After two-year storm, SMC3 attendees enter 2011 with high hopes
Conference attendees bullish on growth, despite specter of rising rates.
Two years ago today, attendees at SMC3's annual winter meeting gathered around a big-screen TV in an Atlanta hotel to watch the swearing in of Barack Obama. They then proceeded home to resume the struggle to survive the worst downturn most had ever seen.
Last year at this time, the same group came together again, battle-scarred but hopeful about what lay ahead.
This week, the group of shippers, carriers, 3PLs, and assorted vendors brought a far different attitude to the event. For the first time since the financial crisis unfolded in the fall of 2008—and for many, the first time since a miserable freight recession took hold in 2006—optimism was clearly evident and for the most part, untempered.
When asked at a general session how many expected at least 10-percent revenue growth in their businesses in 2011, an overwhelming majority of audience members raised their hands. One notable exception was Chris Lofgren, president and CEO of truckload and logistics giant Schneider National Inc. Lofgren forecast 5 percent revenue growth for his company and voiced concerns that a slew of new government regulations—Lofgren listed 16 of them in a presentation he gave at the conference—would have a dampening effect on Schneider's growth outlook.
"There are more regulatory changes now than we've ever faced before," Lofgren told the audience. "Until we see the outcome of this, we are not going to add a single truck."
But Lofgren was in the minority this week. Thom Albrecht, transport analyst for BB&T Capital Markets, said in a Jan. 19 presentation that 2011 "could be a great year for freight" as companies aggressively ramp up their capital spending programs, and industrial production—which Albrecht said "creates freight"—grows at two to three times the rate of U.S. gross domestic product. Albrecht said he sees the current upcycle lasting until 2014.
Even the renowned economist Donald Ratajczak, whose voluble presentation style belies a cautious, prove-it-to-me attitude toward economic cycles, waxed bullish. Ratajczak was particularly optimistic about the second half of 2011, especially as states currently struggling with budget deficits get their fiscal houses in order and the economic drag resulting from the belt-tightening is offset by a 2 percentage point reduction in the employee-paid portion of the social security tax. Ratajczak said the reduction should add $250 billion in economic stimulus during 2011, the lone year the cut is to be in effect.
Ratajczak said the recovery could be derailed by a continuation of "bad policy" coming out of Washington. He added, though, that most of the policy directives that sowed so much uncertainty among the business community have already taken place and that future moves, if any, will be more benign to business.
Ratajczak also cautioned that China's potential inability to control inflation could lead to a dramatic and damaging upward spiral in prices. "But I see that as a 2013 problem," he added.
The fly in the transport ointment appears to be the prospect of rapidly escalating carrier costs and rising freight rates for shippers as carriers look to recoup lost ground from the freight recession of the past four years, seek to recover the expense of current and future investments, and brace for the impact of various regulatory actions on their driver pool and truck fleets.
G. Tommy Hodges, a trucker for 45 years and now president of Goggin Warehousing LLC, a 3PL based in Shelbyville, Tenn., said various environmental directives over the past eight years—including diesel engine retrofitting directives in 2007 and 2010 to comply with Environmental Protection Agency requirements—have added $35,000 to the cost of the average truck during that span. The costs of these unfunded mandates have yet to be recouped, so they will be passed on to shippers in the form of higher prices, Hodges told the gathering.
"That's a bubble on the horizon that's getting ready to pop. You better get ready for it," he warned.
The cost of replacing aging truck equipment is another concern. Albrecht said in his presentation that the average heavy-duty tractor and dry van trailer is older today than at any time in the past 10 years. What's more, new tractors cost $34,000 more today than in 2001, and maintenance costs—driven by increases in materials inflation—continue to climb, he said.
Compounding the dilemma is the imminent shortage of drivers as the federal government's new driver safety measurement program—CSA 2010—forces carriers to purge their fleets of drivers who are considered unsuitable risks under the CSA guidelines.
Albrecht said the trucking industry has exhausted the option of mining available labor from such depressed industries as construction. "If people haven't decided to be truck drivers by now, you're not going to pull them out of the unemployment lines," Albrecht said. He deemed the driver shortage an "incredible nightmare."
The result of all this is that dry van rates per loaded mile—an important pricing indicator—have begun to climb. After troughing in 2009, rates rose modestly in 2010 and are expected to spike in 2011, Albrecht said. He compared the current situation to 2002, when shippers lost their leverage over dry van rates and prices began a steep upward climb that continued for the next four years.
So far, the trucking industry is getting by with general rate increases in the 5.9 percent neighborhood for 2011. For their part, several carrier executives believe continued technological innovations and productivity improvements will offset the need for annual rate increases beyond the mid single-digit range. "There's a lot of opportunity to reduce expenses across the supply chain," said Jack Holmes, president of UPS Freight, the less-than-truckload unit of UPS Inc.
Lofgren of Schneider framed the future as one driven not by cost increases but by the continued tug-of-war between loads and capacity. "There are certainly cost increases coming, and you have to factor that in, but it's really a supply-demand issue. In the end, it's about productivity," he said.
For all the talk about what 2011 holds for shippers, carriers, and 3PLs, however, there is at least one inescapable fact of life: Rates have been down so long that, with the economy improving and costs rising, there is only one direction for prices to head.
"We are telling our customers that the general trend is up," said John Wiehoff, chairman and CEO of C.H. Robinson Worldwide Inc., the nation's largest freight broker.More articles by Mark B. Solomon
Join the Discussion
After you comment, click Post. If you're not already logged in, you will be asked to log in or register.
Resources Mentioned In This Article
- Drivers wanted: English as a primary language not required
- Old Dominion raises tariff rates by 4.3 percent
- DOT official says transportation funding to come from changes in inventory accounting formula, tax treatment of overseas earnings
- Analyst says truckload contract rate hikes could easily exceed 4 to 6 percent in 2014
- U.S. Bank to extend payment terms to shippers while keeping carrier terms intact
Feedback: What did you think of this article? We'd like to hear from you. DC VELOCITY is committed to accuracy and clarity in the delivery of important and useful logistics and supply chain news and information. If you find anything in DC VELOCITY you feel is inaccurate or warrants further explanation, please ?Subject=Feedback - : After two-year storm, SMC3 attendees enter 2011 with high hopes">contact Editorial Director Peter Bradley. All comments are eligible for publication in the letters section of DC VELOCITY magazine. Please include you name and the name of the company or organization your work for.