Mid-year Logistics Rate Outlook: Is Opportunity Fading?
All modal paths still lead to this conclusion: too much capacity, too little freight. For now, the shipper retains a strong buyers’ market advantage, but that could all change by the end of the year.
By John Paul Quinn, Contributing Editor -- Logistics Management, 7/1/2009
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Simply stated, all transport modes are in stall. In fact, it’s a grim scenario of fundamental down-side economics for carriers, with ocean lines mothballing fleets and truckers looking out at parking lots full of units that haven’t been on the road for months.
There isn’t much happening in the air either, with a lot of DC-8s in hangars; and on the ground, the parcel competition is a gloves-off battle royal for business among FedEx, UPS, and the now deregulated USPS that has started flexing its rate-bargaining muscles.
The only anomalous and uncertain rate situation lies in the less-than-truckload (LTL) sector. While presently overcapacity persists, the variable here is the precarious financial condition of YRC Worldwide, a carrier that represents about 25 percent of the national capacity, and which has asked for government relief. YRC’s situation has raised serious concerns since a sudden loss of that much capacity could shift LTL rate dynamics in favor of carriers.
Aside from this specific case, few observers anticipate much change in traffic-flow volume in any sector anytime soon—which definitely bodes well for those shippers who have something to ship.
“This is still a buyers’ market in terms of rates, but it may begin to turn toward the end of this year,” says James Haughey, director of economics for RBI-US, Logistics Management’s parent company. “We have a substantial reduction of freight regardless of mode, so maybe by the fall if shippers are producing a dollar of product for every dollar of sales instead of drawing on inventory, then incoming and outgoing shipments may begin to pick up.”
On the road and rails
For carriers in the trucking sector, the second half will continue to be a buyers’ market, according to Paul Svindland of advisory firm AlixPartners, with overcapacity reaching levels never before experienced in the industry’s collective memory.
“The latest capacity statistics indicate that some 150,000 units are currently idle,” says Svindland. “To put that into perspective, that is ten times the number of trucking units in the entire fleet of Swift Transportation. Since supply so heavily outweighs demand, downward rate pressure will most likely continue at least through year-end.”
The picture is fairly grim for truckers, Svindland observes. If diesel prices go up rapidly that could spell the demise of some trucking companies that are hanging on now due to the fact that diesel costs have been low.
He also notes that the trends in the intermodal sector for all intents and purposes parallel those in the truckload (TL) market. With TL rates as low as they are now, they’re more and more competitive with intermodal; so intermodal will lose some volume due to the rate-cutting across various transport sectors.
But as far as bargaining with trucking carriers is concerned, there are some prudent, discretionary guidelines to follow. “Last summer, some carriers made no secret as to what they will do when the market turns in their favor,” notes Charles Clowdis, managing director for North America at economic and financial analysis firm Global Insight. “So, a shipper shouldn’t force a situation of a carrier losing six cents for every dollar he’s paid. That’s a short-term tactic that leaves the shipper open to retaliatory action, which some carriers have already intimated they will do.”
On water, in the air
On the sea lanes especially, rates took a real dive in the second quarter; and even if oil prices were to rise, rates have already fallen by such magnitude that new surcharges could not possibly offset the situation.
“The benchmark container freight rate is traditionally pegged to the Hong Kong-Los Angeles run,” says Philip Damas, research director at Drewry Shipping in London. “We have reached an all-time low of less than $1,000 for a 40-foot container as opposed to $1,800 a year ago, so we are in uncharted waters.”
Damas believes that with rates at these unprecedented depths, some steamship companies may not survive. “If you’re a shipper you have to be wary of choosing a very low price deal because your carrier may not be around at the end of the contract period,” he warns. “The good news is that ocean rates are down; the caveat is you have to be careful about the solvency of who you’re doing business with.”
And air freight, as the costliest transport mode, continues to lose business to land carriers. “We project that domestic air freight will be off 2.9 percent in the second half, while ground parcel will be up 1.5 percent, a primarily rate-based migration,” observes Ted Scherck at The Colography Group, an advisory firm for parcel shippers. “Capacity, particularly in the air with UPS parking its DC-8 fleet and FedEx deferring new aircraft deliveries, is being pulled out of the market at a consistent pace with declines in tonnage.
According to Scherck, shippers should understand that there is some stability of pricing coming back into the market and this could expand and become universal throughout sectors. Many carriers are coming to the point where they won’t move traffic below cost, and are cutting costs to match their traffic. They have become more efficient at this and have been helped by a significant tailwind in the form of fuel prices dropping from last year’s levels.
Parcel shippers should be aware that there are some significant opportunities available, and analysts agree that they should take advantage of them while timing is still on their side.
“Carriers are doing two things tactically, and both are good for shippers,” notes Jerry Hempstead of parcel advisory Hempstead Consulting. “If one of their shippers puts his business out for bids they will aggressively renegotiate pricing to hold onto that account. And secondly, where carriers see a chance for new volume or incremental business, they’re offering extraordinary discounts at levels we haven’t seen in a decade.”
But Hempstead cautions that this situation won’t last forever, because once the economy eventually turns, the parcel carriers will probably be the first sector to spot it. “As soon as they see their piece counts going up, they’ll tighten their pricing reins,” he says.
Road ahead
Shippers shouldn’t expect any surprises in the second half, most observers agree. There may be a few signs of carriers discreetly reasserting themselves, but no major change in the overall predominance of a buyers’ market.
“There may be some cautious aggression by carriers toward year-end, but we don’t see a sellers’ market by any stretch of the imagination,” says Scherck at Colography. “But it won’t be a total buyers’ market either—so it’s wait and see.” The real question, adds Scherck, is whether we’re seeing just a pause in the economy’s decline or if we’re actually experiencing the bottom. “That’s the sleeper in the equation. Will all of this global stimulus result in actual shipments? No one knows and everybody is cautious,” he says.
RBI’s Haughey sums it up this way: “Every mode will still be operating with surplus capacity into next year, and the price risk to shippers is minimal. Their worry won’t be rates, but whether they have anything to ship and somebody to sell it to.”
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