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."


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