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Trucking At The Cusp of Expansion, Yet Roadblocks Remain

Date: Nov 06, 2013 @ 07:00 AM
Filed Under: Transportation Finance

Equipment Finance Advisor catches up with Dan Clark and John Conkin of GE Capital’s Transportation Finance to gain their perspective on key issues facing the transportation sector. Clark and Conkin give the sector a stable rating, yet both note issues such as a shortage of drivers and general uneasiness about the health of the overall economy continue to inhibit expansion.

Equipment Finance Advisor:  Recent data from sources including FTR Associates, the American Trucking Associations and Transportation Services Index indicate truck freight tonnage rose in 2013 as compared to 2012. Do you view this as a potential precursor to a rise in Class 8 demand?

John Conkin:  I don’t think that the increase in freight tonnage is necessarily related to increased Class 8 demand. The information we are seeing leads us to believe that this increase is attributable to truckers moving heavier freight. While the number of loads is increasing as indicated by the data we’re receiving from the American Trucking Associations, it is not increasing at the same velocity that tonnage is increasing. If you look in terms of what’s going on in the economy today, the segments that are growing are energy, housing, automotive and some construction. Those are heavier types of freight and that’s led to the increased tonnage.

Photo of Dan Clark - President & General Manager - GE Capital Transportation Finance

Dan Clark:  We do note that capacity is pretty much at the point at which we will begin to see, with any growth at all, a real capacity issue in terms of the number of units on the road and the ability to deliver freight.

Equipment Finance Advisor:  The trucking industry has been in a replacement cycle for a number of years now and much of the data released in 2013 indicates this cycle is continuing. Meanwhile, capacity utilization has increased for 18 of the past 19 months and remains at its highest level since 2005. When do you see the industry moving toward an expansion cycle?

Clark:  As I noted, I think we’re right at the cusp of seeing the need for expansion. However, there are some limiting factors. The first and foremost factor has to do with the number of drivers. The age of drivers in North America has increased significantly and we’re not seeing a younger group of truckers coming in. We are faced with this driver limitation and that’s hampering any real expansion.

In terms of the economy, we’ve seen some false starts and there’s uneasiness about that as well. And of course, there are the various regulations that arise in the transportation industry. Whether it’s the hours of service or whatever else it might be, those regulations impart negative feelings to industry players.

Photo of John Conkin - Senior Vice President - GE Capital Transportation Finance

Conkin:  I think until there’s some confidence and reliability as to what’s happening in the general economy, I don’t expect we will see a lot of expansion. What I’m mostly hearing from our customers is that while they feel good about their own businesses, they are still waiting to see what is going to happen on the economic front.

Equipment Finance Advisor:  The Hours of Service regulations implemented in July have trucking executives concerned about operational inefficiencies. How do you see this regulatory change impacting trucking companies?

Clark: One thing to note here is that this regulation has probably affected to the greatest extent the larger, more efficient fleets. I say that because the fleets that had really spent time to get the best use of both the truck and the driver were pretty much maximizing their capacity and hours of service. They were getting every penny out of every mile. When the regulation hit, that threw a wrench into their systems. This has had a lesser effect on the smaller to medium fleets.

Equipment Finance Advisor:  Trucking dealers have maintained a relatively cautious stance relating to inventory-to-sales ratios. What do you believe these dealers will need to see that will instill greater confidence to build up inventory levels?

Conkin:  Ninety percent of truck and trailer sales run through the various dealer networks. Today, the timeframe from order to build to delivery is down to a few weeks … something in the range of three to five weeks. The dealers ask themselves: “Why should we take the risk and stock as much inventory as we have historically if the time from order to delivery is so short?” I don’t know what the magic number is here, but until you see that timeframe move out to eight weeks or so, I don’t expect to see dealers ramp up their inventory.

Clark:  Basically, what we’re seeing today is dealers keeping a few units on hand to use as show models, so to speak. In the industry, most trucks are ordered according to the specifications of the individual fleet so there isn’t really any need for the dealer to carry that inventory risk. When the order boards were showing delivery times of two to three months, a dealer would order models with the specs of some of its better customers to have them on hand. But that has changed.

Equipment Finance Advisor:  What is your outlook for the trucking industry over the next two to five years?

Clark:  I’ve been classifying the trucking industry in the same way for the last year or two … good, but not great. And as I look out, I see it staying pretty much the same: a good and fairly stable market. Some challenges remain for the industry overall on both the manufacturers’ and dealers’ sides.

On the fleet front, they still are at the point where they need to get their rates up and that will come when capacity tightens up and shippers are unable to find someone to move their freight. At that time, shippers will have to pay more and that influx will hopefully take care of the driver issues.

Conkin:  I would agree with Dan and if I had to give the industry a grade, I would give it a good solid B. The replacement cycle and the age of the equipment out there mean that dealers are providing a great deal of maintenance these days and they are happy about that. I think once the economy starts to heat up, it’s going to bring the shortage of drivers to light.

Equipment Finance Advisor:  What are the most frequently voiced concerns your field representatives are hearing form trucking executives these days?

Clark:  I would say there are two with the first being the lack of drivers. Right after the most recent recession, we saw driver turnover drop to historic lows. But today, we’re up back up to nearly 100% turnover at many of these fleets. The numbers are staggering and there’s obviously an expense associated with having to continually put new drivers behind the wheel. The second issue concerns the rates. They are waiting for the pendulum to swing back into their favor so they can get the rates they have been waiting for.

Equipment Finance Advisor:  Do you see any significant “bumps in the road” as we move into 2014?

Clark: I can’t think of any but of course Washington could always do something. As an industry, we’ve been fairly resilient over the past couple of years; it has muddled along. One of the biggest things that could cause some issues is if mortgage rates begin to rise significantly. While housing hasn’t turned around as quickly as many thought it might have, we’re still seeing more activity than we did a couple of years ago and the low mortgage rates are helping the freight movement. If we see another spike in the rates and things slow down even a little bit, I’m not sure if the rest of the economy will be able to pick up the gap.

Equipment Finance Advisor:  In late September, GE Capital increased its credit facility for Rush Enterprises to $750 million from $600 million.  As Rush Enterprises is the largest commercial truck dealer in North America, does this have any broader implication for the trucking sector?

Clark:  Mostly, I think it depicts the nature of our long-term relationship with the Rush organization. This relationship has been in place for 25 plus years and I really think it shows that some of the industry’s players want to do business with the companies that have been there for them through all economic cycles. They have confidence in GE Capital’s ability to withstand the next down turn. After all, if there’s one thing we’ve all learned it’s that there’s always another downturn out there … we just don’t know when it will be.

Equipment Finance Advisor:  Do you have anything to add with regard to the credit markets in general?

Clark:  There’s no question about it, any liquidity that left after the downturn is back in full force. In the trucking finance industry, you have the manufacturers’ captive finance companies and the national, regional and local banks. All of the previous players are back and we’re starting to see new players sprout up on a monthly or weekly basis it seems. I don’t think the industry has any problem with liquidity at this point and I definitely don’t foresee it in the immediate future.

Editor’s Note: Equipment Finance Advisor was pleased to learn the John Conkin was recently named president of the Allied Committee for Transportation or ACT1. At this year's American Trucking Associations' annual conference, ACT1 announced a new initiative, an industry-wide movement centered on establishing a positive image and a more robust connection with policymakers and the general public.

Executive Editor | Equipment Finance Advisor
Stuart Papavassiliou is the Executive Editor of Equipment Finance Advisor and ABL Advisor.

Contact Stuart Papavassiliou at 484.380.2964 or

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