Monday, May 17, 2010

Truckload Freight Rates - Up or Down?

Given that almost no new capacity is being added to the market, any increase in freight volumes has to tighten capacity a bit.
Truckload freight rates are on every shippers mind. Will they continue to rise, or will shippers be able to get them back to where they were a year ago - cheap!

We've noticed that trucking rates in certain sectors have been increasing for the past few months - especially the flatbed market. But what about van freight??

There certainly are a lot of opinions about how fast rates in the greatly depressed truckload and LTL sectors are likely to begin some sort of recovery along side a now growing economy.

Recently, transportation industry analyst John Larkin predicted that rates would stay low into 2012 even with economic recovery, for reasons ranging from increased use of technology by shippers in sourcing transportation to continued over capacity in both the TL and LTL markets.

There is, however, another opinion out there. Meet Charles Clowdis from IHS Global Insights. According to Charles, he believes that rates will rise more rapidly than many analysts have predicted.

According to Clowdis, the number of carriers and owner operators that went out of business has lowered the total supply of trucks in the US. He believes that this point has led to a straining capacity currently, and will force pressure to raise rates sharply higher if shippers want to get their freight moved.

Clowdis states that “Many carriers, both truck load and less-than truck load, have not replaced their fleets on a schedule that puts the most fuel-efficient equipment requiring less maintenance into service,” meaning fewer trucks will be available on any given day.

All told, Clowdis predicts TL and LTL rate hikes in the 7-10% range, “as capacity decreases and becomes more valuable to serve the released consumer demand.”

Of course, even rates hikes in those ranges would still leave shipping costs well below rates in 2007, but from a current year perspective, if Clowdis is accurate, it could lead to sharp year-over-year cost increases that could affect a shipper’s bottom line and ability to meet transportation budgets.

But Wait - There's More

Transportation companies are being pressured to adhere to "Green Initiatives" by shippers. Overall, many of the green initiatives combine reducing miles driven, which lowers shipping costs and greenhouse gases (GHG) at the same time. Sounds great, right??

Clowdis, however, feels that it is not as "rosy" a picture and feels that there are some challenges to this.

“Pressures to lower CO emissions will require investment in more fuel efficient engines to meet Green Initiatives that surely will be mandated by shippers,” Clowdis says. “Decreased fuel efficiency likely to result from added emission control enhancements can decrease the miles-per-gallon trucks currently produce and add to carrier costs that can be passed along to shippers.”

The cost structures of the carriers will simply be passed on to the shippers if the carriers wish to stay in business. Many carriers have heavily borrowed in order to ride out the past recession - and at much higher interest rates. The only way to stay going for many is to raise rates to service the added debt. According to Clowdis, freight rates “will also be driven upward by the need to service debt incurred by many of the carriers that resorted to borrowing to sustain themselves during the downturn”. This will no doubt lead to additional pressures to drive rates up.

“Terminal and infrastructure facilities also will require investment to restore efficiencies in operational areas and handle increased tonnage,” he says, adding that such investments must be financed in part by some increases in freight rates.

All this leads to the conclusion that sharp “rate increases are a certainty,” according to Clowdis.

To further illustrate, the American Trucking Association (ATA) tonnage index for March reported an adjusted month over month increase of .4%. However, there was a 7.5% increase in freight volume. There have now been 4 straight months of year - over - year tonnage gains.

Given that almost no new capacity is being added to the market, any increase in freight volumes has to tighten capacity a bit.

Last week, ATA Chief Economist Bob Costello was quoted “For most fleets, freight volumes feel better than reported tonnage because the supply situation, particularly in the truckload sector, is turning quickly."

Tuesday, May 11, 2010

Controlling Transportation Costs

In order for shippers to control transportation costs, we thought we may help with some possible strategies. Of course, each shipper is different. Each shipper will have to consider many factors with methods to insure they get their shipments delivered in a timely manner during the current trucking capacity crunch.

Where Are We Today?

Currently, controlling transportation costs has been next to impossible with the current trucking capacity crunch. This loss of supply has been due to the many companies that have closed their doors or sold off un-utilized trucks during the recent recession. While many larger companies are starting to finally stop the losses, it is estimated that many smaller carriers are still in danger of losing their business. There is still a lot of uncertainty concerning the new safety regulations - many estimates are that over 175,000 truckers will no longer be eligible to drive once the new regulations take effect. See last week's blog article for more.

The Shipper's Perspective

Manufacturing is growing and has been expanding now for over 8 straight months - it looks like things are moving forward. This expanding along with the loss of trucking capacity (especially flatbeds and stepdecks) has created an environment where most shippers are being forced to "bid for trucks". This is not pleasant and most traffic managers are doing overtime to get loads moved.

What Can Shippers Do to Attract Trucks?

The market is going to demand that rates will be increasing (they already have been). There is little that anyone is going to be able to do to prevent the uptick in pricing just as no one could seem to keep pricing from going down during the recession.

