The winter of their discontent
Bad weather, tight capacity made for soaring costs and tense times for the trucking industry in the first quarter. Was this an anomaly or the shape of things to come?
On a balmy Florida morning in mid-April, Gail Rutkowski, executive director of the shipper group NASSTRAC, took the microphone at her organization's annual conference and proceeded to give a couple of service providers an earful.
Freight brokers, Rutkowski said, are eager to negotiate rates with shippers yet are willing to break their contractual commitments should capacity tighten and a truck is no longer available at the predetermined rate. Brokers and their carriers want the stability of committed volumes at negotiated rates, yet carriers also want the freedom to reposition their assets should circumstances dictate, said Rutkowski, a 40-year industry veteran. "You can't have it both ways," she told broker executives in a NASSTRAC panel session aptly titled "Ten Things I Hate About You: An In-Depth Look at the Shipper/Broker/Carrier Relationship."
Rutkowski verbalized the frustrations of shippers reeling from one of the most brutal quarters in U.S. transportation history. Terrible weather in huge swaths of the country during January, February, and early March kept many trucks off the road for extended stretches. Rail intermodal networks were hammered, which had the dual effect of denying truck shippers access to an alternate transport mode and forcing traditional intermodal users onto the highways. Smaller truckers picked up some of the slack, but they too were prone to shift assets to the spot market to capture higher rates.
With their contracted truck services often unavailable, shippers were left to the mercies of the spot market. Not surprisingly, they paid dearly for space. Spot rates for dry van services—the most common type of truckload transportation—climbed to between $1.95 and $2.09 a mile during the quarter (including fuel surcharges), according to DAT, a consultancy that tracks the market. The firm's load-to-truck ratio, which measures the ratio of loads to available trucks, doubled from the levels of two years before, a reflection of far more demand than supply.
Market participants accustomed to short-term surges normally due to a natural disaster were stunned by the cycle's longevity. "It was remarkable, almost like a once-in-a-lifetime experience," said Kerry R. Byrne, executive vice president of Total Quality Logistics (TQL), a Cincinnati-based broker.
Spot rates have remained high into the summer as the trucking supply chain moved through its seasonally strong period, an improving economy stimulated freight demand, and some third-quarter orders were pulled forward into the second quarter ahead of a possible work stoppage at West Coast ports. Dry van rates averaged $2.08 a mile (including fuel surcharges) during June, according to DAT data. Rates for flatbed and refrigerated transport soared as the market struggled with seasonally high demand for construction equipment and produce.
In a mid-July interview, Rutkowski stood by her pronouncements at the NASSTRAC conference. "During [the first quarter], shippers experienced brokers—and to a lesser extent, carriers—refusing to honor contracted pricing and forcing shippers to pay much higher spot rates to move their freight," Rutkowski said. The behavior "caused a lot of bad blood between shippers, brokers, and carriers," she noted. Rutkowski added that the hostility has abated somewhat since then and that shippers have become more "carrier friendly" when crafting requests for proposals. She didn't elaborate.
For their part, broker executives on the NASSTRAC panel said they were caught in much the same first-quarter maelstrom as their customers. "The capacity crunch was greater than any of us could have planned for," said Eric McGee, senior vice president of transportation for J.B. Hunt Transport Services Inc., the diversified truckload giant that has a fast-growing brokerage operation. McGee said Hunt's truckers were charging rates that were up "double-digits" from a year ago. McGee added that Hunt never intends to leave its shippers hanging. "In normal circumstances, we are committed to our customers to honor what we signed up for," he said.
Rob Kemp, president and founder of DRT Transportation LLC, a broker with about $65 million in annual sales, said the situation was so bad in the first quarter that loads would not get moved even if they could fetch much more than the contracted rate. Kemp said that DRT honors its contractual commitments to the point that it will lose money on the load rather than turn it away. "I looked at our book of business the other day, and about 8 percent of the loads on our board lost money," he told the audience.
