the trucking industry

The Trucking Industry of Yesterday, Today and

Tomorrow

Brad MorrisVice President – Marketing and PricingAAA Cooper Transportation

Beginning in mid-2008, the market began to crumble around us

Oil and diesel prices hit all time highs in late summer of 2008

The housing bubble was deflating at a rapid pace

Job losses started to mount

The Trucking Industry of Yesterday

Carriers (along with other industries) were not prepared and did not react quick enough

Carrier long term debt levels were high due to the pre-buy of tractors prior to the new 2007 emission standards

Several regional carriers were expanding their networks to become super-regional, thus taking on debt for new facilities

Freight was decreasing while debt was increasing… not a good combination


LTL carriers have a much larger fixed cost basis than TL carriers due to terminal networks

While both TL and LTL carriers can park tractors, LTL carriers cannot “park” terminals

LTL carriers must find a way to keep fixed cost as a percentage of revenue as low as possible

Only two solutions to this problem:◦ 1) Remove fixed costs◦ 2) Maintain a reasonable level of revenue

Answer: Both must be done


Almost every industry was facing their own challenges to survive

Carriers were plagued with under capacity

As a result, cuts in transportation costs were required, yet carriers were expected to continue to maintain established service levels (which has an associated cost)

Carriers were now faced with current day costs yet with revenues at levels seen from 6-8 years ago


With the lack of capacity, carriers had no choice but to take on pricing that would otherwise be considered unreasonable

Pricing wars broke out among many carriers

3PL’s presence grew dramatically, thus calling on carriers to reduce rates, especially for small to midsize shippers

Carriers had to lower both fixed and variable costs, so pay cuts were initiated and suspension of retirement plans paid on behalf of the carrier were suspended in many cases

Layoffs reached all time highs and in many instances were delayed longer than they should have been


With cheap prices, high debt loads, fierce competition, and a continued high cost of doing business, why did some LTL trucking companies not fail, especially the largest one in the nation?

Legislative- with the largest Teamster trucking company on the brink of bankruptcy, did the President put pressure on TARP banks to work with YRCW to keep them from calling in loans? Keep in mind the President and the Teamsters are both from Illinois.

Real estate and equipment (tractors and trailers)- did banks really need trucking terminals or equipment on their balance sheets when no one was buying?


END RESULT:

Excess Capacity + High Debt +Fierce Competition + Market Instability

=

Low Prices and High Operating Ratios


At some point, I believe everyone has used the term “cautiously optimistic”

Capacity has been taken out of the market, especially on the truckload side

Why? Carriers have not purchased equipment for the last two to three years. As equipment is pulled out of service due to mileage or age, parked trucks are being used and there has not been a need to purchase.

Carriers have “right sized” their networks

The Trucking Industry of Today

Truckload carriers have began to raise rates quickly and dramatically in many cases

LTL carriers have become more disciplined in their pricing decisions. Rates have begun to rise, especially over the last two months.

The effort by some of the larger long haul carriers to force YRCW out of business has now subsided and yield management has now taken its place

Previous rate levels were unsustainable for a long period of time


Many financial analysts still claim the LTL market is very much under utilized and much capacity remains. I disagree.

Why disagree? LTL companies have “right sized” their networks through personnel and equipment

Worker productivity is at highs not seen in many years

All costs, especially fixed costs, have been put under a microscope and any excess has been removed

Analysts are looking at capacity from a facility standpoint and past freight level capabilities. While capacity does remain in the case of facility size, it has been removed in all other areas.


What happened that has caused a turn around?

In March, it was like a switch being flipped. Within a few short weeks, the industry saw a vast improvement in shipment count. Prior to this, YOY shipment count was improving, but at a much slower rate.

Debate still exist if this will be short term or long term in nature. Short term will mean inventories are being restocked and we will see a “double dip” in the market.

