Tightening Regulations Capacity And Pressure Ground Transportation - Todd C. Fowler - KeyBanc Capital Markets Inc.
December 20, 2011 - The Wall Street Transcript has just published Transportation and Logistics Report offering a timely review of the Transportation sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Todd C. Fowler is a Vice President and Equity Research Analyst with KeyBanc Capital Markets Inc. With the company since June 2006, his research coverage is focused on transportation and logistics companies. Mr. Fowler previously worked for FTN Midwest Securities Corp., where he was an Associate Analyst responsible for coverage of companies primarily in the transportation and aerospace and defense industries. Before that, Mr. Fowler worked as a Public Accountant in the audit practices for Arthur Andersen LLP and Ernst & Young, where he was responsible for clients in the automotive, manufacturing and retail sectors. In their May 2011 best brokerage analysts survey, the Financial Times/StarMine recognized Mr. Fowler as the number two earnings estimator in the air freight and logistics sector for 2010. This is his third Financial Times/StarMine award. Mr. Fowler earned a B.S. degree in accounting from the University of Dayton in Ohio.
TWST: The first three - full truckload, less than truckload and intermodal - seem to have some similarities in terms of the larger themes. Is that accurate?
Mr. Fowler: I think that is a fair statement. There are distinctions between the markets, but full truckload, less than truckload and intermodal have similar end markets and some similarity in the type of freight they are hauling. I would point out less than truckload has more exposure to manufacturing, while truckload and intermodal are more consumer or retail oriented. We think about less than truckload being split or even a little more weighted to manufacturing, where as truckload and intermodal are probably 60/40 or 70/30 consumer and retail.
TWST: Overall, how are the truckload, less than truckload, intermodal and logistics areas doing?
Mr. Fowler: We are generally positive on most sectors going into 2012, but particularly in the full truckload market. What we experienced through most of 2011 is relatively balanced full truckload capacity following several years of downsizing by carriers to match supply with demand. It feels like we reached equilibrium, and for most of this year, the truckload market has been pretty balanced. That balance created opportunities for rate improvement, and we think most industry participants realize it won't take much of an increase in demand to drive more meaningful capacity shortages.
So when we look ahead to 2012, if we expect some growth in the economy, particularly in the main drivers of truckload freight such as housing and retail with unemployment moving down a little bit in the past couple of months, we think those trends should have favorable implications for truckload capacity dynamics. Tight truckload capacity should also have favorable implications for intermodal, which has had another year of strong growth, and we are seeing pricing momentum in the less than truckload space.
TWST: In terms of changes in capacity, was there a factor that made the carriers actively try to downsize or is it a natural evolutionary change?
Mr. Fowler: It's a little bit of both, and not something that was specific to 2011. It is a continuation really going back to 2006, when freight demand began to soften related to the slowdown in housing, and then accelerated during the recession, at which point a lot of carriers and the industry as a whole realized they had too much capacity and began downsizing their fleets. We've probably seen anywhere from between 12% to 18% of capacity come out of the truckload market since it peaked in 2006. So it's been a gradual reduction over time.
I think what we're seeing that's new or different in the past couple of quarters more recently has been the impact on capacity from a changing regulatory environment, particularly as it relates to driver availability. It has always been difficult to find good, qualified drivers; and turnover, particularly for truckload carriers, has been an issue. But following recent changes from the Federal Motor Carrier Safety Administration's Compliance, Safety, Accountability program, or CSA, there is increased scrutiny on drivers, which we think is reducing the employable driver population. Also, safety scores are more transparent to shippers, so some carriers who don't have good safety scores or are above certain thresholds, customers have that information, and on the margin, it seems like that is restricting or possibly taking some additional capacity out. So we don't expect those things to change going forward, at least in the intermediate term, which is helping to tighten capacity.
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