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-July 29, 2009

 
 

Supply Chain Graphic of the Week: Understanding Factors that Influence Truckload Capacity

 
 

Capacity is Influenced by Many Factors; One View of the “Capacity Tank”

 
     
 

By SCDigest Editorial Staff

 
 


There is frequently discussion in the press and among industry analysts about the level of truckload carrier capacity in the market.

 

The issue is especially pertinent right now, as hundreds of carriers have left the market given the dramatic slump in demand. That has given rise to both predictions that there may be a severe capacity crunch in the US when demand picks up, as well as others who say many of the idled trucks can easily be brought on-line, because the offshore market for used trucks has contracted dramatically.

 

Recently, Lana Batts, an analyst at Transport Capital Partners, gave a presentation in which she tried to graphically represent the key factors that impact TL market capacity, or what she calls the “TL Capacity Tank,” or feeder system, as shown below.

 

For example, changing EPA emissions requirements will often drive new truck purchases, as happened for example in 2007. The value of used trucks is also a key driver, as noted above; when values are high, as they were until just recently, idled trucks (coming from bankruptcies or voluntary idling) are generally quickly sold off overseas, permanently leaving the market. When values are low, as they are now, the idled trucks remain in the US, and can be brought back to market when demand returns.

 

Credit also plays a big factor. When credit is highly available, especially to small and medium-sized carriers, they tend to optimistically invest in capacity; currently, many carriers are in perilous financial condition, and many banks may pull the plug and force carriers that have borrowed money into bankruptcy. They have been slow to do that, however, given the low value of the truck assets used to secure the loan.

 

These dynamics all end up as “active capacity,” which right now continues to be above demand, but that situation could change rapidly.

 

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