February 17, 2011
transportation report | Truckload

Shippers, carriers strap in for next roller-coaster rate ride

Shippers, carriers strap in for next roller-coaster rate ride

Right now, things are relatively quiet in the $520 billion U.S. truckload business. But with freight demand on the rise and capacity tightening, no one expects that to last.

By Mark B. Solomon

"In the modern era, the shipper community has experienced 75 years of truck service. During that time, capacity has been short for only two years. Otherwise, capacity has been available and rates have fallen in real terms. The industry's entire structure and culture has been built around cost control. It is profoundly alien to capacity assurance. It will take ten years to mark the wrenching change."
—Noel Perry, managing director, FTR Associates

The nation's truckload industry is at one of those crossroads moments, a period when, in theory, shippers and carriers should step back and explore how they will do business over the next 10 years, not just for the next 10 days.

But theory goes out the window when the rigs need to roll today. And today, things are relatively quiet in the $520 billion U.S. truckload business. Supply and demand is, for the most part, in balance. Traffic flows, while stronger than in the hellish days of late 2008 and the first half of 2009, remain soft on many lanes. Capacity has tightened but is still readily available throughout most of the country. Freight rates, before factoring in fuel surcharges, have climbed, on average, about 5 to 6 percent from the 2008-09 trough. However, they remain below the "surge" levels many had predicted.

That's not to say shippers are paying an additional 5 percent across the board. Many shippers rebidding their "legacy contracts"—most truckload contracts run one to two years—have fared much better than that. Ben Cubitt, a former top shipper executive and now senior vice president of consulting and engineering for Transplace, a Frisco, Texas-based third-party logistics service provider, says many of Transplace's shipper customers who rebid their contracts in the fourth quarter netted savings of 3 to 4 percent over their previous deals.

Cubitt says while carriers are feeling less pressure to cut rates than they were two years ago, they still lack the leverage to pass along significant increases to shippers. "Demand is not strong enough now to dramatically change pricing patterns," he says.

But the calm may not last long. As the industry exits its traditionally weak winter months and heads into the seasonally strong spring period, truckers are tweaking their spreadsheets. Looming cost pressures, ranging from compliance with a slew of unfunded government mandates to rising diesel fuel costs to the need to replace aging rigs, have fueled their determination to push through price hikes. And there are few who are willing to bet the carriers won't eventually get their way.

What's more, shippers that feasted off bargain-basement rates during the downturn may soon find themselves scrambling for trucks. If carriers are forced to choose among customers, the smart money says they'll give preference to shippers that didn't squeeze them when times were tough.

Derek J. Leathers, COO of truckload giant Werner Enterprises, says carriers like Werner will allocate a large portion of their fleet capacity to those shippers who refrained from playing rate hardball after the freight recession began in late 2006. Werner's asset allocation moves will come at the "expense of shippers who were unsupportive of our needs," Leathers says, adding that there are many businesses that fall into that category.

As a result, some shippers may face a Hobson's choice of sorts: Pay up—perhaps in a big way—or risk not having wheels.

Feeling the pressure
For shippers, how bad could it get? According to Noel Perry, managing director of Nashville, Ind.-based consultancy FTR Associates, the rate picture over the next three years will mirror the 2004-2006 cycle, the last period of sharply rising prices. Perry says rate increases in 2011 will be slightly lower than the 2004 average of 11 percent. The real pain, he predicts, will be felt in 2012, when rates rise above 2005's nosebleed levels of 17 percent. Rates in 2013 should be higher than the 2006 average of 8 percent, Perry predicts. Next June should mark the peak of the upcoming cycle, he adds.

By contrast, Leathers says that Werner projects a "flattish" economy that would likely forestall double-digit rate hikes. However, stronger-than-expected freight demand could easily change the equation, especially with trucker costs rising at what Leathers calls "unprecedented levels." For now, Werner and its customers are trying to wring as much productivity as they can from their existing operations in an effort to delay the day of reckoning, he says.

