Capacity Squeeze May Spark Supply Chain Changes
William B. Cassidy, Senior Editor
| Apr 29, 2014 9:35AM EDT
One way to measure trucking demand is by looking not at how much freight a trucking company can haul, but at how much freight it turns away.
In the first quarter, U.S. Xpress Enterprises, North America
’s sixth-largest truckload carrier, turned down as many as 1,200 loads a day tendered by shippers via electronic data interchange. That’s four times the number of shipments the carrier rejected in the same period last year, Chief Marketing Officer John White said.
In late April, the Chattanooga, Tenn.-based carrier is still turning down 600 loads a day.
“We’re turning down more freight on a daily basis than we were in January, and we’re up twofold in the amount we turn down compared to last year,” White said. “I’m the most popular guy in the industry now. Everybody wants our capacity.”
The rough equilibrium between trucking demand and supply enjoyed by shippers during the last two years is getting rougher by the day. The cost of hiring a truck is rising, and not just because of the recent severe winter or faster economic growth. Truck pricing is climbing steadily simply because there are fewer trucks.
The unusually harsh winter did for trucking operators what a sputtering economic recovery could not do in five years: It significantly increased their pricing power. As four months of storms and frigid temperatures disrupted commerce, signs of systemic weaknesses in U.S. freight markets emerged from ports to the prairies.
Spot market truckload rates soared in the first quarter.
Full-size chart
Those weaknesses include truck capacity levels at least 20 percent below a pre-recession peak reached in 2006. Spot market truckload rates soared in the first quarter, and contract truckload rates are still climbing.
Some shippers are being hit by double-digit increases, according to BB&T Capital Markets. In a March 26 investor note, BB&T highlighted a carrier that proposed hiking rates 11 percent on selected lanes, but got a 13 percent increase for three extra trucks a day.
“
In every lane, in every market, holy smokes, the rates have jumped,” said Kerry Byrne, executive vice president of Total Quality Logistics, a $1.6 billion third-party logistics company handling 18,000 loads a week for shippers. “For our customers, there’s di*****elief, because it happened so fast. The weather blew it all up.”
“
Capacity is one season out of phase,” said Richard Mikes, a partner at financial advisory firm Transport Capital Partners. “This year, the winter season was the typical spring season in terms of truck capacity.”
That means capacity is even tighter than usual as the actual spring retail season unfolds, and truck rates are likely to rise higher than shippers anticipated a few months ago, he said.
Winter
’s end brought shippers some pricing relief, but not much and probably not for long. The DAT Solutions national average spot rate for dry van tractor-trailers dropped from its first quarter peak of $2.10 to $2.06 per mile by April 19, said DAT pricing analyst Mark Montague, who calls April “a moderating month.” Spot market dry van rates, however, “are still 21.7 percent higher than a year ago.” At that time, the average rate was $1.79, “and $1.80 is around break even,” he said.
“
We’re getting a little breather here,” Montague said. “Enjoy it, but hang onto your seats, because it could get pretty intense by the end of May and into June.”
The produce season, spring outdoor retail sales and Memorial Day loom in those months.
“I think we’re going to see an uptick in demand again, because we haven’t really seen the spring retail surge in lawn and garden and patio sales yet,” White said. “We’re still hauling pellets for wood-burning stoves to the Northeast.”
As retail and industrial shipping strengthen, the effect won
’t be unlike another major winter storm, as higher demand runs into reduced capacity.
Logistics companies and shippers trying to move goods from Mexico to the U.S. already have seen truck capacity tighten because of earlier-than-usual demand for Mexican produce, said Troy Ryley, managing director of Transplace Mexico.
“We feel strongly that the game is changing,” he said. “There’s not the bandwidth in the market there used to be” in terms of available truck capacity.
“
When do things normalize? Not anytime soon,” TQL’s Byrne said. “The weather was the catalyst for some things that were percolating out there on the supply side. They’re not going away. I see a tight market for trucks continuing. Last year, the fall peak wasn’t such a huge deal, but this year could be different.”
Shippers now will enter May and June and the second half of the year with a tighter, costlier trucking market than they expected. That
’s unsettling for companies already concerned about the disruptive cost of a potential strike at West Coast ports. Transferring truck freight to intermodal rail isn’t the easy option it’s been in recent years, at least for the moment. The railroads are still repairing networks damaged by the severe winter, and they’re busy handling more crude oil, frac sand and grain. Intermodal has its own capacity issues. Railroads plan to spend billions of dollars on tracks, equipment and facilities to keep up with freight demand. Union Pacific Railroad is taking locomotives out of storage to increase capacity.
