Too Few Truck Drivers Means Swift’s Profit in Expansion: Freight

Trucking companies are struggling to find qualified drivers even as the U.S. unemployment rate remains at the highest level in almost 30 years.

Driver turnover rose to 89 percent in the third quarter of 2011, the highest since 2008 and the fourth consecutive quarter of increases, according to data from the American Trucking Associations. That’s mostly because new regulations and job prospects in other industries are creating a “quality shortage” of available workers, said Bob Costello, chief economist for the Arlington, Virginia-based group.

The increase in turnover is troubling because as the economic expansion continues to gain strength, trucking is “an industry that has jobs and may not be able to fill them,” said Charles Clowdis, managing director of transportation advisory services at IHS Global Insight in Lexington, Massachusetts. To attract and retain drivers, trucking companies will need to offer higher pay, which will probably necessitate rate increases, he said.

Companies such as Swift Transportation Co. (SWFT) and Celadon Group Inc. (CGI) may be able to outpace the higher costs with rate increases that will improve profit, said John Larkin, an analyst in Baltimore at Stifel Nicolaus & Co. He maintains “buy” recommendations on these stocks.

The U.S. jobless rate remains elevated by historic standards, at 8.3 percent in February, compared with less than 5 percent before the 18-month recession that began in late 2007. Even so, difficulty in recruiting and retaining workers probably will be the “No. 1” issue affecting Swift and the industry, President Richard Stocking said at a March 15 conference hosted by JPMorgan Chase & Co.

Millions and Millions

“It’s kind of a weird situation when you have millions and millions of people out of work to have a driver shortage, but it’s starting to present itself again,” Stocking said.

Newfound stability in construction is partially to blame for poaching candidates as hiring in this industry picks up, said Thom Albrecht, an analyst in Richmond, Virginia at BB&T Capital Markets. Construction work offers a “better quality of life,” he said: Instead of spending several days on the road, people can work the same number of hours, make a comparable salary and go home every night.

Worker mobility between these industries caused many people to take trucking jobs during the recession, Clowdis said. Those who obtain a commercial driver license often get one that’s “all-encompassing,” qualifying them to drive both a dump truck, for example, and an 18-wheeler, he said.

Construction Jobs

The number of people working in construction grew 1.2 percent in February to 5.6 million from a year earlier, the sixth consecutive month of gains, Bureau of Labor Statistics data show. The economy has added about 65,000 jobs in this industry in the past year, though it’s shed more than 2.1 million since peaking in April 2006.

New regulations intended to increase truck safety also are affecting hiring, Larkin said. Some of these rules -- from the Department of Transportation’s Federal Motor Carrier Safety Administration -- were implemented in 2010. More are on the way next year, which “will further reduce the effective workforce, as well as hamper productivity,” he said.

Safety records are now posted online for infractions that include speeding tickets, moving violations and improper load securement, Larkin said. The resulting shrinkage in available drivers has cost the industry as much as 3 percent of capacity. Forthcoming changes include further limits on the number of hours that drivers can work and requiring on-board trip recorders.

Potential Drag?

This is tightening the supply of available drivers for such companies as Werner Enterprises Inc. (WERN) The Omaha, Nebraska-based carrier anticipates finding drivers will be “even more challenging” this year than last, the company said in a Jan. 26 statement.

Similarly, Arkansas Best Corp. (ABFS) forecasts a “potential drag,” with more than 400,000 drivers possibly exiting the industry by the end of 2014 due in large part to the regulatory changes, Chief Financial Officer Michael Newcity said at a Feb. 16 conference hosted by BB&T Capital Markets, citing FTR Associates data.

Some people laid off during the downturn may be claiming jobless benefits and supplementing this with “under the table” jobs instead of returning to work, Larkin said. The extension of unemployment insurance payments to as much as 99 weeks is one of the “larger competitors” for Werner, President Derek Leathers said at a Nov. 16, 2011, conference hosted by Stephens Inc.

Raises and Bonuses

To combat this, companies are trying to make driving jobs more attractive by offering pay increases, sign-on bonuses and other perks, Clowdis said.

Phoenix-based Swift will provide raises based on miles driven, safety and service to customers, Stocking said. Old Dominion Freight Line Inc. (ODFL) bumped up salaries by 3 percent in September, Chief Financial Officer J. Wes Frye said on a Feb. 2 conference call.

Higher wages probably will translate into increased rates for customers, the trucking associations’ Costello said. An index of truckload revenue per mile rose 5.3 percent in December from the year earlier, to the highest level since July 2008, based on a survey of the association’s members.

Swift and Celadon should be able to raise rates faster than the cost of inflation, Larkin said. Swift shares have risen 50 percent this year and Celadon is up 38 percent, outperforming the 12 percent rise in the Russell 2000 Index. (RTY)

Growth-Free Expansion

Larkin projects rates will increase in the range of 2 percent to 6 percent this year, which will help to drive margin expansion, “even if economic growth remains mediocre.”

U.S. gross domestic product climbed 1.7 percent last year, data from the Commerce Department shows. It will expand 2.2 percent this year, according to the median estimate of economists surveyed by Bloomberg News.

Still, if the economy were growing at a rate of about 3 percent annually, “we would be struggling right now, but we’re not,” Costello said. There’s not yet a threat to the supply chain and higher wages may be helping with retention, he said. Without wage gains, the situation would probably be worse, he added.

Recruitment also isn’t “nearly as bad” as in late 2005, when turnover peaked at 136 percent, Albrecht said, citing the trucking association’s index. Still, the current rate is more than double the low of 39 percent in the first quarter of 2010.

Even so, the confluence of regulations and a rebound in the U.S. construction market is reducing the supply of qualified applicants, Clowdis said.

“Right now there simply are not enough drivers coming into the market to fill all the seats at many trucking firms,” he said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net

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