It's called the core carrier concept: Shippers reduce the number of motor carriers under contract in order to negotiate better rates and reduce congestion on their docks. The idea is that motor carriers, forced to choose between providing better service at lower rates and losing business altogether, will be motivated to make sure their rates and service measure up. Long a common purchasing strategy, the idea quickly took hold in trucking once deregulation took the fetters off trucking competition.
The result was a fiercely competitive marketplace in which profitability often eluded truckers, especially at the levels that keep shareholders happy and allow reinvestment. In the nearly quarter century since interstate deregulation, thousands—tens of thousands—of truckers found they could not keep up and closed their doors. Others, however, have prospered.
Throughout those years, the prevailing buyer's market meant shippers could get away with consolidating their carrier bases and exerting pressure on truckers to offer steep discounts. But now, that's all changed. Demand for trucking is outstripping supply. And today many shippers find themselves forced to rethink the core carrier concept: not abandon it, by any means, but modify it.
Capacity is tight across all shipping modes, with shipping volumes strong since July. The trucking industry in particular—by far the major mode for North American shippers—has seen capacity shrink.
James Welch, president and CEO of Yellow Transportation, described the truck freight market in 2004 as a "perfect storm." Yellow, one of the nation's largest LTL carriers, saw freight surge in July, and Welch said, in a November interview, that he expected the peak shipping season to last into mid-December, weeks longer than usual.
Brad Brown, marketing and communications leader for Averitt Express, is of the same mind. "It's a whole different situation than a couple of years ago," Brown says. "Customers are coming to us and asking what they can do to drive the partnership." Averitt operates both an LTL and a truckload business, operating primarily in the Southern United States.
The shortage is particularly severe in the Northeast. With the loss of both USF Redstar and Guaranteed Overnight Delivery (G.O.D.), shippers suddenly find they have fewer LTL options for regional shipping. Capacity has become a serious problem in that region. "We've been very discreet in commitments to new accounts," says Jim Latta, vice president of A. Duie Pyle, an LTL carrier serving most of the Northeast.
But the problems are most acute in the truckload sector.
Dave Geyer, vice president and general manager of truckload services for Schneider National, the nation's largest truckload carrier, says, "From my perspective, the shortfall of capacity is as extreme as it has been at any time over the last couple of decades." One indication: He says the company's rate for turning down business because of a lack of capacity is up about 20 to 25 percent year over year.
As a result, shippers are seeing rates rise in both the truckload and LTL sectors. In addition, to assure capacity, many shippers are for the first time in years calling on more truckers to haul their cargo.
Rates rise, strategy shifts
Shippers are fully aware they've lost the negotiating leverage they long enjoyed. Edward M. Wolfe, a securities analyst who specializes in transportation for investment bank Bear, Stearns and Co., and his colleagues Thomas Wadewitz and Dana Cease conduct a quarterly survey, the "Supply Chain Indicator," that solicits more than 1,000 shippers' opinions on market conditions. The report for the third quarter of last year, issued at the end of November, showed that shippers expected to pay higher rates for trucking, rail and airfreight services this year, even during the traditionally slow first quarter. The Bear, Stearns analysts say survey respondents expect truckload rates will rise 3.8 percent and LTL rates 2.5 percent this year.
Many truckers believe that it's about time—that the industry needs those increased revenues simply as a matter of long-term health. Latta, in remarks echoed to one degree or another by many in the industry, says that the industry has had excess capacity in most years since interstate hauling was deregulated in 1980. "We simply were not getting enough for what we did," he says. "We were not getting enough capital to reinvest in the fleet."
Now it's clearly a seller's market, and carriers expect to earn better returns. Jerry Moyes, CEO, chairman and president of Swift, the holding company for truckload carrier Swift Transportation, in his keynote address to the National Industrial Transportation League's annual meeting in November,made the point candidly."The tables have turned," he said. "We think it is going to stay this way for the next five or six years.We need to get paid more for our services."
Perhaps of more concern than rates is simply assuring that freight moves. Late last year, Wolfe told a teleconference on freight capacity sponsored by Tranzact Systems that his surveys over the last few quarters had indicated that shippers were using an increasing number of smaller carriers in their quest for capacity. About half the shippers responding to the third-quarter survey said they would use a larger number of carriers.