As a result,
“It’s an early Christmas for truckers,” said Satish Jindel, president of Pitt*****urgh-based transportation research firm SJ Consulting Group. Trucking operators such as U.S. Xpress “are replacing lower-yielding freight with higher-yielding freight.” Although this may not be the cataclysmic capacity crunch shippers have been warned about since 2010, “the crunch is there,” Jindel said. “If truckers are able to get rate increases of 3 to 5 percent, that’s a crunch.”
Trucking hit a reset button as it emerged from winter, Montague said.
“There’s been a change in the thinking in the industry,” he said. “A lot of the lowest rates are gone, and even backhaul rates are up. For years, all we saw rising were head-haul (outbound) rates, never the backhaul rates.”
Shippers need to prepare to pay more for transportation this year, Jindel said.
“They’ll have to pass the higher costs on to the consumer or bear them, or ask how do I redesign my supply chain and practices to be more efficient in using transportation?” If a supply-demand equilibrium is re-established, it will be at a higher price point and with lower level of truck capacity. Water levels may rise as snow melts, but truck capacity doesn’t return to the market so easily.
The JOC Truckload Capacity Index dropped to 79.8 in the fourth quarter of 21013.
Full-size chart
The JOC Truckload Capacity Index dropped to 79.8 in the fourth quarter of 2013, its second lowest reading since 2006, as several large truckload fleets continued to reduce their tractor count in late 2013. The index, based on actual tractor counts at a group of publicly owned large truckload carriers with more than $10 billion in combined revenue, confirms truckload capacity levels were still about 20 percent below their pre-recession peak before the stormy and frigid first quarter.
The index doesn
’t take into account the loss of capacity at midsize and smaller privately owned truckload carriers or the hundreds of trucking companies that went bankrupt in 2013. A total of 335 carriers operating 7,775 trucks went out of business in the fourth quarter, the highest number since the third quarter of 2010, according to Donald Broughton, chief market analyst at Avondale Partners.
Those 335 carriers were small companies, but the combined number of trucks is the equivalent of a fleet the size of Werner Enterprises, the nation
’s third-largest truckload carrier, which operated 7,050 tractors as of Dec. 31. In the first quarter, another 10,650 trucks left the market as companies went bankrupt or just shut down, Broughton said at the Transportation Intermediaries Association’s annual conference in Tucson, Ariz., this month.
Broughton also expects truckload rates to rise 4 to 6 percent on average this year, with bias
“on the high end of that range.”
In its first quarter earnings report, Werner pointed to a
“meaningful improvement” in freight demand “which we believe is a longer-term shift in market dynamics.” Although first quarter revenue was flat year-over-year, Werner improved its total revenue per mile by 3.1 percent while reducing overall miles ─ a sign of better pricing. “We are in the process of negotiating rate increases with many customers during the traditionally substantial spring bid season,” the company said.
Unlike the sharp constriction of truck capacity in early 2010, which faded as the economic recovery slowed, this crunch may be long term and have a lasting effect on supply chains.
“The situation is much more acute and severe than people realize,” said Mike Regan, chief of relationship development at TranzAct Technologies and chairman of the Advocacy Committee for shipper group NASSTRAC.
“
People don’t realize how acute and severe the problem is because they’re seeing individual pieces of the elephant. It’s only when you step back and take in the whole picture that you see it’s an elephant. Shippers are looking at their individual situations and not understanding this is happening throughout America.”
While truckload and less-than-truckload carriers pursue contract rate increases in the low- to mid-single digits, smaller to midsize shippers already are seeing rate increases on some lanes higher than 10 or 20 percent, Regan said. The 2 to 6 percent increases discussed by carriers and analysts are averages that often mask substantially higher rate hikes on certain lanes and for certain types of business.
“
I know a carrier that turned down an $8-a-mile rate because he didn’t want to have his trucks stuck in northern Minnesota,” Regan said. “One shipper told me he never thought he’d pay a $1,000 repositioning fee to get a truck.” That shipper did. In this environment, Regan said, “the only reason you’re not going to see a 5 to 7 percent increase in your freight costs is because you had crappy rates to begin with.”
As trucking and other transportation costs rise, shippers may have to rethink how they ship, and where they ship from. A prolonged period of higher truck rates in the North America could lead more shippers to move distribution centers and manufacturing plants closer to customers, encouraging
“internal re-shoring” of sorts.
Smart shippers are rethinking how they move freight through supply chains and approaching motor carriers early to secure capacity.
“They’re willing to engage in deeper, more substantive discussions, commit to things on a longer-term basis,” said White of U.S. Xpress. “Some are coming to us to talk about bids and how can we work together to take costs out of the system. We’re trying to have very constructive discussions with our clients. We know their challenges.”
