Plan B

| January 29, 2009

Commercial development projects with longer lead times are still keeping some truck operators busy. Even that sector is slowing down and is projected to weaken considerably in 2009 in most U.S. markets.

This fall, instead of hauling lumber to home improvement stores and housing sites in the Pacific Northwest, owner-operator Dave Bicheno of White Swan, Wash., transported fresh pears six days a week to a cannery in Oregon. Transporting pears paid well – better than 2x4s – but by the season’s end in November, he had planned to go back to delivering building materials, which is down by 50 percent this year.

Tulsa-based Melton Truck Lines runs 1,000 tractors and more than 1,750 flatbed trailers, primarily carrying industrial products like raw steel and machinery. Over the past two years, the company’s tractor productivity dropped 10 percent, says Russ Elliott, a senior vice president. “In 2001 and 2002, there was a decrease, but we’ve never faced a sustained period when we’ve had two 5 percent drops,” he says. “We’re definitely in a longer and more painful trend than we’ve ever been in.”

The construction-led freight slowdown in North America, heading into its third year, is hurting owner-operators and carriers alike. Now that the sharp slump in homebuilding in recent years has triggered the credit crisis and accompanying recession, truck transportation likely will decline up to 2 percent in 2009, the worst performance since 1982, says Noel Perry of FTR Associates, a transportation consulting firm. The result of three years of declining Class 8 truck loadings and two years of lower Class 8 ton-miles “puts strong pressure on the carrier base,” he says.

Freight volumes overall are decelerating, but it’s a mixed bag for different freight segments, says Bob Costello, chief economist for the American Trucking Associations. While dry van shipments are contracting year over year, tankers are benefiting from the popularity of biofuels and hazmat shipments turned down by railroads, he says. Flatbed carriers are seeing many fewer building material loads, although metal products and heavy construction shipments have taken up the slack, carriers say.

“It’s a continuation of what we’ve seen the past two years,” says Todd Spencer, executive vice president of the Owner Operator Independent Drivers Association. “We won’t see any improvement until we see an improvement in the overall economy. A lot of that hinges on when the housing industry not just rebounds but ceases to deteriorate.”

For those who’ve relied on transporting building materials, the news isn’t bright. The U.S. Commerce Department reported that housing starts are at the lowest level since 1991. Adjusted for population growth, the housing start figure is actually the lowest since the government began tracking starts in 1959.

The manufactured housing outlook is bleak, too. The industry went through its own bubble about five years ago when buyers who shouldn’t have been financed got loans anyway. Foreclosures followed.

“When the credit crisis got worse and no one was lending to anybody, it just compounded our problem,” says Chris Barrett, executive vice president at Bennett Truck Transport of McDonough, Ga. “I think our housing segment is likely to come back before other segments do, based on affordability and quality of construction. I’m optimistic we’ll get out of the woods before site-built gets going.”

Bennett calls on 950 trucks run by owner-operators to transport manufactured and modular housing and recreational vehicles. The company’s business was down 20 percent to 25 percent before the credit markets froze up and is off as much as 35 percent now, Barrett estimates.

“On the housing side, we’re at historic lows of units manufactured,” he says. “RVs are at a 16-year low.” Barrett says winter business normally slows 50 percent from the summer peak, but this winter may be worse. “Next year, we project we’ll be off another 15 percent,” he says.

In retail, the normal fall boost that comes with holiday shipments isn’t happening this year. “We haven’t seen that materialize the past two years and, if anything, this year is worse than last year,” says OOIDA’s Spencer.

December, January and February are usually the weakest months for flatbed freight, and this winter could be worse. Melton’s Elliott jokingly says after this year’s third quarter, “We’d just completed the best winter we’ve ever had.”

When the industry will turn around is anybody’s guess, but no one’s guessing it’s imminent.

“Our thinking in the flatbed market is the housing industry has to significantly turn around before we see any turnaround, because those commodities [dominate] our business,” Elliott says. “We don’t haul much in building materials, but when that goes away, those haulers come into our market and poach some of our business in the industrial sector.”