We believe July will be an important month to see if this improvement is sustainable



Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec.2006 3% 3% 1% 2% -4% -3% -3% -6%2007 -3% -1% 2% 2% 1% 3% 4% 2% 1% 5% 5% 3%2008 5% 4% 3% 3% 4% 4% 5% 3% 2% -2% -7% -10%2009 -12% -13% -11% -9% -7% -5% -2% 1% 5% 10% 11% 14%2010 18% 23% 26% 30% 28%

Source: CRC Channel Research

Percentage Change in Demand for Regional Less-than-Truckload (LTL) Services(Year-over-Year)

Percentage Change in Demand for Regional Less-than-Truckload (LTL) Services

(year-over-year)

3%3%1%2%

-4%-3%-3%

-6%

-3%-1%

2%2%1%4%

2%1%

5%4%3%3%4%4%5%3%2%

-2%

-7%

-10%

1%

5%

14%

23%

26%

30%28%

3%5% 4.5%

3%

-12%-13%

-11%-9%

-7%-5%

-2%

10%11%

18%

-15%-13%-11%

-9%-7%-5%-3%-1%1%3%5%7%9%

11%13%15%17%19%21%23%25%27%29%

What does this mean for LTL pricing? Carriers are beginning to align pricing back with current day costs Discipline is returning and yield management is now taking priority

over market share and/or trying to remove competition from the market

To what extent prices will increase will depend on: 1) Was a decrease or freeze of rates requested (demanded) over the last 2 or 3 years? 2) Does the shipper (3PL) treat the carrier as a partner or a commodity? 3) Has the shipper allowed the carrier reasonable increases over time? 4) Does the shipper require carriers to meet stringent requirements? For example, the freight is not ready for pickup until 8 p.m. each night but the same service levels are expected

5) Does the shipper allow for a reasonable variable fuel surcharge?

6) Does the shipper allow for reasonable charges for additional accessorial services?



Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec.2006 25% 27% 25% 40% 50% 45% 75%2007 80% 80% 85% 90% 100% 100% 100% 100% 100% 95% 100% 97%2008 95% 100% 100% 100% 93% 95% 95% 100% 100% 100% 100% 100%2009 100% 90% 90% 100% 100% 100% 100% 100% 100% 90% 73% 75%2010 66% 66% 50% 25% 10%

Source: CRC Channel Research

Sources Reporting More Aggressive Pricing (Greater Discounts) for Regional Less-than-Truckload Services(Year-over-Year)

Sources Reporting More Aggressive Pricing (Greater Discounts) for Regional Less-than-Truckload Services

25%27%25%

40%

50%45%

75%80%80%

85%

100%95%

100%95%

100%100%100%

93%95%95%100%100%100%100%100%100%

90%90%

100%100%100%100%100%100%

90%

73%75%

50%

25%

10%

90%

100%100%100%100%97%

66%66%

0%10%20%30%40%50%60%70%80%90%

100%

What are the unknowns of the future in trucking?

Potential bankruptcies could still be on the horizon

CSA 2010 could cause increases in costs for both carriers and shippers

The completion of the Panama Canal will change freight flows

Carriers will need to continue to diversify their offerings and be flexible to meet changing supply chain trends

The Trucking Industry of Tomorrow

The Trucking Industry of TomorrowBankruptcies have lagged historical norms as banks have been hesitant to foreclose on struggling carriers

1,855 trucking failures in 200919% below 17-year average, 49% below last recession

1,200

3,670

3,990

2,345

1,195

2,250

1,305

1,850

3,065

1,955

1,700

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

# o

f T

ruckin

g F

ailu

res

Trucking Company Failures (1999 – 2009)

CSA 2010 Could very well be one of the most influential

factors on the trucking industry since deregulation

Cost will almost certainly rise for both shippers and carriers as carriers will compete for drivers with the best safety scores

Driver shortages could very well come into existence quicker and to a larger degree than previously expected

Safety will come to the forefront of carriers’ priorities. AAA Cooper absolutely agrees this should occur.


Completion of the Panama Canal Shippers are frustrated with Long Beach and a

large amount of freight will be diverted to the Gulf Coast and the East Coast

This will have a tremendous affect on the direction of freight flows within the nation

Should allow for more efficient supply chains on freight moving to the Southeast and Northeast

Will allow for new opportunities for carriers who are prepared and integrated into their customers’ supply chains


Carriers must diversify Listen to your customers and anticipate

their needs

No single carrier can be all things to all people. Determine which services you will offer and excel at those services. Be great at a few offerings instead of just good at many.

Successful carriers will always prioritize by:1) Safety

2) Service 3) Efficiency and cost


Questions?

Contact information:Brad MorrisAAA Cooper [email protected]

Thank you!

mailto:[email protected]

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