I'm happy to write that some reports of my early demise have been greatly exaggerated. One or two of you dear Tire Business readers wondered what happened to my column for the past three months.
Well, due to a fall off of a 10-foot ladder while putting Christmas lights up in a tree outside my house last Thanksgiving weekend—and the four broken ribs and right wrist, along with a punctured lung that resulted—I was physically unable to sit up and take nourishment or pound on my keyboard.
However, today I am almost right as rain. After a few more weeks of physical therapy, I should also be as good as new and back in the saddle again. (Let's just hope I can cure myself of these awful clichés.) It's fitting that my first column of 2014 is in Tire Business' Commercial Tire & Retreading Report since trucking and the commercial tire market are areas I know a few things about.
Since we are not too far into the year, I think it would be appropriate now to dust off the old crystal ball to see what may be in store for the rest of 2014.
The good news is that the economy this year, rather than moving forward in spurts and stops, is now actually moving along a path of slow and steady improvement. It closed out 2013 with a gross domestic product (GDP) growth rate of 2.4 percent, which is relatively strong.
Actually, it's strong enough that the Federal Reserve had the confidence in December to start cutting back on the massive monetary stimulus policy that it had established to prevent a financial collapse and trim its monthly purchases of bonds and mortgage-backed financial derivatives to $75 billion from $85 billion.
However, since it continues to be concerned with slow growth in consumer expenditures, the Fed is continuing to keep interest rates low, at least until unemployment falls to 6.5 percent. Most economists are predicting the economy will continue to accelerate as the year goes on and should grow about 2.7 to 3 percent in 2014.
The drivers of this growth are a strong housing market recovery, falling natural gas prices, robust auto sales, improvement in consumer confidence, steadily improving credit availability and improving employment. (Overall unemployment now stands at 6.7 percent.)
Trucking should fare rather well in 2014 as increased consumer confidence, combined with improved credit availability, impact auto and home sales positively, which along with recovery in sectors like energy and construction translate into more freight for trucks to haul. In addition, import and export activity is strong and accounts for almost 25 percent of all truckloads hauled.
As a result, it is expected that truck freight volume this year will grow in the range of 3 percent. This is not as fantastic as a growth rate of 3.5 percent or better—which is indicative of a really good economy—but it's OK.
In fact one economist, Ken Vieth, president and senior analyst at Columbus, Ind.-based Americas Commercial Transportation Research Co. L.L.C. (ACT), dubbed the current economic climate “The Great OK,” where “things are too good to be sad and too bad to be happy.”
Even though the economy is not going gangbusters, this OK economy will still be good not only for trucking but for truck and trailer manufacturers as well. Since the average age of the U.S. tractor fleet is at an all-time high of 9.8 years—where it has been since 2010—retail truck sales should see some modest growth in 2014.
Fleets will be replacing old units that tend to have higher maintenance costs and downtime with ones that have new technology, including improved fuel economy and increased uptime. However, not many carriers will be expanding their fleet size until there is an abundance of freight to haul.
At year-end 2013 a total of 231,700 orders were booked for Class 8 trucks, down just 2 percent from 2012. But for 2014, tractor sales numbers are projected to be in the 260,000 range. About 240,000 trailers also are projected to be built this year as well, which is slightly ahead of the 235,000 units built last year.
However, these projections made at year-end may be a little low as sales of heavy-duty trucks were up 56 percent year-over-year in January, which was the best month since 2007. February sales, the highest since 2006, were a 27-percent improvement from the same month in 2013.
Since orders have been strong—above 30,000 units—for the last three consecutive months, the market is now considered to be in a growth cycle, with annualized order activity over the last six months at 320,500 units. What this indicates is that fleets are gaining confidence in the freight market.
Yet as the freight market strengthens, capacity will tighten due to a shortage of drivers, meaning freight rates will rise. Most trucking companies are expecting their freight volumes will increase and they will be able to raise their rates in 2014. It is expected that freight rates will increase around 4 percent this year. If rates increase, then fleets will be able to pay their drivers more.
