ACT Research points to promising future for truck and trailer demand

Citing a strong rebound in net margins for publicly traded truckload companies in the second quarter, ACT Research, a provider of data and analysis for trucks and other commercial vehicles, said it expects continued improvement in demand for heavy-duty vehicles and trailers.

In its “ACT North American Commercial Vehicle Outlook,” ACT is calling for full-year production of Class 8 vehicles to be up 26 percent year-over-year at about 150,000, with further increases into 2011. And it is also calling for commercial trailer production to increase by 47 percent to about 116,000 year-over-year.

“Trucker profitability rebounded sharply in the second quarter, fueled by tightening capacity and rising freight rates,” said John Burton, ACT vice president-transportation sector, in a statement. “Even with modest economic growth, commercial vehicle demand should continue to rise as carriers appear to be replacing an aging fleet but not adding capacity. Demand for new heavy-duty vehicles continues to be well below normal replacement levels, meaning overall fleet capacity is shrinking due to scrappage and export of used tractors. This will allow truckers to retain pricing leverage and profits.”

While many truckload carriers had strong second quarter earnings results, these results came out at a time when various economic indices reported the strong momentum from the first half of the year began to slow down.

ACT Partner and Senior Analyst Kenny Vieth said that while truckers had a strong second quarter, it creates a question of if that performance is indeed sustainable.

“We still have below replacement [level] retail sales for Class 8 vehicles,” said Vieth. “There is still capacity coming out of the market that way. And we are still seeing fairly healthy exports of used Class 8 trucks out of the marketplace, which is another avenue for lowering capacity, and we are seeing slower economic growth as opposed to contraction at this point, with a possible double-dip recession in the future.”

Unless a double-dip actually occurs, even an incrementally growing economy is still going to absorb capacity, said Vieth. And the ACT 2010 forecast—and into 2011—remains at below replacement levels for expectations of commercial vehicle manufacturing. This suggests that truckers should be able to build on the momentum that they started to gain in the second quarter, although it may not be as robust as it could have been if the economy were continuing to grow at the pace it did during the first half of the year, according to Vieth.

“Even a modest pace of growth is still going to take capacity out of the market,” said Vieth. “That story still works well for truckers. The route to a double-dip gets tied into the European financial crisis, and they have managed to forestall that situation from worsening. When we entered this downturn in late 2006, a lot of the excess capacity and overconsumption that had gone on in the economy has really gone away. Even if the economy slows, we will not be in that situation that we were in 2008 with a bad inventory-to-sales ratio compared to where it is now. Even if the economy slows, there will not be that type of inventory overhang that is going to cause manufacturers to shut their plants down. At this point we are at such a low level that you are not going to see a massive retrenchment.”