TruckingÆs renaissance
Shippers prepare for rate hikes, tight capacity.
By Eric Kulisch
Motor carriers have cautioned shippers for more than a year that when the economy comes roaring back they may have difficulty finding a truck or intermodal box as quickly as needed to serve their customers.
Two factors ' a static fleet size and a potential erosion of drivers ' are exacerbating the situation and making that scenario more likely.
Some of the bluntest warnings that shippers who bottom-feed for low rates will be most impacted by the changing market dynamics are coming from officials at Schneider National, the Green Bay, Wis., trucking and intermodal giant.
Truckload and less-than-truckload rates appear to be firming even though volume growth has dipped a bit since early fall 2010, giving highway carriers a feeling of pricing power they haven't had in years. Capacity is modestly tight in some regions (weaker on the West Coast), but most observers believe equipment and driver supply isn't constrained enough yet for shippers to pay extra to secure capacity. Carriers are keeping an eye on March, when the produce season begins.
Motor carriers need better pricing stability ' read higher rates ' if they are going to invest in extra capacity that supports the performance of manufacturers and retailers, Schneider Chief Executive Officer Christopher Lofgren said Nov. 15 in Fort Lauderdale, Fla., during a roundtable discussion at the annual TransComp freight conference and expo organized by the National Industrial Transportation League and the Intermodal Association of North America.
The head of the largest privately owned U.S. trucking fleet railed against the volatile nature of rate setting each year in which shippers treat ubiquitous truckload service like a low-value commodity but then expect carriers to make big investments in equipment in anticipation of more demand.
'This episodic pricing phenomenon isn't going to help anybody,' he said. Manufacturers and retailers should realize their behavior influences the availability of trucks and ultimately the performance of their companies, he added.
During boom times in the middle of the last decade there was about 15 percent excess capacity in the truckload industry and carriers began to lose pricing leverage. Fuel surcharges implemented as diesel prices shot up brought in extra revenue, but blinded truckers to underlying efficiency and demand problems. Shippers reacted to cost spikes by negotiating lower mileage rates and discounts. When the recession hit in 2008, shippers in droves began exercising clauses in their pricing agreements to seek lower rates ' sometimes coming back two or three times within a year for further givebacks.
As the economy went into a tailspin, trucking companies parked equipment, sold assets in overseas used truck markets, deferred purchases of replacement trucks, reduced pay levels and made other drastic cuts ' or went bankrupt. Now, as the economy bounces back, they are reluctant to invest in new assets until they are confident economic growth is consistent and their business profitable.
Many large and mid-size carriers in recent years have become more disciplined in contracting and pricing, refusing to haul freight on unprofitable lanes or for customers that require special attention but are not willing to cover the extra costs.
Lofgren said Schneider won't buy more tractors and trailers until customers are willing to pay rates high enough to generate adequate returns on investment.
Motor carriers and shippers should discard their 'schizophrenic relationship' and instead focus on a more collaborative partnership with more stable rates that enable investment planning, Lofgren said.
Trucking companies need to maintain an operating ratio ' expenses to revenue before interest and taxes ' of 96 or better in order to have the cash flow to reinvest in the business, according to industry officials.
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| 'There needs to be a certain amount of buying commitments. If they want an element of pricing certainty there's got to be a certain element of buying certanity' | |
| Steven Van Kirk vice president, intermodal commercial management, Schneider National |
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The collapse of trucking prices 'for us reinforced the need to get a reinvestable level of returns to justify investing in more equipment,' said Steven Van Kirk, Schneider's vice president intermodal commercial management, in an interview at TransComp.
The company didn't buy any domestic intermodal containers in 2010 even though demand was higher than anticipated.
'The thing that's illuminating about 2009 is how different companies behaved to lower costs and increase payment terms. Some shippers took a commoditized buying approach. Others took a more strategic relationship whereby rates may go down, but not place a carrier underwater,' Van Kirk said.
'The shippers who dropped the prices to egregious levels found that just because you have a price doesn't mean you can get a box. So they're the ones experiencing more of the capacity shortfalls,' he said.
Schneider is reaching more multiyear agreements now so it can count on a shipper's 'freight being a key part of our network operations and they can count on us to meet their transportation needs,' he said.
That type of collaboration, Schneider officials said, makes it easier for carriers to plan how much capacity to add rather than being subjected to the peaks and valleys of market demand.
'From our perspective, there needs to be a certain amount of buying commitments and pricing commitments. If they want an element of pricing certainty there's got to be a certain element of buying certainty,' Van Kirk said. That can be achieved in a number of ways, he added, including minimum volume commitments by lane and period, willingness to pay for space even if it's not used and tying price to the amount of volume tendered.
The less-than-truckload market is in worse shape than truckload. It was almost 25 percent over capacity five years ago. Since then it has experienced significant contraction, but still suffers from too many trucks and low rates as many shippers try to consolidate more shipments to fill a dedicated truck, which is more economical.
Truckload and LTL profits per load will need to increase by the high single digits before carriers feel comfortable investing in more capacity, according to Lee McMillan, vice president of strategic services for AAA Cooper Transportation in Dothan, Ala.
Carriers have been able to obtain rate increases of 4 percent to 6 percent in first quarter contracts, with expectations of 5 percent to 10 percent rate increases as capacity tightens, said Douglas Woodrich, transportation analyst for Longbow Research, in a Feb. 16 report.
Analysts' pulse of the truckload market indicates that supply and demand was balanced during the normally slow January period and that capacity could tighten as demand picks up in March. A large majority of shippers surveyed are resigned to rate increases across the board during the next six months.