One particular challenge that irks White is the length of time some shippers take to unload drop-and-hook trailers, which can mean an empty trailer isn
’t available when a U.S. Xpress tractor drops a full one off at a customer site.
“
The big cost to us is that we have to bobtail that tractor away and find another empty trailer someplace else,” he said. “That’s a very costly activity. We’re burning unnecessary fuel and time. And when I bobtail away from a drop-and-hook site, my trailer pool gets out of whack, and eventually I have to bobtail back in to that location. That’s two inefficient moves.”
It
’s also two more reasons to raise rates.
The JOC Truckload Capacity Index dropped to 79.8 in the fourth quarter of 21013.
Full-size chart
The JOC Truckload Capacity Index dropped to 79.8 in the fourth quarter of 2013, its second lowest reading since 2006, as several large truckload fleets continued to reduce their tractor count in late 2013. The index, based on actual tractor counts at a group of publicly owned large truckload carriers with more than $10 billion in combined revenue, confirms truckload capacity levels were still about 20 percent below their pre-recession peak before the stormy and frigid first quarter.
The index doesn
’t take into account the loss of capacity at midsize and smaller privately owned truckload carriers or the hundreds of trucking companies that went bankrupt in 2013. A total of 335 carriers operating 7,775 trucks went out of business in the fourth quarter, the highest number since the third quarter of 2010, according to Donald Broughton, chief market analyst at Avondale Partners.
Those 335 carriers were small companies, but the combined number of trucks is the equivalent of a fleet the size of Werner Enterprises, the nation
’s third-largest truckload carrier, which operated 7,050 tractors as of Dec. 31. In the first quarter, another 10,650 trucks left the market as companies went bankrupt or just shut down, Broughton said at the Transportation Intermediaries Association’s annual conference in Tucson, Ariz., this month.
Broughton also expects truckload rates to rise 4 to 6 percent on average this year, with bias
“on the high end of that range.”
In its first quarter earnings report, Werner pointed to a
“meaningful improvement” in freight demand “which we believe is a longer-term shift in market dynamics.” Although first quarter revenue was flat year-over-year, Werner improved its total revenue per mile by 3.1 percent while reducing overall miles ─ a sign of better pricing. “We are in the process of negotiating rate increases with many customers during the traditionally substantial spring bid season,” the company said.
Unlike the sharp constriction of truck capacity in early 2010, which faded as the economic recovery slowed, this crunch may be long term and have a lasting effect on supply chains.
“The situation is much more acute and severe than people realize,” said Mike Regan, chief of relationship development at TranzAct Technologies and chairman of the Advocacy Committee for shipper group NASSTRAC.
“
People don’t realize how acute and severe the problem is because they’re seeing individual pieces of the elephant. It’s only when you step back and take in the whole picture that you see it’s an elephant. Shippers are looking at their individual situations and not understanding this is happening throughout America.”
While truckload and less-than-truckload carriers pursue contract rate increases in the low- to mid-single digits, smaller to midsize shippers already are seeing rate increases on some lanes higher than 10 or 20 percent, Regan said. The 2 to 6 percent increases discussed by carriers and analysts are averages that often mask substantially higher rate hikes on certain lanes and for certain types of business.
“I know a carrier that turned down an $8-a-mile rate because he didn’t want to have his trucks stuck in northern Minnesota,” Regan said. “One shipper told me he never thought he’d pay a $1,000 repositioning fee to get a truck.” That shipper did. In this environment, Regan said, “the only reason you’re not going to see a 5 to 7 percent increase in your freight costs is because you had crappy rates to begin with.”
As trucking and other transportation costs rise, shippers may have to rethink how they ship, and where they ship from. A prolonged period of higher truck rates in the North America could lead more shippers to move distribution centers and manufacturing plants closer to customers, encouraging“internal re-shoring” of sorts.
Smart shippers are rethinking how they move freight through supply chains and approaching motor carriers early to secure capacity.
“They’re willing to engage in deeper, more substantive discussions, commit to things on a longer-term basis,” said White of U.S. Xpress. “Some are coming to us to talk about bids and how can we work together to take costs out of the system. We’re trying to have very constructive discussions with our clients. We know their challenges.”
One particular challenge that irks White is the length of time some shippers take to unload drop-and-hook trailers, which can mean an empty trailer isn’t available when a U.S. Xpress tractor drops a full one off at a customer site.
“The big cost to us is that we have to bobtail that tractor away and find another empty trailer someplace else,” he said. “That’s a very costly activity. We’re burning unnecessary fuel and time. And when I bobtail away from a drop-and-hook site, my trailer pool gets out of whack, and eventually I have to bobtail back in to that location. That’s two inefficient moves.”
It’s also two more reasons to raise rates.
