U.S. trucking firms could be in the proverbial driver's seat by the end of the decade as favorable supply-demand dynamics combine with information technology adoption to generate solid profits and take market share from a railroad industry struggling to keep pace with innovation, according to the 29th Annual "State of Logistics Report" that was released today.
The report, prepared by consultancy A.T. Kearney Inc. for the Council of Supply Chain Management Professionals (CSCMP) and presented by third-party logistics (3PL) provider Penske Logistics, said advanced line-haul technologies such as autonomous vehicles and truck platooning could be widely available to shippers over the next three to seven years. That phenomenon, combined with truckers' ability to adopt advanced technologies to reduce their operating costs, will narrow the cost differential between the modes and put railroads under increasing competitive pressure, especially since rail suppliers have not been as aggressive in embedding performance-enhancing technology into their products, the report said.
Truckers are leveraging these tools to cull unprofitable or marginally profitable shippers from their ranks, and to marginalize businesses that adhere to the transactional, rate-driven mindset that in the past has paid short shrift to the needs of fleets and drivers, the report said.
The rosy outlook for truckers seems counterintuitive, given challenges ranging from finding, hiring, and keeping qualified drivers; the productivity squeeze accompanying compliance with the federal mandate requiring most vehicles to be equipped with electronic logging devices; higher diesel fuel prices; road infrastructure problems; and elevated operating costs. For now, the authors said, railroads are sitting pretty as strong demand gives them pricing power—especially in intermodal—and as productivity improvements boost profit margins and the newly enacted corporate tax cuts increase their cash flows. Intermodal costs rose by double digits year over year, in part as shippers struggling to find over-the-road capacity converted traffic to the railroads.
How long that lasts will likely depend on the industry getting its operational act together. Events of the past few months haven't been encouraging. In March, the Surface Transportation Board (STB), the nation's rail regulator, concerned about unreliable and inconsistent service, ordered all Class Is to submit to the agency their service plans for the rest of 2018. Service complaints in 2017 spiked 144 percent from 2016 levels, the STB said.
STEEP GRADE AHEAD
The exceptional pricing leverage being enjoyed by asset-based carriers, a trend expected to hold at least for several years, was the central narrative of the report, entitled "A Steep Grade Ahead." Last year's report, which analyzed 2016's performance, described an uncertain future for the industry and posited various scenarios for its direction. By contrast, this year's report had a single message: Assets are where it's at.
"Carriers are in control as demand outstrips supply, while shippers try to 'create capacity' by improving efficiency whenever possible," according to the authors. For shippers, the biggest challenge won't be fighting the upward rate trend, but being creative to secure adequate capacity at prices—though much higher than they are accustomed to—they can live with.
After declining in 2016 for the first time since 2009, U.S. business logistics costs climbed 6.2 percent in 2017. Logistics costs as a percentage of gross domestic product rose to 7.7 percent last year, from 7.6 percent the prior year. The report's three main components—transportation, inventory carrying costs, and so-called other expenses, such as administration—rose substantially.
Transportation costs increased 7 percent, led by intermodal, which rose 10.5 percent; dedicated contract carriage, which spiked by 9.5 percent as more shippers demanded capacity assurance; and parcel and express, which rose 7 percent. Truckload and less-than-truckload (LTL) costs rose 6.4 percent and 6.6 percent year over year, respectively, according to the report. Only waterborne freight, with an increase of just 1.1 percent, came in below the 3-percent threshold for year-over-year gains.
Inventory carrying costs climbed 4.6 percent over 2017, paced by a 5-percent gain in borrowing costs as interest rates climbed. Physical storage costs climbed 4.2 percent as demand for facilities to support e-commerce fulfillment and distribution continued apace, the report said.
In a sober assessment of the often-problematic relationship between shippers and their 3PLs, the focus still remains on cost cutting, rather than on building mutually beneficial relationships over the long haul, according to the report.
