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.
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.
"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.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The U.S. manufacturing sector has become an engine of new job creation over the past four years, thanks to a combination of federal incentives and mega-trends like nearshoring and the clean energy boom, according to the industrial real estate firm Savills.
While those manufacturing announcements have softened slightly from their 2022 high point, they remain historically elevated. And the sector’s growth outlook remains strong, regardless of the results of the November U.S. presidential election, the company said in its September “Savills Manufacturing Report.”
From 2021 to 2024, over 995,000 new U.S. manufacturing jobs were announced, with two thirds in advanced sectors like electric vehicles (EVs) and batteries, semiconductors, clean energy, and biomanufacturing. After peaking at 350,000 news jobs in 2022, the growth pace has slowed, with 2024 expected to see just over half that number.
But the ingredients are in place to sustain the hot temperature of American manufacturing expansion in 2025 and beyond, the company said. According to Savills, that’s because the U.S. manufacturing revival is fueled by $910 billion in federal incentives—including the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act—much of which has not yet been spent. Domestic production is also expected to be boosted by new tariffs, including a planned rise in semiconductor tariffs to 50% in 2025 and an increase in tariffs on Chinese EVs from 25% to 100%.
Certain geographical regions will see greater manufacturing growth than others, since just eight states account for 47% of new manufacturing jobs and over 6.3 billion square feet of industrial space, with 197 million more square feet under development. They are: Arizona, Georgia, Michigan, Ohio, North Carolina, South Carolina, Texas, and Tennessee.
Across the border, Mexico’s manufacturing sector has also seen “revolutionary” growth driven by nearshoring strategies targeting U.S. markets and offering lower-cost labor, with a workforce that is now even cheaper than in China. Over the past four years, that country has launched 27 new plants, each creating over 500 jobs. Unlike the U.S. focus on tech manufacturing, Mexico focuses on traditional sectors such as automative parts, appliances, and consumer goods.
Looking at the future, the U.S. manufacturing sector’s growth outlook remains strong, regardless of the results of November’s presidential election, Savills said. That’s because both candidates favor protectionist trade policies, and since significant change to federal incentives would require a single party to control both the legislative and executive branches. Rather than relying on changes in political leadership, future growth of U.S. manufacturing now hinges on finding affordable, reliable power amid increasing competition between manufacturing sites and data centers, Savills said.
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.