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Rough ride ahead
The U.S. trucking market faces especially challenging conditions as it heads into the second half of 2011. With economic growth improving only haltingly and transportation capacity getting tighter, shippers and carriers find themselves at cross-purposes. Carriers want greater profits (and that often means higher rates), while shippers seek the right balance between ensuring that they get the service they need and combating price hikes. Indeed, full truckload rates are already on the rise in the United States. We expect to see a price hike in the range of 3 to 6 percent, excluding the impact of fuel surcharges.
Historically freight-price increases have been kept in check by the comparatively low barriers to entry or expansion in the truckload freight market as compared to other industries. Can we therefore expect to see price increases capped during this recovery and then reversed as new carriers add capacity? The shortterm answer almost certainly is no. That's because added regulation, oil price inflation, resurgent driver wages, and driver shortages are expected to drive up costs and keep capacity tight.
[Figure 1] Cass Information Systems freight index for January 2008 - March 2011 Enlarge this image
One indication that rates will remain high is the current trend in freight expenditures versus shipment volumes. Prices declined severely in 2009 as volumes dropped and carriers sacrificed margins in order to keep market share. Although shipment volumes have increased, the Cass Information Systems Freight Index shows freight expenditures outpacing shipment increases in 2010, with that tendency intensifying in Quarter 1 of 2011.1 (See Figure 1, which shows the Cass Index chart with an expenditures-to-shipment ratio added.) Only part of this increase was attributable to fuel costs; the rest was due to price increases sticking.
In response to the increase in shipment volume, U.S. truck capacity is rebuilding. Actual monthly production for Class 8 truck orders averaged 12,000 to 14,000 units/month in 2010, with the production rate accelerating at the end of that year. Sales of heavyduty trucks continue to recover and are even surpassing the estimated industry replacement rate of 14,000 to 16,000 units/month.2 But while this means capacity will increase, it won't be enough in the short term because of the accumulated deficit from carriers delaying purchases over the last three years.
Additionally, both shippers and carriers will struggle to deal with a worsening driver shortage. The total number of employed truckload drivers dropped from a peak of just under 500,000 in 2007 to just over 400,000 in January 2011. Driver wages have recently increased 3 to 4 percent after a drop of about 10 percent over the last two years.3 Only the weakness in general employment levels, especially in the construction industry, has kept driver wages from increasing even more. Look for wages to keep rising and for the trend to accelerate when construction recovers. At the same time, the Compliance Safety and Accountability (CSA) 2010 regulation will cause trucking companies to increase their driver safety screening, which will further slow hiring and reduce the driver pool.
Finally, carriers are being very cautious about adding capacity or making additional investments. The bankruptcy rate for carriers was lower in 2009-2010 than in previous recessions because assetrecovery prices dropped to levels that were unacceptable to banks. That meant more trucking companies survived than expected. But carriers were shaken by their near-death experience in 2009; as a result, they are being more cautious in 2011 and will wait until their fleets have reached capacity at higher prices before they consider expansion. Furthermore, recession- scarred banks will keep a lid on carriers' ambitions with tighter lending standards.
The importance of value creation
So how can logistics leaders get capacity assurance at a price they can defend? And how can carriers maximize profits without appearing to price-gouge?
The answer may lie in less-adversarial relationships and a greater focus on overall value creation. Transactional relationships that emphasize opportunistic bidding and capacity switching by shippers and carriers alike generally are on the wane and are even less appropriate for shippers in these capacityconstrained times. Instead shippers and carriers need to turn to a relationship model that emphasizes partnering and value creation while still putting lanes out to bid. This will assure reliable capacity for shippers and steadier, more profitable business for carriers.
The idea of achieving a value-creating partnership while still going out to bid may seem paradoxical. However, we have seen it work, with the shipper achieving 5- to 15-percent savings while the carrier increases profitability. The sourcing process no longer involves bidding wars that focus heavily on price and are followed by "winner's remorse." Rather, it is used to discover and create previously unseen value from carriers' proposals. For example, an incumbent carrier may keep the same overall shipment volumes but find some volume re-allocated to lanes where it is more profitable and therefore more competitive.
Here are four examples of how shippers and carriers can collaborate to create greater value and mutual gain.
• A broker monitors a shipper's needs on a lane and moves shipments from truckload to intermodal or even to boxcars when it knows the shipper can accept a longer transit time (and for boxcar, the transloads).
• A shipper commits volume to a carrier that can use that shipment as a backhaul for another shipper. The carrier is assured busy trucks on both hauls and can be more competitive.
• A carrier that has a surplus of trailers from a recent downsizing can drop trailers free of charge. The shipper benefits from having a pool of drop trailers instead of having to expand storage capacity. The carrier, in turn, is assured a better-paying lane and can earn more with its power units.
• A carrier coming out of a zone with low outbound volumes (for example, Florida) can offer extra capacity at very short notice, helping out a customer while being able to charge more than the spot backhaul rate.
The simple lesson is that just as the shipper that relies on low-ball bids will come up short on trucks in a capacity crunch, the carrier that relies on price increases to become more profitable will lose to the carrier that creates more value for the shipper. Clearly, shippers and carriers will face challenges in 2011 and beyond. But if value-seeking approaches and recent experience are any indication, collaboration and creative solutions can minimize—and possibly reverse—market-driven price increases.
1. The Cass Freight Index is available at www.cassinfo.com/frtindex.html.
2. Morgan Stanley Research, Proprietary Freight Index, April 24, 2011, Exhibit 18.
3. Morgan Stanley Research, Exhibits 22-24.
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