Truckload rates are down—but for how long?
Weak demand and more capacity are bringing truckload rates down. But that may not last long, say carriers and analysts.
By John D. Schulz, Contributing Editor -- Logistics Management, 3/1/2007
The combination of an economic slowdown in autos and housing, a worse-than-expected fourth quarter with no peak shipping season, and better control of inventory by shippers has caused a shift in the balance of power when it comes to pricing for truckload (TL) services, carrier executives and analysts say.
Perhaps the best advice for shippers of truckload freight is to lock in rates now. That’s because it’s debatable how long the shift in dynamics that has briefly caused an oversupply of capacity in the TL sector will last.
Donald Broughton, trucking analyst for A.G. Edwards and Sons, is predicting a 3 percent to 5 percent contraction in demand for truckload services this year. He bases that weak tonnage prediction on the slowing economy and a rise in the prime lending rate to more than 4.5 percent. Broughton believes there is a two- to three-quarter delay between changes in that lending rate and changes in truck tonnage — which would mean that truckload volumes could remain weak for a few more months.
“After an unprecedented, almost three-year shift, the balance of power between shippers and truckers has shifted back to the shippers,” Broughton says. “Most shippers have memories like elephants, and they see the current environment as 'payback time.’ They know that when there are more trucks than loads, there are truckers willing to work for peanuts.”
As usual, the key to truckload pricing is capacity. According to Thom Albrecht, trucking analyst for Stephens Inc., a year ago there was a capacity shortage of between 5 and 7 percent. By the third quarter of 2006, supply and demand were in equilibrium, but now there is what Albrecht calls “modest” overcapacity putting pressure on rates. He forecasts first-half rates to be flat at best and down as much as 3 percent in a worst-case scenario for carriers. But equilibrium should be restored by mid-summer as capacity tightens again, he adds.
Bob Costello, chief economist for the American Trucking Associations, says flatly that the first half of this year “will not be that easy for trucking and the general economy.” He is predicting an overall increase in the Gross Domestic Product (GDP) of 2.3 percent. But with the service sector growing at 3 percent annually, that leaves growth in tangible goods at just 1.6 percent.
“At least in the first half, it will remain one of the tougher environments since the last recession, but not as bad as the last recession,” Costello says. “In the second half of the year, we’ll hopefully see a pickup.”
Tougher Environment for Carriers
Carriers and analysts blame an 11 percent drop in housing demand year-over-year and an inventory correction of as much as 5 percent in some sectors for the drop in both truckload demand and rates late last year.
Scott D. Flower, trucking analyst for Bank of America, tracks truckload pricing each month. By his calculation, TL pricing in December 2006 was just 0.8 percent above December 2005 levels — unusual (if not unprecedented) during what usually is one of the busier months for freight shipments.
All this has created a buying opportunity for shippers, especially in the spot market, where there has been up to a 20 percent drop in rates year-over-year.
“Spot market prices were depressed in the fourth quarter and the first quarter of ’07,” says Mark Rourke, president of truckload for Schneider National.
It appears that situation will continue. USA Truck recently announced that its trucking revenue per mile had declined 1 percent in the fourth quarter of 2006. That’s leading shippers to expect rates to be either flat or slightly down, at least in the spot market, for the early part of this year.
John G. Labrie, president of Con-way Truckload Services, says there were several reasons why there was more capacity in the fourth quarter last year than there had been in the same quarter of recent years. Most notable, he says, was a somewhat softer economy, retailers’ changing supply chain strategies, no real hurricane activity, and some shift of truckload freight to intermodal rail.
“The long-term supply-and-demand balance is likely to look more like it did in ’05 and ’04, given driver labor-market constraints,” Labrie says. “These are a tremendous constraint to aggregate, over-the-road, truckload-capacity growth in the industry.”
Forecast vs. Reality
Most carriers say first- and second-quarter growth in the sector will largely be determined by the overall strength of the economy. Economists are all over the map in their predictions, but the general feeling is that growth will be softer than it has been in recent years. Even carriers say it’s difficult to accurately judge this market.
