Recovery on hold

Last summer’s bleak short-term outlook for the trucking industry got bleaker after the Sept. 11 terrorist attacks. The recovery many had predicted for the industry has been delayed six months to a year.

“For the third quarter, growth was going to be positive, although not too much positive,” says Bob Costello, an economist with the American Trucking Associations. “It’s definitely going to be negative now. We haven’t seen the full scope yet.”

For carriers and owner-operators reeling from a year of slow growth and expensive fuel, the news isn’t good. Freight is expected to slow further, even through the normally busy fall season, and fuel prices will be subject to spikes as long as there is instability in the Middle East.

“It has affected the economy all the way down,” says Rye, N.Y., owner-operator Bill Maloney. “It’s going to be a landslide effect. I live about 20 miles outside New York City, and the whole immediate area has been affected, especially the hazmat hauling.”

Truckers who haul manufactured durables such as appliances and automobiles will be hit hard, along with those who haul the raw materials for those manufactured goods, says economist Ken Kremar, director of capital goods and freight transportation at DRI-WEFA. Other segments will suffer, too, just not as much.

“Before the attack, auto sales and housing seemed to be holding up,” Kremar says. “But not now. There’s a tendency with consumers when something like this happens to wait and see. They step back. They don’t fall off a cliff, but they shop with less enthusiasm.”

Owner-operators who haul for retail outlets will also see a drop in business, says John Barnes III, a Deutsche Banc Alex. Brown trucking analyst. A report he prepared 10 days after the attack says fleets dependent on retail goods, such as Werner, J.B. Hunt and Swift, would probably post significant losses. In the weeks after the attacks, stocks for some trucking companies plunged as much as 32 percent, though most were rebounding by early October.

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Construction haulers may also see declines. New York state officials say funds planned for large public construction projects may be shifted to reconstruction efforts at the World Trade Center site, though that spending will be spread over many months. The collapse of the travel industry means new hotel construction is likely to stall, Kremar says. Airport construction, a promising segment prior to Sept. 11, will grind to a halt as Americans fly less.

Truckers who haul produce and meat will probably be less affected by the economic downturn, Costello concedes. “We still have to eat.” For the same reason, products headed for discount stores should see a limited impact. “But even clothing will be affected by this,” he says. “You can always hold off on purchases like that.”

Costello points to consumer spending during the Gulf War as an example of what might happen in the second half of this year. Consumers, apprehensive over the possibility of a prolonged war, saved money and did not begin spending in earnest until after the war. Now, Costello says, consumers have similar questions.

These uncertainties pushed consumer confidence to a five-year low after the attacks. As consumer confidence sags, economists don’t expect consumer-spending levels to stay high enough to prevent a recession, as was the case for several months before the attacks, despite a major decrease in manufacturing activity.

“There’s been a fair amount of damage to consumer confidence,” Kremar says. “It doesn’t look too good over the balance of this year and into the beginning of next year.”

Owner-operators and fleets can expect reduced revenue from freight slowdowns and increased costs from heightened security. Fleets are beefing up satellite tracking, building fences and checking IDs.

“More investment will be made to improve the security of our trucking and air freight services,” says Bob Delaney, vice president of Cass Information Systems and a consultant with ProLogis. He estimates new security measures will cost trucking companies $20 billion.

Extra security also means delays. Nowhere was this more evident than at border crossings in Mexico and Canada after the attacks. Expanded security checks created delays of up to 12 hours. “The cost of these delays could be astronomical,” Costello says.

The time devoted to hazmat inspections and compliance is also expected to increase, after revelations of fraudulent commercial driver’s licenses with hazmat endorsements and concerns that terrorists could use trucks in an attack. Transportation officials have set up additional checkpoints at bridges and tunnels and warn truckers to expect thorough inspections.

The Federal Motor Carrier Safety Administration said in late September that inspectors will visit 80,000 trucking companies hauling hazmat.

With the known changes of increased hazmat security, slower freight and wasted hours at the border, as well as the unknowns associated with the U.S. attack on Afghanistan, trucking’s short-term bright spots are few and far between. “Growth is going to be extremely meager for the next few months,” Kremar says.

Photo courtesy of Michael Rieger/FEMA.

Rising from the ashes

While analysts say most areas of hauling will feel some pinch from the economic impacts of the Sept. 11 attacks, there are a few relatively bright spots for owner-operators:
The dip is expected to be short-lived. Many economists see the recovery extending into the second and third quarter of 2002. Have patience, they say, because the U.S. economy is resilient. “Our economy will come back stronger, and the terrorists will not win,” trucker Bill Maloney says.

Diesel fuel prices could be reasonable. Though Middle East turmoil could set diesel prices on a mostly upward roller-coaster ride, at press time in early October, diesel was cheaper than before Sept. 11. Fuel prices actually declined as much as 12 cents a gallon through the end of September. With oil prices trading at less than $22 a barrel – $7 less than oil prices before the attack – petroleum analysts say the sagging economy should push prices lower.

“Pump prices have shown a consistent downward trend since Sept. 14, and there are no signs of that trend slowing,” says Mark Derks, an analyst with fuel service provider T-Chek Systems.

Fuel prices have dropped for a number of reasons:

  • Worldwide demand slowed after the attacks.
  • Diesel stockpiles, sufficient before the attacks, now exceed demand.
  • Airline slowdowns have made oil available for diesel and gasoline instead of jet fuel.
  • Oil-producing countries have pledged to keep oil flowing despite low demand.
  • Less-than-truckload business might do well. Some LTL carriers may benefit from additional freight that would have traveled by air. In the days after the attacks, expediters and LTL carriers increased business, but that’s not expected to continue, stock analyst John Barnes says. LTL carriers may see declining freight volumes but should recover more quickly than the truckload carriers, he says.

    The fittest will be in greater demand. Owner-operators and carriers on the verge of bankruptcy will probably fail, giving those that remain access to more loads, Barnes says. “A further deterioration in the economy may actually be a blessing in disguise for most of the core carriers,” he says. Failures will accelerate consolidation and pull surplus trucks off the road so surviving carriers can raise rates and gain market share, Barnes says. If fuel prices remain stable, profit margins should increase.

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