The survey results indicate that many shippers are seeking out more truckload carriers in part because smaller carriers overall have more capacity available than the larger carriers, and in part because larger carriers, given tight capacity, have not only increased rates, but are more insistent on collecting accessorial charges.
But cultivating new carriers isn't so easy. "A lot of shippers had pared back on the number of carriers [they used]," Geyer notes. "As the market has gotten tight, a lot of them don't have the staff or the relationships to broaden their carrier base." That's proved a boon to brokers and other nonasset based third parties. Shippers often turn to those companies, which do have relationships with large numbers of carriers—companies like C.H. Robinson and Landstar Systems as well as smaller firms around the country. Carriers like Schneider have also gotten into the brokerage business.
Effects of the capacity crunch go beyond the problems shippers have experienced finding carriers to move their freight. While it's difficult to draw a direct line between tight capacity and inventory levels, Wolfe and his team wrote in the third-quarter "Supply Chain Indicator" that shippers reported an increase in safety stocks, some of which may be due to concerns over the reliability of the freight network for ontime deliveries.
Econ 101: Demand outstrips supply
Why did capacity get so tight so quickly?
Geyer cites several reasons: a sharp increase in demand; loss of capacity in the industry resulting from some 12,000 bankruptcies in the last three to four years; and a loss of productivity resulting from driver hours-of-service rules that took effect last January. At the same time, trades such as construction and manufacturing that offer more attractive (and higher-paying) jobs are siphoning off the driver pool.
Overall, industry capacity has grown some, he points out, but demand has grown substantially faster. In particular, a resurgence in manufacturing has amped up demand for freight services. At the same time, carriers have been cautious about expanding capacity.And in the truckload sector in particular, the capacity crunch is as much the result of an endemic problem for the industry—the shortage of qualified drivers —as the carriers' reluctance to put new trucks on the road.
Nor has the LTL business been immune. One of the most recent examples was Guaranteed Overnight Delivery, which shut down its LTL business in the Northeast late last year. That followed the shutdown of USF Redstar earlier in the year, a closing executives blamed on a job action by its Teamster union employees.
While not all of that capacity has vanished (other carriers have snapped up some of the used equipment), the shutdowns have contributed to the truckload capacity problem. The Bear, Stearns analysts write that truckload capacity is the tightest they've seen in the seven years they've conducted the survey, and they expect both truckload and LTL capacity to tighten further over the next year, even though orders for new trucks have surged.
Problems in the railroad industry have contributed to the trucking capacity crunch as well.When railroad service deteriorated over much of the past year—in large part because of the industry's own capacity issues—many shippers shifted at least some freight to motor carriers. While there are signs that rail service has improved in recent months, no one expects to see a stampede to the rails anytime soon.
Meanwhile, the driver shortage, a problem that plagues the industry whenever the economy gathers strength, shows no signs of easing. Geyer points out that the pool from which most new drivers are drawn—workers aged 21 to 44—is shrinking. Added to that, trucking wages haven't kept pace with those in construction and manufacturing—the major competitors for the labor force.
But the biggest problem of all is that truck driving is one tough way to make a living. The life of a driver in the truckload industry can include weeks away from home, nights spent tossing and turning in a cramped cab, unpredictable schedules, and the everpresent prospect of being dispatched to far-off destinations on short notice. "Every survey we do puts pay secondary to lifestyle,"Geyer says. "Longhaul truck drivers too frequently are unable to tell their families when they're going to be back."
Moyes said much the same in his keynote address at the National Industrial Transportation League's annual meeting. The shortage of drivers is the worst he's seen in 38 years in business, he told the audience. "Why?" he asked. "Because of the poor quality of life."
Like most other truckload carriers, Schneider and Swift are boosting driver pay and offering other incentives, such as signing bonuses, to attract drivers. Schneider is also investing heavily in routing systems that give drivers more advance notice on where they'll be going and when.
In addition, many carriers, both in the truckload and LTL sectors, have made increasing use of rail intermodal service for the linehaul portion of shipments, but that has not proved a panacea.
A lesser shortage in LTL
The situation may not be as severe in the LTL sector, but strong demand and rising costs have still taken their toll. Welch said the strength of the economy in 2004 took the entire motor carrier industry by surprise. "It was a challenge to our company and the entire industry," he said. "There's hesitancy to put on a lot of capacity because we're not sure what business will be like [this year]." He expects it will be March before carriers can accurately gauge their capacity needs for the year.