Here are some "non-rate" items that shippers can do to attract trucks - especially if the rates are similar to the competition (competition is anyone taking your trucks from you!):

  • Make Your Facility "Trucker Friendly" - drivers appreciate the little things that make them feel welcome - clean restrooms, coffee pot, inexpensive snacks;

  • Improve systems for loading and unloading. - Time is money. If carriers are consistently delayed either loading or unloading, they will more than likely choose to go to a facility that does not delay. Detention is never the goal to collect an additional $100-200. Carriers and drivers are paid when the truck is moving, not sitting.

  • Be Flexible - Do You REALLY need a flatbed?? Flatbeds and stepdecks are the trucks that are the most affected by the capacity crunch. Can you make some minor changes and utilize vans? Vans, while still affected by capacity, are more abundant and you can possibly have your items shipped for lower rates than the flats.

  • Does the Load REALLY need to be tarped?? Drivers prefer to take loads that do not require tarping. Tarps can weigh 100 pounds and typically take 2 tarps to cover the typical load. Imagine if you had to lift 100 pounds of hard to work with material over your head - it can get old after a while. We're not advocating you take chances on cargo claims, but if a load really doesn't need to be tarped you may be more successful in moving it versus a load that does require tarping.

  • Offer "windows" to pick up loads versus strict appointments - flexibility in pickup and delivery times can make it easier for carriers to put trucks into your area. When they can "work them in", the freight is more valuable to the carrier and you may not have to pay as much as strict appointment freight.

  • Try to be understanding if a truck is not able to make your pickup or delivery parameters - We all understand that everyone has customers, and sometimes customers can be a little demanding (anyone ever heard of JIT?). It may go a long way for shippers to make an attempt to educate their customers concerning some potential issues with the current capacity crunch. Carriers need to do their best to communicate problems to their customers, but being delayed at other shippers can sometimes not be avoided. Trucks are getting older due to the financing squeeze put on carriers - they can't buy new trucks yet. There are going to be more truck break downs. If a transportation manager screams at a poor load planner if a truck is delayed, sooner or later that planner will make a decision to load with someone else. Not trying to excuse lack of performance - just trying to educate on the reality of the current truck supply;


We hope that this blog post will help transportation managers and company executives not only to understand the current trucking environment, but also to minimize their rate increase exposure.

Tuesday, May 4, 2010

Freight Rate Forecast

News Flash... Freight Rate Forecast Is In.
Fasten Your Seat Belt - It's Going to Get Rough out There!

Just this morning, I received e-mails from numerous shippers pleading for trucks. Yes, I said “PLEADING” for trucks. Shippers are faced with either increasing rates to compete against their competition or they face the problem of losing business to other companies who can find a way to get the product delivered.

What Is Going On???

According to research, I’ve found a few factors that seem to explain and then forecast what will happen in the future. Let’s start out by figuring out the cause.

Supply of Trucks

Trucking Bankruptcies

Some have already forgotten the greatest recession since the Great Depression. Trucking companies have not. According to Transport Capital Partners, Bankruptcies have idled 445 companies and 21,000 trucks in the 4th quarter of 2009. More than 170,000 trucks have been idled over the last six quarters.

Limited Speeds

Fuel has increased more than 38% today versus a year ago. It is estimated that fuel surcharges are only covering 75-80% of the actual costs incurred by the carriers - especially for long hauls. Carriers have resorted to limiting their truck speeds from 68 mph to 62 mph. This reduction in speed equates to approximately another .5 MPG. The problem? It takes longer to deliver loads and is estimated that drivers will fill up their log books quicker, resulting in an additional 2-3% loss of trucking capacity.

The Result - A Much Smaller Supply of Trucks

The graph shows what has been going on. We simply don't have the trucks on the road that we once did.

Demand For Trucks

While the supply of trucks has dwindled, what about the demand for them??

If you've been following along this blog at all you know that we are under an economic recovery that appears to be sustainable. Of course, that means more manufacturing, more retailing, etc.

That means more demand for trucks.

We all know what more demand and less supply equates to - higher rates.

Certain segments of trucking are in much more demand than others - such as flatbeds vs. reefers. Flatbeds are becoming very difficult to find.

So What About the Future?

There are a few capacity problems for the future.

Loans for New Equipment

Banks are not loaning money to companies that haven't shown a profit. This means that trucks are getting older and older and they are going to be breaking down more and more. This means that there are going to be more loads "piling up" due to truck breakdowns.

Attitude Towards Buying New Equipment

According to Transport Capital Partners, their survey shows that 45% of carriers polled indicate that they will not purchase or add equipment until their fleets are fully utilized and rates have increased. In 2009, 32% felt this way. Another 16% aren't making any plans until they feel the economy has improved and is stable.

CSA 2010

The new safety system will be taking effect at some point this year (exact dates have not yet been determined). It is estimated that up to 175,000 current drivers will become ineligible as soon as the new monitoring system takes effect. This will further put a short term strain on the overall trucking supply.

The Botton Line: If you are a shipper, be prepared for a rough ride the next few months.