But productivity measures—like leveraging existing assets rather than investing in new vehicles—could soon run their course. Equipment utilization has increased by about 10 percent in the past year and is now in the 90 to 92 percent range, according to FTR. A move into the high 90s, Perry says, would be "stretching the system" and would force up rates as carriers either try to make do with their old rigs or try to recoup the costs of replacing older vehicles with newer, more expensive models.

In a report issued last month, FTR predicted equipment utilization would approach 100 percent later this year due to rising freight demand and "conservative fleet attitudes" toward adding drivers and equipment. "As a result, carriers will have greater latitude to both raise rates and to be more selective" in freight selection, the firm says.

According to preliminary data from consultancy ACT Research Co., orders for heavy-duty Class 8 commercial vehicles in January rose to 27,300 units, a 320-percent increase over January 2010 figures. Still, most experts believe that virtually all of today's newly purchased equipment will be used to replace aging trucks rather than add to existing fleet capacity.

Window of opportunity
Truckload shippers, for their part, seem prepared—or resigned—to fork over more money to move their goods. A February survey of 500 U.S. and Canadian shippers by Morgan Stanley & Co. found that nearly 80 percent of respondents expect rate increases of about 4 percent over the next six months. The survey also indicated that robust freight volumes should support truckload volumes and prices. On the other hand, an easing of capacity that followed a short-lived tightening phase in the late summer and early fall of 2010 may act as a brake against higher rates.

Another factor that could have a dampening effect on truckload rates is competition from intermodal service; the survey found that intermodal continues to gain share against truckload because respondents perceive intermodal as delivering superior value for each dollar spent.

William Greene, Morgan Stanley's lead transport analyst, is skeptical that truckload rates will soar any time soon. "Reduced [truckload] supply will support some level of pricing gains, but without a strong economy, it's hard to believe carriers can obtain the mid to high single-digit pricing required" to increase margins, he says.

Cubitt of Transplace shares that view. He says it may take as long as two years for truckers to recoup higher expenses, unless something occurs to disrupt the current supply-demand equilibrium.

Cubitt says shippers now have a window to lock in attractive rates before capacity tightens again, freight demand takes off, and the effects of government regulations like the CSA 2010 driver safety initiative kick in. Cubitt also advises shippers not to expect new or renewal contracts to be extended for two years, noting that an agreement of that duration would create too much cost risk for carriers.

Building bridges
As shippers and carriers strap in for the next roller-coaster rate ride, the larger question facing the industry is how to inject stability into a business whose outlook is more uncertain than ever.

According to experts like Perry and Cubitt, an important step toward securing a better future is to recognize how the culture of the past has poisoned the well. For one thing, shipper-carrier contracts are considered informal documents with little force of law, they contend. It is easy for either side to exit the agreements, and it is common for one or the other to press for modifications to a contract should market conditions change.

Though a contract may prescribe specific rates, it usually doesn't require firm capacity commitments on the carriers' part, Cubitt says. In addition, truckload contracts don't penalize carriers for not delivering on capacity commitments, he says. As a result, an unhappy shipper often has just two options: to threaten to pull traffic from the carrier, and to actually do it.

But shippers haven't helped matters by using the downturn as an opportunity to flex their muscle, adopting what Perry characterizes as a "ruthless" approach in their dealings with carriers. Shipper behavior has sparked an angry public outcry from carriers, with many vowing revenge once the pendulum swings in their favor.

Breaking the cycle requires trade-offs, according to the experts. Perry believes that if shippers want to lock in rates today as a hedge against what he sees as an imminent price spike, they should be prepared to maintain those rates during the next down cycle, which Perry expects to start around 2014.

"If shippers and carriers want to have smoother cycles, they must find ways to establish permanent relationships," he says. "What we need is a system that acts as a stabilizing influence. But it requires trust, and that doesn't exist right now."

Leathers of Werner agrees that a change in the culture would be of great benefit to all concerned. "What I'd like ... is [for all of Werner's relationships] to emulate the relationships we have with our existing customers," he says.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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