Many owner-operators and carriers with flatbeds have shifted from housing to commercial and industrial, whose projects take longer to complete. Commercial, however, may be the next sector to slow down. An annual study by the Urban Land Institute and accounting firm PricewaterhouseCoopers forecasts that commercial real estate and development in all major U.S. markets except Dallas and Houston next year will have its worst period since 1991-92.

Daily Express, a heavy- and specialized-haul company based in Carlisle, Pa., has seen its construction equipment business drop 30 percent from two years ago, says Todd Long, president and CEO. As that sector has waned, the company has more than compensated by finding business in agriculture, wind energy, crane deliveries and mining equipment. “The increase in wind energy and in the price of commodities around the world has created an unbelievable demand for machines that capitalize and produce in those markets,” Long says.

The puny housing market convinced Hollis James, an owner-operator from Tulsa, to shift away from hauling lumber three years ago. An owner-operator for five years, James now carries coiled and flat steel, light poles, pipe for oil field operations and windmill equipment. “I may have to wait a day or two sometimes, but generally it’s not too bad finding loads” with a broker’s help, he says. “If it doesn’t pay a minimum of $2.25 a mile, we won’t deal with it.”

Steve Callahan of Madison, S.D., is another owner-operator who’s been able to stay busy. A former farmer, Callahan hauls transformers and park equipment, such as picnic tables and fire rings, through Ron Schoellerman Trucking of Vermillion, S.D. He says he’s getting paid about $2.50 a mile and keeps 80 percent of that.

“I’ve hauled shingles and tar paper, but I’ve done that usually just to get a load home,” Callahan says. “It doesn’t pay much, and we don’t haul that now.”

Callahan says he’s been told that hauling the park equipment will stay busy into January. He says the company also has a contract to haul fire trucks to Houston for shipment overseas.

Monroe Freight of Monroe, N.C., hauls store fixtures and metal products, but owner Lane Pressley says getting loads for return trips to North Carolina has been a struggle. “The inbound is terrible and getting worse,” he says. “I think the next six months will be tough and then it should turn around after that.”

Monroe brokers loads to owner-operators when it has too much business for its own seven tractors and nine dry vans. Pressley says one of his customers is anticipating a fourfold expansion early next year, which will lead Pressley to buy additional trailers and lease them to owner-operators.

Anecdotal evidence indicates the slowdown has taken a toll on single-truck owners and very small fleets. Bicheno’s bookkeeper told him that 10 of her owner-operator clients have gone out of business.

Through September, 2,690 carriers with five or more trucks failed during 2008, says analyst Donald Broughton of Avondale Partners. He says the bankruptcies have removed a record 127,000 trucks from the road. Many of those fall within the scope of the National Association of Small Trucking Companies, most of whose members average 20 trucks.

NASTC President David Owen says his members are coping with the slump in various ways, from shutting down a truck or two to not renewing a contract with an owner-operator to brokering out business. “We feel the downturn a lot faster than many other businesses,” he says. “Some are consolidating loads in LTL or avoiding long runs that may not pay as well or to areas that are unfriendly toward truck operators.

“The cycle of demise can turn in as little as a week or 10 days for a small trucking company,” Owen says. “A company can be vital in June and broke in August.”

Some companies are dealing with the changed economic environment by taking a closer look at their customers. Integrated Transport Logistics of Montgomery, Ala., will stay with flatbed, step deck and specialized hauling, but will work more closely with its customers to try to avert cash flow problems, says Scott McGlon, owner and chief operating officer. “We are doing a lot more due diligence on our customers and brokers we work with,” he says. “When the going gets tough, there are shippers that use their vendors as a financing source. We’re making sure that doesn’t happen to our companies.” McGlon says he’s already dropped three customers because of shaky credit.

“I’m very concerned about the next couple of quarters until conditions start to stabilize with the bailout plan, which I’m not very confident in,” he says. “We’ll keep it close to the vest over the next six months.”

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