Ake’s Take: How the Capacity Crisis was Born

By | March 20, 2018

The U.S. trucking industry is experiencing a capacity crisis, with insufficient numbers of trucks and trailers to haul an ever-increasing amount of freight. FTR’s measurement of Total Truck Utilization is currently at 97% (meaning 97% of all trucks are in use). The index is expected to hit 100% later this year. While it is an impossibility for 100% of trucks to be hauling freight, it indicates extreme capacity constraints in the industry, causing major disruptions for both fleets and shippers.

So how did we get into this mess? Well, you can blame the Great Recession. Throughout the oughts, fleets managed their capacity more loosely, maintaining a certain amount of “flex capacity” to handle peak freight periods and not caring much when this excess capacity was idle. This strategy worked well in that era, when freight continued to shoot upward fueled by the housing bubble. Staying ahead of a fast-paced game was profitable.

But then the bubble burst. Most large fleets had enough capitalization to survive. Middle-sized fleets that managed their assets well also lived, but over-aggressive ones and smaller fleets got slaughtered. There were approximately 5,500 fleet bankruptcies in 2008, another 2,200 in 2009, and still a considerable number in 2010. By 2012, an astounding 18% of trucking capacity had been removed from the system.

The long, slow economic recovery that began in 2010 did not pressure the industry to promptly replace the lost capacity. Fleets were able to put trucks back into service at a measured pace. The trucking industry, as well as many sectors of the economy, benefitted from the sluggish recovery because growth was easier to manage, and profits grew.

Fleets were also very cautious after seeing many competitors fold during and after the Great Recession. Businesses, overall, were more cautious, a key proponent of the long, slow recovery. Large fleets managed their capacity more conservatively. Medium-sized fleets strove to be lean, efficient operations. The result was a significant reduction in “flex capacity.” This was very logical under the circumstances, and extra capacity was rarely needed in the slow-growth environment.

Capacity utilization reached the normal range in mid-2013, signaling the industry and the economy were regaining strength. Utilization percentages were fairly stable for a few years, except for a blip due to the Hours-of-Service regulations in late-2014. However, the utilization rate began a definite upward climb in mid-2016 and accelerated through 2017.

During an FTR forecasting meeting in January 2017, our updated capacity utilization forecast graph appeared on the screen. There was stunned silence … and then someone said:
“If this is correct, we’re headed for a severe capacity crunch early next year.”

Our model predicted that accelerated freight growth would combine with productivity-limiting ELD implementation, to push the capacity utilization percentage to near 100% in 2018. Based on this, we began to warn our customers about the “possibility” of a capacity crunch. The expected rise in utilization was a main reason the 2018 FTR equipment forecasts were much higher than other forecasts for almost all of last year.

And then the surge in business confidence after the election started to turn into real dollars. The roll-back of regulations provided more economic impetus. Manufacturing activity revived, and the freight forecasts kept increasing. Now throw in some tax reform. The same forecast graph that caused the commotion 14 months ago appears even more ominous now.

The flatbed fleets saw the surge beginning last May and began to ramp up capacity. Spot market rates started to shoot up last March, flattened out in the second half of 2017, and then spiked at year’s end.

In September, we began hearing complaints from some large shippers that couldn’t find trucks to haul their freight. They had contracts but not trucks. This forced them into the spot market, resulting in higher freight costs and increased late deliveries. The frustrated logistics managers had to explain why the company was paying higher prices for reduced customer service.
But many fleets remained cautious in responding to the capacity crisis. Some people questioned our optimistic 2018 equipment forecasts as late as October, explaining the fleets were not showing any urgency in placing orders for 2018.

However, this was to be expected. It took over ten years for freight volumes to recover after the Great Recession, and fleets had learned to manage their capacity well over that time. It’s difficult to change what is working well. For the industry as a whole, it’s like filling a big barrel with a hose delivering a slow, steady stream. It takes a long time to fill the barrel, and you get bored waiting for it to top out. Just when you are near the top (which you can’t really see), the water pressure increases and now you have an overflow you are not ready for – and a mess.

Now orders for trucks and trailers are pouring in, OEMs are increasing rates, and we all hope that fleets can find drivers for the new trucks they hope to put into service. It’s a mad scramble: shippers trying to find trucks to efficiently move goods, and truckers trying to supply those trucks. And if it can’t be done, economic growth will suffer.

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About Don Ake

Don has more than 20 years of experience in the transportation industry, including 16 years with industry supplier Hendrickson International. Don has a very strong forecasting and market analysis background. While at Hendrickson Don developed forecasting models, methods and processes to accurately forecast Truck and Trailer builds and product demand. Don wrote an industry economic newsletter and gained a reputation as a top industry analyst. His industry supplier background provides a "customer perspective" now that he is with FTR.