about their own areas for quite some time as noted over the past several surveys,” Conkin said.