High costs will limit capacity growth in trucking
Used truck prices have increased by over 50% for 3-year-old models over the past 12 months. With the larger fleets struggling to recruit new drivers to the space, cost barriers will limit the small fleet/owner-operator growth as well, helping to extend the capacity crunch on all levels.
It is a fairly well-known fact inside the trucking industry that over 90% of the fleets operating in the U.S. have less than 21 trucks. The barriers to entry for starting a trucking company are basically limited to the size of your wallet and your ability to finance a vehicle. This cost barrier has grown sharply over the past year — to a point where many are likely to forego the effort.
Supply chain issues have ironically plagued trucking OEMs as their own production limitations contribute to the limited supply of vehicles available for transporting goods. Class 8 orders stalled over the summer, not necessarily due to seasonal spending patterns but because of delays in production capabilities, as Alan Adler wrote about multiple times in September.
With new equipment becoming less available, the larger fleets that normally purchase the majority of these new trucks are holding on to their older vehicles for longer periods of time. Used trucks are the most economical way for smaller fleets and owner-operators to start and grow their businesses, and paying $90K for a truck is dramatically different than spending the $58K they did in July 2020.
Trucking rates are very high at the moment, but even with expanding margins this price is becoming much harder to overcome.
Looking at Truckload Carriers Association data that is largely comprised of small and midsize fleets, operating ratios — what percentage of the revenue is spent on moving the freight — are still in the low 90s. In August the members that operate van fleets reported a 93% OR, meaning they made just 7 cents for every dollar of revenue. This does not include interest or tax expenses.
The average cost of operating a vehicle was around $1.20/mile for a 500-mile run in 2019, according to the TCA and other industry averages. At full utilization, driving an average 448 miles per day and six days per week puts the total annual mileage at 134,400. Without going through an accounting lesson in depreciation, this puts the cost per mile around 11 cents. Raising the cost of a vehicle to $90K increases the cost to nearly 17 cents per mile.
This may seem like a marginal amount, but assuming all other costs have been stable (they have not been), this increases the OR to a 98%. Trucking spot rates had the bulk of their increase last year and have slowed their pace, while truck prices are now accelerating.
Truck price growth is outpacing trucking rate growth over the past six months. For certain, this has already deterred a few entrants and inhibited fleet growth. This is also occurring at a time when driver wages are expanding rapidly, eating into carrier margins. While the current cycle appears to still have plenty of fuel behind it, it is not sustainable, although increasing truck prices may contribute to its extension.
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