Freight rates: Brake time?

After a year of steady rate increases, shippers may be in for some relief. But the extent of that relief will vary from industry to industry.

By -- Logistics Management, 7/1/2000

It's no secret that prices for most transportation services crept steadily upward last year. Surveys from the U.S. Bureau of Labor Statistics show that the average cost to ship freight and packages by truck and courier services grew 2.9 percent in 1999. Average rates for scheduled air cargo rose 2.0 percent in 1999 after three years of declines. And prices for moving freight on U.S. rivers and coastal waters rose a whopping 7.0 percent last year.

The reasons are hardly a secret either: An extraordinary nine-year business expansion had by mid-2000 exerted plenty of inflationary pressure on transportation services. And carriers' costs have skyrocketed, especially in recent months. One key cost driver, of course, has been the rising cost of fuel. In the spring of 1999, the Organization of Petroleum Exporting Countries (OPEC) drove up prices by cutting crude oil supplies. At the same time, Asia emerged from its recession and demand for oil rose. Crude oil prices hit a critical $30-per-barrel mark in February 2000 and, after falling slightly, had inched up to $30 again by the middle of May.

Logistics service providers have had to deal with sharply higher fuel costs as a result. For example, between April 1999 and May 2000, air carriers faced a 55.0-percent hike in jet fuel prices. Water freight carriers watched residual fuel prices surge 99.0 percent during that same period. And truckers have been hit with a 53.0-percent jump in gasoline costs and a 59.0-percent rise in diesel fuel prices. As a result, adding fuel surcharges to freight rates became common practice among carriers by the end of 1999 and remained on the table in the first half of 2000.

At the same time that fuel costs took off, labor markets in the United States tightened considerably. The unemployment rate slid to 3.9 percent in April 2000, the lowest jobless rate in 30 years. Finding truck drivers and warehouse workers has been particularly tough. As a result, labor costs are rising. In the 12-month period ending with March 2000, hourly wages paid by the freight transportation industry rose 5.5 percent and wages disbursed by the public warehousing and storage industry jumped 5.1 percent. Hourly wages for truck drivers, meanwhile, rose 2.2 percent over the same period to a record high of $14.37.

Signs of a Slowdown

Yet the days of skyrocketing prices may be over. As a result of recent interest rate hikes by the Federal Reserve Board, the prospects for further red-hot logistics price escalation are starting to wane. Overall, price increases for transportation services are expected to slow a bit by the end of 2000 and ease up even further in 2001.

In fact, analysts at Thinking Cap Solutions, an economic analysis firm based in Port Angeles, Wash., see rather significant change ahead. In 2000 and 2001, they predict, escalation in average trucking prices will slow from the 2.9-percent annual growth recorded in 1999 to a 1.1- to 1.2-percent pace. In 2000, aircargo prices, which moved up by 2.0 percent in 1999, are expected to grow just 1.3 percent, followed by a year of no inflation in 2001. Rates for moving freight by water using U.S. carriers, which jumped by 7.0 percent in 1999, will rise by a more modest 4.6 percent on average in 2000, followed by a 2.2-percent drop in 2001.

Rail rates are a bit tougher to call. Average prices for shipping via rail actually fell 0.6 percent in 1999 because railroads were unable to capitalize on the economy's emerging inflationary trends. But given shortages of track and railcars and the overall strength of the U.S. economy, Thinking Cap Solutions expects average prices for hauling freight by rail to grow 1.6 percent in 2000 and 0.8 percent in 2001.

Evidence of a turnaround can already be seen in some of the transportation industry's key cost drivers. For example, on the fuel front, prices for jet fuel fell 4.4 percent between March and April 2000. Average prices for diesel fuel also dropped 6.6 percent, and gasoline prices declined 4.2 percent over the same period.

As for labor costs, average hourly wages for workers in the rail and water transportation sectors as well as wages in the warehouse and freight intermediary industries all declined between February and March 2000. This was the first monthly decline in wages recorded in many months.

In addition, the U.S. economy is expected to slow down in late 2000 and 2001 if the Federal Reserve Board raises interest rates as expected. A slowdown in economic growth and a reduction in cost pressures would hold shippers' costs to more manageable levels in the months ahead.

Keeping a Lid on Costs

When looking at how rising transportation prices have affected logistics spending in the manufacturing sector, it quickly becomes apparent that the effects vary both by mode and by industry. For example, increased air transportation costs have had little impact on inbound freight costs for manufacturing industries because rail, truck, and water services play a bigger role in getting materials to the factory floor. Higher water transportation prices, however, are translating into higher inbound freight costs for key commodity industries, especially those in the chemical, metal, and building materials sectors, according to Thinking Cap Solutions' exclusive Industry Cost Escalation (ICE) model.

It's also striking to see that those industries that are experiencing the highest cost-escalation rates are generally those that don't spend a lot of money on logistics (relative to their total manufacturing budget). We should note here that of the 40 manufacturing industries with the highest escalation rates for logistics costs, logistics costs make up less than 2.0 percent of each industry's total manufacturing costs. So, for example, the sharp rise in transportation rates over the last 16 months did not increase the textile bag industry's total costs by more than 0.2 percent.

Industries that spend a lot on logistics (relative to total costs) tend to be industries that have experienced somewhat slower rates of cost escalation over the last 16 months. No doubt, logistics managers in these industries are under the greatest pressure to hold transportation costs down.

Producers of ground or treated minerals, for example, spend more than 25 percent of their total budget on logistics but faced an inflation rate of just 4.8 percent between January 1999 and April 2000. Calculations from Thinking Cap Solutions, however, show that high spending-coupled with a slower rate of escalation-has the potential to boost total costs in the treated-minerals industry by 1.2 percent. In general, the manufacturing industries that spend the most on logistics will be among the biggest beneficiaries of a 2001 logistics cost-escalation slowdown.