John G. Larkin hasn't worked in the transportation field since the dawn of creation. It just sometimes feels that way.

Larkin began his transportation career in 1977 as a research assistant at the Center for Transportation at the University of Texas at Austin. After obtaining his bachelor's and master's degrees in civil engineering from the Universities of Vermont and UT-Austin, respectively, as well as an M.B.A. from Harvard University, Larkin spent three years at CSX Transportation in various planning and economic analysis capacities. In 1987, he embarked on what would become a near 25-year career as one of the industry's most renowned securities analysts, rising to become managing director and head of the transportation practice at Baltimore-based Stifel, Nicolaus & Co.

Larkin, who has forgotten more about transportation that most know, spoke to DC Velocity Senior Editor Mark B. Solomon about what came before, what is happening today, and what the present portends for the future.

Q: What are your data points telling you about the direction of shipping volumes and the health of the overall economy over the next six to 12 months?
A: We have much better real-time data on freight volumes than ever before. But the most useful information is of the anecdotal variety from privately held companies. They have no ax to grind with public shareholders and almost always shoot straight. Through their feedback, we have detected a disconnect: Freight volumes, at least relative to downsized capacity levels, are looking rather good at the moment. The sky is not falling.

We think the economy will continue to grow at a sluggish 1- to 2-percent rate through the elections. High unemployment, a high savings rate, uncertainty regarding tax policy and health care costs, and the anti-business rhetoric coming from the White House have slowed new hiring, risk taking, and capital formation.

Slow growth is probably the best we can hope for, and I would not rule out a mild double-dip recession. But it would be mild due to the leanness of inventories.

Q: You've worked in transportation since before deregulation. Between inflationary pressures, driver shortages, and aggressive government intervention, can you recall a climate so unfavorable to truckers as the one we have today?
A: One man's pain is another man's gain. All of the issues cited put a crimp on capacity additions. The surviving carriers that are able to effectively deal with all these challenges will benefit from the improved pricing that accompanies tight supply and demand. But we are in uncharted territory when it comes to the quantity and magnitude of the challenges facing the trucking industry.

Q: Do you foresee all this resulting in significant rate pressures for shippers over the next two to four years? Or will shippers—the larger ones at least—be able to drive down increases to levels that mimic the annualized inflation rate?
A: I strongly believe the driver-driven capacity shortage will be dramatic and that shippers will have to pay up for high-quality capacity over that time frame. The fly in the ointment would be a severe downturn in the economy. Under those conditions, rates could fall again.

Q: Driver retention today appears to be a bigger challenge than driver recruitment, with driver turnover in the third quarter running at an estimated 90 percent compared with 40 percent a year ago. What can companies do to hold on to drivers?
A: They can pay them more, get them home more frequently, keep trucks rolling to maximize productivity under the current hours-of-service regulations, offer economic incentives to safe drivers who are almost always on time, and sensitize those who come into contact with drivers to treat them like the valuable resources they are.

Q: Rail intermodal stands to benefit from the challenges facing truckers and truck shippers. Yet if rails want to be competitive, they will have to deliver reliable service over the shorter distances traditionally served by a solo trucker. Are the railroads really capable of playing consistently on the shorter hauls?
A: Length of haul is relative. By "short haul," the rails are talking about 500- and 600-mile lengths of haul. The railroads in the East will continue to improve their service in lanes of that length that are anchored by big cities such as Chicago, Atlanta, and New York. Otherwise, only a few shorter lanes are dense enough to make economic sense, such as Savannah to Atlanta.

Q: There has been a rise in yard dwell times reported by the Class I railroads. Does that indicate the rails might not be able to efficiently handle any additional volume that might come their way?
A: Dwell times have risen some, but I think more due to weather issues than to capacity constraints. We have had some amazing weather this year, especially the heavy rains that led to unprecedented flooding.

I believe the railroads are much more capable than they have been historically in terms of coping with volume fluctuations. Railroads can digest another 10 to 15 percent more volume without any significant deterioration in service levels—assuming that other factors, such as weather conditions, remain unchanged.

Q: It has been said the impact of CSA 2010, the new hours-of-service rule, the driver shortage, and tougher emissions standards is a supply chain problem, not just a trucker problem. Do you think shippers, receivers, and intermediaries grasp the severity of the problem and are thinking about ways to mitigate the effects on carriers?
A: I would say that about a third of the shippers understand the situation. They are collaborating with carriers to help them get more productivity out of their equipment. They are working with their vendors on product and packaging design with the goal of loading more product per 53-foot box or trailer. They are looking to take control of inbound loads in order to minimize systemwide empty miles.

The challenge is for carriers to somehow convince the other two-thirds of the shipper community that the world is changing.

Q: In 34 years working in and covering the industry, what has been the most profound change you've seen?
A: The margins earned by the Class I railroads. We struggled at CSX in the 1980s to run below a 90-percent operating ratio. Now, carriers are targeting operating ratios of 65 percent or below. And the railroads have been able to generate these much improved margins while still charging half what they did at the time of deregulation. That is amazing to me.