Flat volumes and ample capacity collide with higher spot rates; is HOS to blame?

Trucking volumes are flat and capacity is relatively ample, yet spot market truckload rates are rising.

This seeming paradox could be explained by the calendar. Barring a stay by a federal appeals court in Washington, D.C., the federal government will start enforcing new standards July 1 governing a driver's hours of service (HOS). As the date nears without any court action, more observers are forecasting that the enforcement will begin as scheduled. As a result, rates are rising as the marketplace anticipates fewer truck miles driven and reductions in driver productivity.

Bradley S. Jacobs, chairman and CEO of XPO Logistics Inc., a Greenwich, Conn.-based truck broker, expedited transporter, and freight forwarder, said truck volumes are neither rapidly accelerating nor precipitously declining, a trend that mirrors the lackluster performance of the overall economy. Truck capacity remains abundant, as it has for months, he added.

Yet the rise in spot market rates reflects the belief of most carriers that they will need to boost prices to offset the negative impact of the rules on driver productivity and the costs of replacing that lost productivity, he said. Jacobs expects productivity levels to be affected from day one, rather than it having a phased-in effect. That's because he expects everyone to obey the law from the start, with predictable consequences on truck miles driven.

The rules, implemented by the Federal Motor Carrier Safety Administration (FMCSA), a sub-agency of the Department of Transportation, will reduce a driver's maximum weekly work hours from 82 to 70. For the first time ever, drivers will have limits placed on their traditional 34-hour minimum restart period, requiring it to occur once every seven days and to include two rest periods between 1 am and 5 am over two consecutive days. FMCSA left unchanged a key provision allowing 11 hours of continuous drive time after a driver has spent 10 consecutive hours off duty.

Most shippers and carriers oppose the new rules as a safety hazard and an unnecessary disruption to their supply chains. While estimates vary, the consensus is that the rules will result in a 3- to 5-percent decline in truck productivity.

Oral arguments on the matter were held March 15 in Washington. The FMCSA has already denied an industry request for a three-month delay of the enforcement deadline.

VOLUMES FALL, BUT RATES STILL RISE
DAT, a Portland, Ore-based information consultancy, said spot market rates in April rose over March levels for all three equipment types: dry van, flatbed, and refrigerated, or "reefers." Yet spot volumes fell 5.8 percent over March levels, according to the firm's freight index. The decline—which was surprising given that better weather in April usually drives strong sequential traffic gains—was due in part to unusually inclement weather, such as floods in the upper Midwest, DAT said.

Year-over-year volumes in April fell 16 percent from record levels in April 2012, DAT said. Van and flatbed rates dropped, while reefer rates rose, it said.

About 20 percent of all truckload volumes move under spot rates, based on DAT's estimates. The balance moves under contract.

A monthly index of shippers' conditions published by Bloomington, Ind.-based consultancy FTR Associates came in with a March reading of -7.3, an improvement over the February read of -9.5. However, the March reading gives only marginal relief to shippers as any level below zero indicates a sellers' market for truck services.

Lawrence Gross, a senior consultant for FTR, said that although FTR's estimate of the hit that HOS will have on productivity is less than the consensus, "even a 3-percent decline will be sufficient to tip the balance of supply and demand significantly away from shippers, assuming the economy continues to maintain at least the anemic growth levels seen recently."

Gross said HOS enforcement will "usher in an extended period of difficulty for shippers, as there is an array of new regulations lined up behind the HOS change that will further impact trucking in the months and even years to come."

HOS is the latest, but not the only, trigger driving up freight rates. Carriers and their customers must also cope with the impact of CSA 2010, a government safety initiative designed to winnow out unsafe drivers; the cost of recruiting and retaining drivers; compliance with new federal engine emission standards; and escalating expenses for all types of equipment ranging from trailers to tires.