January volume was up 3 percent to 4 percent over a year ago, although winter storms prevented better results. February volumes appear to be picking up and have shown more consistency than in the past couple of years, Woodrich said.
The solid bookings are a positive sign for truckers, given that they come on the heels of double-digit monthly increases last year that lose some luster when compared to the market bottom in 2009.
The American Trucking Associations' monthly truck tonnage index jumped 3.8 percent in January, its highest level since January 2008. The index, which has a 100-point baseline, stands at 117.1. It increased 2.5 percent in December after dipping 0.6 percent in November. The seasonally adjusted index rose 8 percent from January 2010. Tonnage for all of 2010 increased 5.7 percent from 2009.
The index reflects that the upward growth trend since last April is still choppy, but the industry group predicts volumes will be solid in the first half and accelerate into the second half of the year unless the recent spike in oil prices dampen consumer spending.
One anonymous carrier quoted in the Longbow report said it is seeking 10 percent to 15 percent increases and that most customers have been receptive so far.
Woodrich predicted carriers would push through another round of rate hikes of 4 percent or more this year.
Shippers say driver and equipment supply is a major concern, especially as a new federal safety measurement system for motor carriers and drivers (see related story on Compliance Safety Accountability) takes root and further restrictions on driving hours loom. In response, carriers are expected to tighten their criteria for driver eligibility to demonstrate to law enforcement and customers that they are reliable, potentially putting some drivers out of work. Shorter workdays mean drivers will have less time to move freight.
'You better fatten up the checkbook,' NIT League President Bruce Carlton said during a press conference about the regulatory and market factors putting pressure on the supply of tractor trailers.
Wal-Mart, the world's largest retailer, has already taken the collaboration theme to heart by signing longer-than-normal contracts with core carriers to ensure stability in its network and higher service levels, Ken Braunbach, senior director of transportation, said during a mid-February webinar on freight issues hosted by the Federal Highway Administration.
Rate escalators based on cost and inflationary indices are built into the contracts to take some market risk and extra negotiation out of the process for both sides, he said.
Shippers who want carrier support need to get better at making their loading docks more responsive, Matt Ehlinger, NIT League vice chairman and director of corporate transportation at NCH Corp., said at the organization's conference. This includes taking measures such as implementing trailer-drop programs to minimize wait times for drivers who face reductions in their daily and weekly on-duty times due to pending federal regulations.
Carriers who use drop-and-hook methods typically have to invest in extra trailers.
Drivers can be detained at a loading dock for various reasons, including lack of staffing or forklifts, insufficient bays, over-scheduling pickups and deliveries, and not having product ready for loading.
Many companies took steps such as instituting appointment systems to reduce driver wait times the last time the Department of Transportation cut back allowable hours of service in 2005. Not all carriers have regular problems with detention, but when it does occur the average wait time is two hours. Improving the detention time for drivers to load and unload could save carriers $4 billion per year, according to a 2009 DOT report.
'At the end of the day, we want them to make a reasonable return on investment and want an efficient system,' said NIT League Chairman Terry Bunch.
Demand for trucking service leveled off after the fall peak season, but motor carrier executives have suggested that truck capacity could be scarce by the second half of 2011. Many carriers have announced plans to negotiate raises into expiring contracts.
And carriers are taking a page from shippers and beginning to reopen contracts ' essentially pricing agreements ' to claw back revenue. The agreements generally have clauses that allow the parties to go back to the bargaining table with 30 days notice if the market changes.
Meanwhile, more carriers are shifting capacity from truckload and LTL operations into intermodal and port/rail drayage, where they perceive increased opportunities and better returns as international trade continues to grow. The moves are part of a wider trend in the past decade of trucking companies diversifying their portfolios to include other modes and logistics services, and are a response to shippers establishing more regional distribution networks with shorter delivery distances.
Truckload carrier Knight Transportation, for example, in 2009 launched an intermodal port drayage operation.
Morgan Stanley transportation analyst William Greene said truckload rates probably won't begin to take off until 2012 because carriers buying new trucks as replacements often end up keeping the old ones longer to take advantage of new business opportunities.
'Traditionally, when carriers look to accelerate replacement in a strong or improving truckload market, there is a hesitation to retire older tractors that are still productive. The result is supply growth.'
Manufacturers report that trucking companies have been placing large orders for new Class 8 trucks in recent months, after purchases dwindled for two years due to lack of demand and tight credit. The trend is expected to continue with the inclusion of an accelerated depreciation clause in the large tax bill passed by Congress in December, Greene predicted.
Despite the release of pent-up demand, motor carriers are still being more cautious in their purchasing decisions.
McMillan spoke at a recent port industry conference about a friend who has a truckload company with 300 trucks that does not intend to invest in any new equipment or routes in the near future even though he has paid down debt and has the capital to invest.
As demand firms, many carriers will rely more on independent owner-operators to supplement their fleets, he predicted.
Schneider's intermodal division plans to buy 500 to 1,000 containers in 2011 as part of a judicious strategy of growing its fleet and giving first crack at equipment to accounts that accepted price increases during the past year, Van Kirk said.
STI, a Fort Wayne, Ind.-based provider of truckload, LTL, white-glove and final-mile transport, recently implemented its first general rate increase (5.4 percent) in three years and signed a deal to purchase 125 trailers from Great Dane and Kentucky Trailer on top of 112 trailers it bought last year, said Jerry Levy, executive vice president of sales and marketing.
Growth in the company's specialized truckload services has been especially strong in recent months as industrial customers ship restaurant supplies, furniture, retail fixtures and other large goods, he said. Towards the tail end of 2010, truckload volume was up 14 percent year-over-year, while LTL shipments increased 3 percent to 4 percent and home delivery volume rose almost 5 percent.
