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2010 Mid-year rate outlook: Paying a Premium

While the extent of the recovery remains uncertain, shippers will continue to be hit with rate increases across all modes.
By John Paul Quinn, Contributing Editor
July 01, 2010

Parcel Problems

There are a few significant developments in the parcel sector that have been developing simultaneously, and none of them bode well for shippers.

Fedex and ups continue to consolidate their virtual duopoly in parcel transportation that began with the exit of dHL from the field a year ago last January, observes Jerry Hempstead, president of Hempstead consulting.

“The rhetoric out of both Fedex and ups is shot through with phrases like ‘yield improvement,’ ‘rational pricing,’ and ‘discounting integrity,’ all of which mean higher rates,” says Hempstead. “Both companiesaredelighted that the u.s. postal service is losing billions of dollars and is applying for a January 2011 rate increase of perhaps 25 percent for parcels under a pound. if that happens, then it’s probably more economical for shippers to see if they can negotiate a discount rate with Fedex or ups.”

In addition, fuel surcharges have mounted as well. a year ago, the surcharge at both companies for an air package was 0 percent. it’s now 10 percent. For a ground package it was 2.25 percent. it’s now 6 percent.

Finally, both carriers have made moves to exclude shippers’ thirdparty consultants from contract renewal negotiations.“the plan is for them not to bid if a third party is called in,” Hempstead notes. “this is like going to court without a lawyer, or a tax audit without your accountant.”

Altogether, says Hempstead, the carriers know that some growth is occurring, so their capacity will be filled by organic growth and they don’t have to compete rate-wise on the street to attract business. “there is just no pretty news for parcel shippers right now,” he adds.

By TrucK and Rail

By comparison with the other modes, trucking and rail seem relatively stable as far as rates are concerned.

“Over the first half of 2010, truckload has recovered about a third to half of the volume lost over the past three to four years,” observes John Larkin, managing director of the transportation and logistics group at analyst firm stifel, nicolaus & co., inc. “so there’s much more of a balanced supply-demand situation, although there have been a few examples of $2 to $3 per mile spot rates above contract rates. i don’t think there are widespread acrossthe-boardrateincreases coming,” adds Larkin.

I’ve never seen anything like a slow economic period that has lasted this long and with this much uncertainty.”
— Chuck Clowdis, IHS Global Insight

In the less-thantruckload sector, the remarkable financial survival of yrc, which has about 20 percent of LtL market share, has led to more than adequate capacity, leaving carriers little room to impose rate hikes.

However, Larkin continues to encourage shippers to look at intermodal seriously and consider using it in long-haul, high-density lanes where savings can be quite considerable.

On the rails, Brooks Bentz, Bostonbased partner in accenture’s supply chain management practice, believes that rates shouldn’t vary much and conventional wisdom is that there may be 3 percent to 5 percent price hikes coming down the line. However, according to Bentz, rail shippers should have no capacity constraints when moving freight by intermodal or carload.

By the end of august,asseasonal traffic is flowing in from asia, shippers will get some indication of what the peak picture is going to be like this year—and how the traffic patterns will develop in whatever modes they employ.

“I’ve been watching the logistics industry for 30 years,” says clowdis, “but i’ve never seen anything like a slow economic period that has lasted this long and with this much uncertainty. i have to say it’s kind of scary.”

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About the Author

John Paul Quinn
Contributing Editor

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