The annual shipper-truckload carrier autumn rate waltz has been concluded, with a few steps added to the 2015 dance card. That's because rising carrier costs and tightening capacity have forced both sides to get more creative in their contract negotiations than they've been in years.
The latest cost shoe to drop has been in the area of driver pay. The most recent and notable move as DC Velocity went to press was truckload and logistics giant Schneider National Inc.'s Oct. 7 announcement that it had raised base and bonus pay by 8 to 13 percent for its dry van employee drivers. This came after recent pay increases for Schneider's tank-truck drivers and for drivers operating so-called dedicated services for specific company accounts. Schneider executives were unavailable to comment beyond the company's press release.
Thom S. Albrecht, transportation analyst at investment firm BB&T Capital Markets, said that a decent number of privately held truckers have already put rates in place that will cover those costs; at worst, Albrecht said, there would be a one-quarter lag. Publicly held carriers are tweaking their rates to ensure that they, too, can pass through the higher labor expenses, he added.
Eric Fuller, chief operating officer of U.S. Xpress Enterprises, which in mid-August announced a 13-percent pay increase for solo drivers, said the carrier has encountered little shipper resistance to rate hikes to compensate for the wage increases. "In most cases, our customers understand the situation we're in, and they have been very supportive," Fuller said.
Still, carriers avoided any across-the-board increases during the autumn contract talks for fear of alienating big customers. Though carriers have more sustained pricing leverage than in any year since 2005, shippers with abundant market clout still have options and can shift to a lower-cost carrier offering similar coverage if they are dissatisfied with an incumbent's pricing. Shippers were not expected to absorb full rate increases except on critically important lanes where there were no viable carrier alternatives, according to Ben Cubitt, senior vice president of supply chain strategy, consulting, and engineering for Transplace, a third-party logistics firm that represents its shipper base in rate negotiations.
For bigger shippers, a response to the carriers' actions is no farther away than their computers' databases. "Essentially, we are expecting large shippers to exercise disciplined application of the routing guides," said John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., referring to a program that lists carriers that serve specific lanes that shippers can pick from.
Cubitt said in mid-October—the height of the 2015 contract rebid season—that despite shipper worries about shrinking capacity and higher rates, "we are still seeing bids without major inflation." Instead, carriers are taking an approach that will result in what Cubitt called "stealth rate increases." A typical carrier strategy, for example, is to reduce the frequency of its acceptance of a shipper's initial rate tender. Whereas in years past, a 90-percent carrier acceptance rate might have been commonplace, that level could drop, across a broad average, to 85 percent in 2015, Cubitt reckons. "Essentially, carriers are saying 'no' to a shipper's load at $1.30 a mile when they could get $1.75 a mile," he said.
Shippers who've traditionally clubbed their carriers over the head will speak with a softer stick in 2015. In the years following the 2006 freight recession and the economic recession that arrived on its heels, a shipper's initial bid might call for a 5-percent rate reduction in return for agreeing to stay with its incumbent carriers, with both sides eventually compromising on 2 to 3 percent savings. That same bid today would also reward incumbency but would not call for rate savings, according to Cubitt. In addition, shippers last year convinced their core carriers to keep rates steady—or propose only moderate increases—if shippers pledged not to take their lanes to bid. That approach didn't work that well this time around, Cubitt said.
However the strategies are sliced, the common thread is that shippers are resigned to paying more next year than they have in recent years. "Grudging acceptance" was how Cubitt described the typical shipper's mindset.
SEE 'SPOT' HURT
Most of the price pain is being felt in the non-contract, or spot, market, where about 20 percent of all North American truckload freight moves. Spot rates began rising more than a year ago and spiked dramatically through the winter and early spring as bad weather curtailed capacity and forced shippers and their brokers to scramble for any rig and trailer they could find.
Rates have barely abated as this story was being written. Van rates in September were up 15 percent from the prior year, while reefer and flatbed rates each increased 16 percent year over year, according to DAT Solutions, a consultancy. Spot rates exceeded contract rates on 45 percent of spot hauls in April and May, a much higher ratio than the traditional 25 percent figure, DAT said. The 2014 numbers, however, were likely skewed by the fallout from the miserable winter weather. With spot rates likely to remain elevated, especially as another winter approaches, shippers have begun moving some of their spot freight to contract service, even if it means paying more for hauling that freight under contract than they have in the past.
In addition, small shippers that lack the buying power of their bigger brethren are likely to get squeezed because they have little recourse, according to Larkin of Stifel. "[They] may have no choice but to accept ... rate increases as full pass-throughs," he said.
According to Fuller of U.S. Xpress, one of the biggest changes in this contract cycle was the increasing willingness of shippers to change their behavior to accommodate his company's drivers. As an example, a customer that in the past had expected pickups between 2 a.m. and 4 a.m. changed its schedule to make it easier on U.S. Express's drivers. Other shippers have been willing to alter their transit time requirements to give U.S. Xpress's drivers more rest and take pressure off them while they're on the road, he added. These types of shipper modifications have been almost unheard of until recently, Fuller said.
Perhaps the most profound and long-lasting change, though, is the increasing attention paid by carriers to core customers, perhaps at the expense of a large swath of other shippers. The same holds true for shippers, which have been paring down their carrier bases and giving those who make the cut the biggest share of their business. Fuller said that while U.S. Xpress continues to serve its broad customer base, "our concentration with our top 50 or so shippers has gone up dramatically" in the past year.
Fuller said those favored shippers have relationships with his carrier and don't treat the freight tender as a transactional exercise with the objective of securing the lowest possible price. The shippers that engage in the latter type of behavior, he said, "will be the ones left out in the cold" in a climate where if the pendulum hasn't swung in the carriers' direction, the scales are as balanced as they've been in almost a decade.