This would be good since right now it is terribly hard to keep drivers. The average dry van base pay has risen only 7.7 percent since 2008 to 37.2 cents per mile. Competition for drivers is not just between for-hire carriers, but private fleets are advertising for drivers now for the first time with offers of higher pay than for-hire carriers.
Intermodal operators are offering drivers opportunities to get home more often, and oil-field exploration also is attracting drivers with whopping pay increases. As a result, it is expected that base dry van pay—excluding performance pay such as safety or fuel economy bonuses—will rise an average of 3 cents per mile or nearly 8 percent this year.
Effect of regs
The federal government has had the greatest impact on the driver shortage. The Federal Motor Carrier Safety Administration (FMCSA) has made it worse by changing the Hours of Service (HOS) regulations that took effect in July last year.
- Cut the maximum work hours per week to 70 from 82;
- Reset the week only if the driver rests for 34 consecutive hours, including a minimum of two nights of sleep that occurs from 1 a.m. to 5 a.m.; and
- Mandate 30-minute rest breaks be taken during the first eight hours on duty.
The effects of these requirements are significant. It is estimated that the HOS reform has reduced trucking productivity 3 percent nationally. In addition, of the more than 2,300 drivers surveyed by the American Transportation Research Institute, 82 percent said the new rules have had a negative impact on their quality of life, with more than 66 percent indicating increased levels of fatigue. Also, 67 percent of these drivers reported decreases in pay since the rules took effect.
The impact on driver wages for all over-the-road drivers is estimated at $1.6 billion to $3.9 billion in annualized loss. As a result, forces are now building to compel carriers to add capacity as well as hike driver pay. The net result of the Hours of Service reforms and the FMCSA's Compliance, Safety, Accountability (CSA) safety rating system is that a lot of drivers are deciding that the independence of the open road is no longer worth the pay and regulatory pressures they are now facing.
Further, it has made finding CSA-compliant drivers a challenge despite many carriers' efforts to establish training schools, attract veterans, increase base pay and performance pay, spec more driver amenities in power equipment and work with shippers to improve the driver experience while dropping off/picking up loads. The combined effect of the new HOS rules and CSA has reduced fleet on-time deliveries by 4 to 5 percentage points.
Therefore, if freight picks up substantially this year, a capacity crunch will be sure to follow as the driver shortage/turnover issue will only become more acute in the months ahead. These two federal regulations are only the tip of the iceberg. There are 26 potential initiatives—the largest collection of regulatory changes in the history of the trucking industry—that could impact trucking in the very near future.
They range from electronic logging devices that improve compliance with the driver hours of service standards, to mandatory speed limits and safety fitness ratings. In addition, President Barack Obama has directed the Department of Transportation and the U.S.
Environmental Protection Agency to develop higher fuel standards for medium- and heavy-duty trucks by 2016. Is it any wonder then that for 2014 the No. 1 concern facing the North American trucking industry has been identified as the changes to the HOS rule? The next four concerns are CSA, the driver shortage, the economy, and the pending electronic logging mandate. Fuel pricing is No. 8.
Fuel is always on the Top 10 Industry Concerns list because it is the largest line item on a truck operator's or fleet's budget.
The good news is that the U.S. Energy Department's Energy Information Administration forecasted diesel fuel prices to remain fairly stable, averaging $3.77 per gallon in 2014, while regular-grade gasoline prices should average $3.43 per gallon. However, in mid-March diesel averaged $4 a gallon while regular gas averaged $3.54 per gallon.
These spikes are due to colder-than-normal winter weather that is driving up energy demand, combined with civil unrest affecting Ukraine, Venezuela and South Sudan. Hopefully with the arrival of spring—and refineries finish their annual refurbishing and changing to summer fuel blends—fuel prices will return to stable, projected levels and perhaps some of the snow around here will disappear.
With the melting of the snow, though, also will come further evidence of the deterioration of the nation's roads and highways. That is a concern not only to the trucking industry but to everyone who drives. The current highway funding law, “Moving Ahead for Progress in the 21st Century (Map-21),” will run out of money in 2015.
