2007 State of Logistics Report/Truckload: Prime time for negotiation
If it's contract time with your core truckload (TL) carriers you should be in negotiations for lower rates now to take advantage of the current overcapacity in the marketplace—because it's not expected to last.
By John D. Schulz, Contributing Editor -- Logistics Management, 7/1/2007
If it's contract time with your core truckload (TL) carriers you should be in negotiations for lower rates now to take advantage of the current overcapacity in the marketplace—because it's not expected to last.
The TL sector accounts for $326 billion—or 45.7 percent—of the nation's total $713 billion U.S. freight transport market. It's a splintered market with the top 10 carriers getting just 13 percent of it, while the top five LTL carriers garner 55 percent, according to data compiled by the American Trucking Associations (ATA) and Stifel Nicolaus, the Baltimore stock brokerage firm.
The TL sector has endured its toughest 12-month decline since the 2001 recession. It began the middle of last year and continued as the slump in auto manufacturing and housing endured. At the same time, Class 8 sales zoomed. This was fueled partially by a pre-buy ahead of the government-mandated 2007 lower-emission trucks; in turn, the industry bought a record 270,000 heavy trucks last year.
ACT Research, which tracks new truck orders, estimates the sector has approximately 116,000 to 120,000 too many trucks, or about 6 percent overcapacity. The industry is forecasting as much as a 30 percent drop in sales this year.
And while conventional wisdom holds that the industry will “burn off” that overcapacity later this year, not everybody is so sure. “Indicators that have historically proved reliable in predicting truck tonnage upturns and downturns are still pointing to continued weakness,” says Donald Broughton, trucking analyst for A.G. Edwards & Sons. “Until that changes, it's premature to predict improvement. For those predicting or hoping for a second half pickup, I have a simple question: Why?”
What the TL sector may see is better year-over-year comparisons even if a genuine recovery is elusive. Because the slump began in the third quarter of last year, the TL carriers may report slightly better comparative numbers. But Broughton warns, “Easy comparisons are not a rebound.”
More fleets are soliciting freight from shippers now than at any time in the past five years, which is clearly an advantage for shippers. The bad news for shippers is for the past nine months, according to the Bear Stearns shipper survey, more freight is being diverted from rail to truck due to aggressive rate increases in rail.
In the first quarter alone, shippers shifted 6.5 percent of their volumes from rail to truck, compared with a 5.1 percent shift in the 2006 first quarter. Still, that same survey showed shippers expected their TL base rates to increase a mere 1.3 percent this year. “It's not that complicated,” Broughton says. “The industry built a record number of trucks and demand has gone down. When capacity goes up and demand goes down, guess what? Pricing gets weak.”
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