MORE THAN MOTHER NATURE
No one doubts that weather conditions played a major role in the first-quarter nightmare. The storms were as widespread and prolonged as they were fierce. Yet every first quarter spells weather problems for the U.S. freight network. What made this year different? First off, the elements amplified an already-strained market for carrier supply. The industry entered 2014 facing a well-documented shortage of drivers as well as the reluctance of carriers to add equipment in the face of escalating costs and the lack of a sustained pickup in demand. An increase in the number of trucking company failures hasn't helped; an estimated 390 companies and 10,650 trucks left the road in the first quarter, according to Avondale Partners, an investment firm; in 2013's second quarter, 205 companies and 4,745 trucks exited the market, the firm said.
Over the past four quarters through this June, about 3 percent of the nation's for-hire fleet and between 10 and 15 percent of spot market capacity left the market, according to the Avondale study. The rise in trucking failures comes as freight volumes increase, a phenomenon that Donald Broughton, an Avondale managing partner who oversees the report, said he's never seen in examining data from the past quarter century.
Carriers also began the year coping with reduced productivity due to the Federal Motor Carrier Safety Administration's new regulations governing a driver's hours of service. The rules, which were enforced in July 2013, reduced a driver's workweek and changed drivers' rest cycles. According to most estimates, they have shaved between 3 and 5 percent off a typical carrier's available asset utilization. Peggy Dorf, an analyst at DAT, said the network had trouble this past winter adjusting to its first cold-weather cycle under the rules. She said the rules should have less of an impact next winter because the industry now has a year of experience working with them.
The growing influence of freight brokers has become a key factor in driving up demand for and cost of space. According to a recent survey of large shippers by Morgan Stanley & Co., 37 percent used six or more brokers in June, compared with 30 percent in June 2012. Shippers no doubt are using more brokers in hopes of increasing their chances of finding affordable capacity. However, this has resulted in a growing number of potential buyers chasing a declining pool of trucks. Rutkowski said she doesn't see this trend reversing any time soon.
Then there is old-fashioned capitalism. Like most free-marketers, truckers sought to "make hay while the sun shone," or, in this case, as the snow fell and the ice formed. With space at a premium and fat spot market rates beckoning, it would only be natural for carriers to migrate their assets to the spot market or to tell their users their contracted capacity would need to be repriced. "Why should I move freight for $1.35 a mile when I could get $2 a mile without any trouble?" said Charles W. Clowdis Jr., managing director, transportation, at IHS Economics, a unit of consultancy IHS Global Insight.
Shipper-carrier contracts generally contain language committing the carrier only if equipment is available, Clowdis said. This effectively gives the carrier an escape hatch to shift rigs and trailers to the spot market, and leave the contracted shipper in the lurch, he said.
WHAT DOES THE FUTURE HOLD?
The prolonged nature of the current cycle, and the seemingly secular trends behind it, will be on everyone's mind as the bidding process for peak-season business gets under way. Shippers have held the upper hand for most of the past eight years as a subpar economy and truck oversupply left carriers clamoring for business. That leverage is gone, and with it any thought of shippers' punishing their carriers for purportedly bad behavior in early 2014. "Shippers cannot afford to have a 'retribution' approach" anymore, said C. Thomas Barnes, president of Con-way Multimodal, which procures capacity for the Con-way companies as well as for other users.
Barnes said that justice is finally being served on those shippers who took advantage of the multiyear downturn starting in 2006 to play carriers off against each other in an effort to get the lowest price for their freight. "A lot of shippers misbehaved between 2007 and 2009," he said. Barnes noted that trucking executives have warned for years that shippers who stayed around during the bad times would be rewarded when the pendulum swung, while those who, in his words, "played the transactional game" could find themselves without wheels.
Meanwhile, truck users are doing what they can to protect themselves. Con-way Multimodal and truckload giant Werner Enterprises recently signed a three-year agreement for Werner to supply the Con-way operating companies with an adequate amount of assured capacity; the agreement is an extension of previous compacts between the two. Byrne said he is using TQL's technology to provide carriers with value-added benefits such as identifying backhaul opportunities on various lanes. And shippers that wouldn't have even thought of it in the past are now asking their carriers what they can do to make their freight more "carrier-friendly."
Clowdis of IHS said savvy shippers should see the turning of the worm and give carriers what they want most: more money. He added that in return for capacity assurance, shippers should offer to pay a 20-percent premium over the going rate. If the shipper's loads fall below the agreed-upon level, the shipper should compensate the carrier for the difference, he said.
"In this environment, that is what a wise shipper would do," he said.
About the Author
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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