At present, there is just $67 billion available for road and bridge repair work—far short of the $200 billion actually needed. President Obama has put forth a $302.3 billion transportation plan covering the next four years, although he provided no funding mechanism for it. Congress continues to argue about where it will get the money it needs to fix our crumbling infrastructure. Highway repairs and the nation's transportation needs are funded by fuel taxes, but no one wants to raise taxes. So they are searching for all kinds of other alternatives.
Many states will fill the loss of federal funds by partnering with private companies to operate toll roads. Whatever happens, it's going to cost trucking, as well as you and I, a lot.
For the commercial truck tire industry, 2014 should be a relatively good year. The Rubber Manufacturers Association (RMA) is projecting that, due to the improving economy and increasing truck tonnage, shipments of medium-duty truck and bus tires including wide-base tires will increase 2 percent or about 300,000 units.
With the increased demand for new trucks and trailers, tire shipments to OEMs should increase about 5 percent from 2013 levels to almost 5.1 million units. This is good news for both commercial tire dealers and tire manufacturers. In anticipation of this increased demand, tire makers have been expanding their production of truck tires.
In the U.S., Bridgestone Americas, Continental Tire the Americas L.L.C., Michelin North America Inc. and Yokohama Tire Corp. all have announced or begun expansions of their truck tire plants. Yokohama is building a truck tire plant in West Point, Miss., that will have an annual production capacity of 1 million tires beginning in October 2015.
Bridgestone is expanding its Warren County and La Vergne, Tenn., plants to produce 1,200 more truck and bus tires a day. Conti is expanding its Mount Vernon, Ill., truck tire plant while Michelin is doing the same at its Starr, S.C., and Waterville, Nova Scotia, plants.
The reasons these companies are so bullish on the truck and bus tire market is the anticipated growth in the U.S. population to as much as 350 million by 2020, freight increases to support this population growth and the economies of producing tires in the U.S. Shipping heavy, large commercial tires across oceans is expensive, so it's much more efficient and cheaper to produce tires close to the demand.
Not only will more commercial tires be produced in 2014, but more new truck and bus tires will be introduced to the market as well. Already in the first three months of this year Bridgestone Americas, Continental Tire the Americas L.L.C., Goodyear, Michelin North America Inc. and China Manufacturers Alliance L.L.C. have launched new commercial tires.
Expect to see more new original tires as well as retreads this year and more tires added to the SmartWay-verified list for being fuel efficient. Tire pricing should remain fairly stable from a raw materials standpoint. The price of petroleum is fairly stable as is natural rubber, so we should not see much fluctuation in production costs.
However, the commercial truck market is going to be challenging thanks to continued competition. Low-cost radial tire makers that have gotten a toe-hold in the U.S. commercial market could put downward pressure on pricing to some degree. I would expect that market share for Tier 3 brands will continue to grow.
Tire sales are not the only opportunities tire companies have identified in the commercial market. For a decade or more, almost every tire company has provided an emergency breakdown service for its fleet customers. Several have put together networks of company-owned facilities, truck stops and tire dealerships to provide mechanical inspections and light-duty vehicle repairs to truck operators.
These services add value to the fleet-tire dealer/manufacturer relationship, serve to keep trucking companies as customers and provide another revenue stream for commercial tire dealers. In 2014 expect more features and benefits to be added to these types of programs. As far as technology goes, fleets are now recognizing they need help to keep their tires properly maintained and avoid CSA citations, bad safety ratings and out-of-service events.
As a result, more carriers are searching for reliable and accurate tire pressure monitoring systems/solutions (TPMS), which is a big change in trucking industry mentality. The National Highway Traffic Safety Administration is considering including TPMS in fuel economy standards for medium- and heavy-duty trucks for model year 2019 and beyond.
With the high cost of tires, fuel and the CSA's tracking every tire problem, Commercial Vehicle Safety Alliance inspectors find, the trucking industry has enough motivation to adopt automatic inflation systems and/or TPMS without being forced to do it. In this good but challenging year in the commercial truck tire business, to be successful stay open to new opportunities, new revenue streams, new products, new ideas and new ways of doing things.
And I highly recommend that you stay off ladders.