Truckload rates kick into high gear
Shippers can expect to pay more for truckload services as the supply of trucks and drivers gets tighter.
By James A. Cooke, Executive Editor -- Logistics Management, 6/1/2004
Prepare to dig deeper into your wallet. A combination of factors, including new government regulations, carrier consolidation, higher fuel prices, and labor and equipment shortages are all coming together to push truckload rates to some of the highest levels seen in a decade.
And be forewarned: The underlying factors behind rising prices in the truckload market probably won't go away soon. "It's not going to change by the end of this year," predicts David Ross, an associate at industry analysts Legg Mason Wood Walker Inc. in Baltimore.
If you want to understand where truckload rates are headed—and why—you'll need to take a closer look at general economic conditions as well as specific developments in the truckload market.
Although the U.S. economy has languished for the past two years, the truckload market has shown hardly any drop-off in activity. That's largely because shippers seeking to lower their transportation expenses have been consolidating small shipments into full truckloads.
Strong demand for truckload services has stretched market capacity to the limit. The truckload index developed by the American Trucking Associations indicates just how tight it's become. The index provides a relative measure of the number of truckloads that are transported each month. Only a decade ago, the index hovered just above 110 (relative to the base year of 1993). During the business boom of the late '90s, it rose steadily toward 150. Despite the economic crash following the terrorist attacks on Sept 11, 2001, the index generally has continued to rise, and last year hit a record high of 181.2, first in May and again in October. Although the index fell after the Christmas shipping season ended, it stood at 166.2 in February of this year, the latest month for which data is available. (See chart on page 37.)
With shipment volumes once again on the rise, carriers don't have enough capacity to keep pace with shippers' requests. "Shippers are having a hard time finding trucks," says Robert Voltmann, president of the Washington, D.C.-based Transportation Intermediaries Association, which represents transportation brokers.
A rash of carrier bankruptcies is one factor behind the capacity shortage. The surge in carriers exiting the industry began three years ago, when diesel fuel costs and insurance rates first spiked. In fact, some 11,500 truckload carriers have gone out of business in the last three years, according to Thomas Nightingale, an executive with truckload carrier Schneider National of Green Bay, Wis. "Small carriers continue to exit the industry," agrees trucking analyst Ross. "Their equipment is getting older and insurance isn't getting any cheaper."
The federal government's new hours-of-service (HOS) rules, which took effect in January, also reduced truckload capacity by imposing regulations that appear to be hampering productivity. The previous rules allowed drivers to operate trucks for 10 hours in a 15-hour work period. The new rules permit 11 hours of driving in a 14-hour on-duty period, but count any time drivers spend waiting to load or unload as on-duty hours. "If drivers can't drive as much, the total number of miles in our nations' fleets gets reduced while demand is expanding," points out Dan Moore, a transportation analyst with financial firm Stephens Inc. in Little Rock, Ark.
Making matters worse: Truckload carriers are finding it difficult to hire enough qualified, full-time drivers or subcontracted owner-operators to move all of their customers' loads. "We're not able to add as many drivers as we would like to do, and that's creating capacity constraints," says Brian Quinn, vice president of sales administration for U.S. Xpress Enterprises, the Chattanooga, Tenn.-based truckload carrier.
Independent drivers have often furnished additional capacity for truckload shippers when their usual carriers couldn't handle their business. But there are fewer owner-operators these days to pick up the slack. "The driver shortage is the worst that it's been in quite some time," Ross observes. "There are not many new people entering the industry. It's prohibitive for owner-operators to start their own operations today because they can't get the financing."
Building Pressure on Rates
Burgeoning demand for truckload services combined with reduced capacity is creating sharp pressure on rates as the law of supply and demand kicks into effect. Every trucking executive and analyst contacted for this article believes that base rates will rise for the rest of this year—they only differ on the extent of those hikes. "I don't think there is any doubt that rates are on the rise," says Kirk Thompson, chief executive officer of J.B. Hunt, the Lowell, Ark.-based truckload carrier. "Capacity should be tight this summer, and rates will most likely go up accordingly."
Factor in surcharges, and shippers could be hit with 10-to 15-percent rate increases in the third and fourth quarters, warns Mike Regan, chief executive of transportation software vendor Tranzact Technologies in Elmhurst, Ill. "Increases of this magnitude could occur if the economy continues to gain momentum and the carriers do not add additional capacity," he says. "And having talked with several large truckload carriers, we don't think additional capacity will be coming on line in 2004."
Analysts at BB&T Capital Markets in Richmond, Va., believe base rates will rise between 5 and 7 percent. Since trucking was deregulated in 1980, truckload rate hikes have exceeded 2 percent only twice: in 1994 and again in 2003. "For larger carriers, say the top 50 to 100 carriers, the environment is ripe for them to raise rates by 5 to 7 percent, excluding fuel surcharges," says BB&T analyst Thomas S. Albrecht. "Some lane rates will go up as high as 9 to 10 percent."
Moore of Stephens Inc. also predicts a 5- to 7-percent increase. Those hikes would not only help carriers offset higher costs, but they also would allow them to grow their revenues, he says. "We're going to see some of the strongest growth in revenue per mile that we've seen in the last 10 years. The industry is going to enjoy revenue-per-mile gains equal to or surpassing the levels in 1994, which is generally regarded as the best year in trucking."
But base-rate increases don't tell the entire story. Shippers are being hit with additional charges that can raise overall costs. Many carriers are using those fees to boost pay for drivers, especially those who are paid on a per-mile basis.
The new hours-of-service rules, for example, have led carriers to assess fees for multiple stops, even for their best customers. And those fees are going up: "Over the years, it was $50 for the first stop and $75 for each subsequent stop," says Danny Crooks, director of truckload services for Averitt Express in Cookeville, Tenn. "We've seen some carriers now go for $75 on the first stop."
Any shipper that holds up a truck for more than an hour or two, moreover, is subject to detention charges. BB&T has reported that carriers are imposing detention fees against 15 to 20 percent of all full truckloads, and apparently are dunning even their best customers. "In nearly every case, the discipline around enforcing detention rules has gotten tighter," says Nightingale.
Finally, truckload shippers are being hit with fuel surcharges as the price of diesel fuel approaches record levels at the pump. Most shippers have a clause in their contracts that allows carriers to assess a surcharge when prices reach a specified level. At press time, diesel was closing at $1.75 a gallon, a near-record high. As a result, shippers can expect surcharges to triple compared to 2003, says Tranzact's Regan. "Fuel surcharges this year are 8 to 9 percent versus 2 or 3 percent last year," he notes.
Drivers Wanted
Taken together, the expected hikes in base rates, accessorial charges, and fuel surcharges will mean double-digit price increases for truckload shippers. Although that kind of increase will hit many shippers hard, at least one observer thinks shippers may be more sympathetic to the carriers' plight than they have been in the past. "We've seen some recognition of support for these charges (on the part of shippers)," says consultant Bill Rennicke, a vice president with Mercer Management Group in Lexington, Mass.
Regardless of how they feel about higher prices, shippers may be more worried about whether they'll be able to find takers for all of their loads. That will become an even bigger concern by autumn—historically the busiest time of year for truckload—when shippers move holiday merchandise to retailers.
Many believe that the root cause of the deepening capacity crunch remains a dearth of qualified individuals who are willing to make their living by driving a truck. "We as an industry haven't figured out the price ceiling that will make truck driving an attractive choice (for a career)," says Quinn of U.S. Xpress. "If the economy keeps on its course, it could be extremely difficult for shippers to find available capacity until we solve the driver issue."
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