“We’ve been around a long time and we think we get a pretty good pulse on the market,” Rourke says. “But in the third and fourth quarters last year, we saw a much wider miss with what shippers were forecasting relative to what actually transpired. It wasn’t just paper products or retail, it was all sectors. The aggregate was very different than the forecast. That was unexpected.”
One of the indicators carriers use for tracking market conditions, the amount of freight the carrier rejects (“turn-down freight”), is extremely low right now. That’s a sign that carriers are looking for freight to fill their trucks.
“We’re almost at record acceptance levels,” Rourke says. “We have capability to take and move more freight than we have right now.” In Schneider’s case, he says, that is partly due to the carrier’s diverse service portfolio. “We have more ways to say 'yes,’ ” he explains.
How are shippers reacting to all of this? Carriers report that shippers are moving to lock in capacity through contractual agreements. “There is good evidence that suggests by the second half there could be a tightening of capacity,” Rourke says. “There is legitimate concern about what the second half of the year holds.”
That’s why many shippers are putting more freight out for bid earlier than they did in past years, when carriers enjoyed more pricing power. “You’re seeing bids coming out earlier,” Rourke observes. “Shippers are saying, 'If there is a break in the fever here, let’s make sure we lock in capacity.’ There have been shippers who were reluctant to put their bids out but some of those people are emboldened by the current situation. It’s more front-end loaded than we’ve experienced in the last couple of years.”
Mike Gerdin, president of Heartland Express, says that his company is seeing bidding activity with a lot of shippers. The majority of Heartland’s contracts come due between February and April, so it’s typical to get a lot of bids this time of year. Even so, he says, “There are probably a few more bids out there than in the past, bids we don’t normally see. It’s probably a case where shippers are expanding their carrier base.”
Gerdin says that Heartland enjoyed good volumes the last half of December. “There was a little bit of softness the end of ’06, but I think it’s going to be strong at least the second half of ’07, if not before that,” he predicts. “The amount of bid volume appears to indicate shippers are planning to move a lot of freight this year.”
Tough Negotiators
Heightened bid activity translates into more pressure on rates. Con-way’s Labrie says there was a “slight softening” in rates the last half of last year. Whether that continues this year will largely depend on macroeconomic conditions more than any other single factor.
“What happens to rates in ’07 will ultimately be determined by what happens to the balance of supply and demand, and the level and pace of business expansion we see in the general economy,” Labrie says.
Carriers say shippers are taking a balanced view in their negotiations: They want to take advantage of short-term rate opportunities, but at the same time they’re concerned about locking in capacity to guarantee that their shipments will move later in the year.
Asked whether shippers are being extra-tough in price negotiations right now, Gerdin says they’re simply trying to be smart buyers. “Most shippers are looking at their entire networks and are doing the best they can to work cost out of their system,” he says. “They’re trying to get the most for their buck as well.” But, he adds, that doesn’t mean shippers no longer care about service quality. “Our niche has always been service, and there are definitely customers out there that have freight for us,” he says.
Carriers’ Crystal Ball
Partway through the first quarter, 2007 appears to be off to a rocky start. In Heartland’s major markets east of the Rockies, shipping volume has been inconsistent. “One day it’s light and the next day it’s heavy, and in the same area,” Gerdin says. “It’s spotty so far.”
Looking further out, carriers see positive trends. Long-term forecasts are up; one ATA forecast predicts 70 percent growth in trucking volumes by 2016. Without a change in the ongoing driver shortage, though, such growth may prove to be more a curse than a blessing.
For now, carriers are hoping for the best. “It’s hard to be confident, but our view is the second half will be more robust,” Rourke says. “The big question is, was last year’s fourth quarter an anomaly as a result of a series of factors converging, or will we be back to normal? Or was there some structural change in demand patterns that means last year was the 'new normal’? Our view is that was the anomaly. We’ll find out.”
Art of the deal for shoppers and shippers
11/20/2009Be on the lookout
12/31/2009
View All On-Demand Webcasts