Robert A. Davidson is president and CEO of ABF Freight System, another of the major national LTL carriers. His company has invested in expansion over the last three years, he says, adding both trucks and hundreds of new dock doors. But like other executives, he'll advocate adding capacity only if it makes business sense. "We're positioned to provide capacity," he says. "But it doesn't make sense to add capacity if you're not paying for the existing capacity." His point: ABF won't add capacity that can't provide sufficient returns. "We don't want to price marginally," he says.
One LTL carrier that has added capacity is FedEx Freight. Douglas G. Duncan, president and CEO of the multiregional carrier, says his company has invested in capacity regularly in recent years, an approach he believes has paid off. Even during the downturn of 2001-2002, he says, "we never blinked an eye."
Old Dominion, a multi-regional LTL carrier based in South Carolina, is another hauler that hasn't shied away from adding capacity, says Vice President Chip Overbey. The company has added tractors and trailers; it even acquired terminals from the Consolidated Freightways system when that carrier failed two years ago.
LTL carriers face far less difficulty than truckload companies in recruiting and retaining drivers, but they have not been without problems. Gerald Detter, who recently retired from the position of president and CEO of Con-Way Transportation Services, has been particularly outspoken on the issue of driver compensation. "We need livable wages and benefits to attract people to a relatively unattractive industry," he said last year. "This is not going to go away. We're having an increasingly difficult time hiring drivers. When the government requires more and more background checks and capability testing, the pool gets smaller.We have to keep wages and benefits [competitive]."
Some parts of the LTL sector may face another serious driver issue in the near future. Welch says that close to half the drivers in his company will retire in the next decade, and with expected growth in freight volume, it won't be enough to simply replace them. Finding qualified drivers is not easy. Welch says that Yellow screens out nine of every 10 applicants.
Carriers have taken a variety of approaches to attracting and retaining drivers. One example: Both A. Duie Pyle and Old Dominion operate their own driver training schools.
The search for options
Options for shippers are limited. Many large shippers already use a variety of software tools to optimize routing with carriers best suited for particular lanes. And although intermodal capacity is tight, shippers will find it a viable alternative in some lanes. Shippers that have abandoned private or dedicated fleets may want to revisit that option. At the DC level, making efforts to improve dock efficiency on both the inbound and outbound sides will make a shipper more attractive as a customer to carriers. Latta and others suggest that shippers pay more attention to freight flows, particularly at the end of the week, when large Friday shipments can disrupt linehaul networks for LTL carriers.
On the carrier side, carriers that have survived the economic turmoil have already vastly improved their own productivity: Welch reports, for instance, that even at the peak of the shipping season in September, shipment days in transit on Yellow were among the lowest in the company's history. Time in transit averaged 2.86 days, he says, compared to an average of close to four days just a few years ago. And carriers continue to make investments aimed at boosting productivity. ABF Freight System, for instance, is installing global positioning system technology in its fleets that will enable the carrier to optimize routing on the fly.
For the longer term, several carrier executives have suggested public policy changes that they believe could do much to improve trucker productivity, and thus ease the capacity crunch. Davidson hopes that Congress will soon reauthorize national highway spending legislation, freeing up billions of dollars for infrastructure investment. He also hopes for near-term resolution of the issues surrounding the revised driver hours-of-service rules, which were thrown into limbo last year as a result of a court decision. And he hopes Congress will at least consider raising truck size and weight limits as a way to add capacity. (That issue has been on hold as a result of a truce between the key railroad and trucking trade organizations, in which they agreed to keep the status quo in the highway bill under consideration.)
Doug Duncan asserts that major changes in public policy are essential."No matter whose numbers you look at, the [nation's] highways are going to be badly overrun in the not-too-distant future," he says. "Longer combination vehicles are one piece of the puzzle."He'd also like to see a substantial increase in spending on the transportation infrastructure. He calls the nation's highway system "the envy of the world," but adds that investment in that system has fallen short in recent years.
As intractable as the capacity problem appears to be, shippers shouldn't let the seller's market dissuade them from challenging rates that appear to be inflated or any deterioration in service levels. That's a point made by Jerry Ulm, president of RHC Logistics and a member of the National Industrial Transportation League's executive committee, during a press conference at the league's annual meeting. "Shippers have to be vigilant," he asserted. "You have to set the bar for service." Shippers, he said, have to challenge carriers to provide service that matches their rates.