"I'll give you all I got to give if you say you love me too
I may not have a lot to give but what I got I'll give to you
I don't care too much for money, money can't buy me love

Can't buy me love, everybody tells me so
Can't buy me love, no no no, no."

The Beatles, Can't Buy Me Love

Those in the trucking business tell me that this recession is the worst the industry has ever experienced. The normal freight recession lasts about 18 months. This recession started in July of 2006 and started to lift in the 4th quarter of 2009. In addition to a national recession that was the most severe since 1980, this one was accentuated by a record pre-buy of trucks in late 2006 and unprecedented bidding which drove rates below costs.

The excess capacity has now left the market at a time of record low inventories and pick up in demand as truckers experience an unusually strong first quarter. Many of the survivors are "walking wounded" with decimated balance sheets. Last week I heard an analyst state that there is a strong possibility of an "instantaneous capacity shortage" as carrier failures accelerate during the recovery. Why?

Driver Shortage

There now exists a driver shortage. Driver recruiting magazines, which became thin as carriers cut costs, are now getting thicker again. As CSA 2010 approaches implementation, carriers have become more selective in the quality of new hires. Decimated recruiting departments are not ready to deal with the new challenges on the driver front. Many truck driving schools were shuttered during the downturn. To the extent that carriers have excess capacity in the form of parked equipment, they will not be able to find the drivers needed to fill those trucks without substantial increases in driver pay.

Equipment

Carriers stopped purchasing tractors and trailers during the recession and as a result the age of equipment is approaching obsolescence. Maintenance costs are rising rapidly. The boom sale year of 2006 was followed by record lows in equipment builds. 2010 tractors are subject to increased EPA requirements adding as much as $10,000 additional to the cost. A tractor which costs $81,000 five years ago now cost $118,000. This comes at a time when used equipment values are extremely low. 60% of the carriers survived the recession by deferring payments on equipment. This produces a dramatic spread between new truck prices and used trade-in prices. Carriers with credit are largely unwilling to invest additional capital in equipment when there is no return on investment, their current equipment is underutilized and rates are below costs. As carriers attempt to operate 4 and 5 year old tractors, maintenance will eat them alive.

Government Regulations

The industry is experiencing an onslaught of government regulations, increasing costs and significantly reducing capacity. FMCSA is forging ahead with CSA 2010, Electronic On Board Recorders (EOBR's), rules that raise barriers to entry into the business and tougher medical requirements on drivers. CARB is creating immediate problems for those who work in California. Other states will likely follow. Additionally, the FMCSA, at the prodding of trial lawyers and public safety groups, are formulating yet another rule on hours of service.

Brokers

Many procurement people at shippers became heroes and got fat bonuses during the recession by bidding asset-based carriers against non asset-based brokers. Trucking rates dropped an average of 10% while payment terms were extended. Very few trucking companies have a 10% margin even in good times. Typically a broker bids less because they have no investment in equipment. Currently, brokers are finding it extremely difficult to find capacity because they don't pay enough. As a result, their margins are squeezed, they can't cover customer commitments and they're returning to customers for rate increases.

Fuel

Historically, increases in fuel costs correspond to failures in the trucking industry. As the economy recovers, fuel will continue marching higher. Many fuel surcharges are inadequate to cover a carrier's true fuel costs.

Cash

As the economy picks up and fuel rises, carriers must have working capital to carry the float between the time they pay costs and the time their customers pay their receivables. The walking wounded lack cash and when they run out, abrupt business closures will result.

Demand

Demand is rising as evidenced by the monthly Purchasing Manager's Index. Many will counter that sales are far from prerecession levels. Albeit true, this disregards the fact that the increases in demand are occurring at 30 to 40% rates. The industry is so leaned out, that it is unable to respond to this rate of increase. This comes at a time when customers' inventories are at record lows, painting a picture of empty store shelves.

What is Your Strategy?

If you are a carrier or a broker, you should get your rates up as quickly as possible. Current rates are not sustainable. Running more miles below costs, or sport trucking as I like to call it, will only increase your losses. If you are a shipper, you would be wise to review your budget, increase rates and educate upper management at your company. If you were fair to carriers, didn't bid during the recession and gave increases during the recession, you're probably in a good position. If you commoditized carriers during the recession, remember what happens to commodities when they're scarce.