The worst is over for carriers, so shippers had better prepare for higher rates ahead.

The global slowdown that began in the middle of 2001 appears to have passed its trough. Leading indicators in the United States as well as in Europe and even recession-battered Japan improved markedly at the start of 2002. Memories of the information technology bust that crippled trade in 2001 are slowly fading as improving U.S. profits start to drive investment forward again. Most importantly for carriers, world trade volumes, after declining 0.2 percent in 2001, are forecast to rise 2.5 percent in 2002. And economists at the International Monetary Fund predict that worldwide trade will grow 6.6 percent in 2003.

With global trade growing again, the pressure on rates for logistics services has been building up, so rate hikes in 2003 should come as no surprise to shippers. Razor-thin margins in trucking, soaring security costs for airlines and excess capacity on ocean liners are some of the reasons why carriers are under pressure to push through rate hikes and explore surcharge opportunities.

Trucking companies have been hit hardest, and the pricing trend reflects this. In the first quarter of 2002, average rates charged by truckload carriers dropped 1.0 percent from year-ago levels. This number comes from a U.S. Department of Labor survey of motor carriers and reflects actual transaction prices, including any fuel and insurance surcharges. Rates for truckload service declined despite large increases in insurance costs imposed even before the terrorist attacks of Sept. 11, and that simply underscores the competitiveness of the truckload business.

More than 3,000 trucking companies filed for bankruptcy in 2001, and many more small operators simply shut down without leaving a bankruptcy paper trail. Capacity has tightened, which will help truckload carriers to raise rates again next year. But truckload carriers will likely meet resistance from the marketplace until the U.S. economy picks up more strength. Economic analysts at Thinking Cap Solutions Inc. project that truckload companies will have to struggle to push rate hikes through in 2002. All told, average rates for truckload service are expected to dip 0.2 percent in 2002 before inching up 1.8 percent in 2003.

Intercity less-than-truckload (LTL) operators weathered the 2001 recession and early 2002's economic uncertainty with a bit more pricing strength than the truckload segment. Average LTL rates rose 4.2 percent in 2001 and are projected to increase 2.6 percent in 2002 and 3.6 percent in 2003. Compared to the average 6.7-percent annual rate increase that the LTL industry enjoyed in the four years prior to 2001, however, these will be disappointing for carriers.

The U.S. recovery will need to gather more steam before trucking companies see significant rate relief. Consensus forecasts peg U.S. economic growth somewhere between 3.0 and 4.0 percent next year. This forecast would be easier for beleaguered truckers to bear if only the downward risks to the gross domestic product (GDP) forecast were not so large. Aside from the continuing terrorism threat, uncertainty about higher fuel prices—thanks to continued turmoil in the Middle East—looms largest for motor carriers.

On the retail market, highway diesel fuel prices increased more than 11.0 percent in the first six weeks of 2002 to $1.299 per gallon, according to the U.S. Department of Energy. Granted, diesel fuel prices in May 2002 were still 21.0 percent below their October 2000 peak. But for a nervous motor carrier market struggling with ever-tightening margins, that volatility in fuel prices will only increase truckers' reluctance to give anything away at the negotiating table.

Just as big a concern, if not bigger, for shippers and carriers alike is the insurance problem. Prior to Sept. 11, the insurance industry had been raising rates 5.0 to 6.0 percent per annum. Now, according to surveys of motor carriers by the American Trucking Associations, insurance rates have skyrocketed. After Sept. 11, primary liability rates increased 32.0 percent, with umbrella coverage increasing as much as 120.0 percent. With fewer insurers available who are willing to serve motor carriers and the increase in exclusions of coverage for terrorism, higher insurance costs are certainly going to be part of any rate increase discussion.

Uncertainty about fuel costs, huge insurance cost hikes and increasing costs for security affect aircargo carriers just as much as motor carriers. Shippers and third-party logistics service providers who choose to move freight on scheduled flights, however, also faced the problem of canceled flights and increased uncertainty after Sept. 11. With many aircraft sitting on the ground, capacity has been constrained and routes have been reduced.

The economics of tight capacity plus the burden of unexpected and sharply higher security costs have put upward pressure on air shipping rates. According to U.S. Labor Department surveys, rates for shipping cargo on scheduled passenger airline runs jumped drastically in the first quarter of 2002. Specifically, these rates soared 16.3 percent from the fourth quarter of 2001 to the first quarter of 2002. In the second quarter of 2002, it's likely that average rates for shipping air cargo on passenger airlines will rise another 20.8 percent before settling into a holding pattern for the rest of the year. When all is said and done, Thinking Cap Solutions projects that average rates will climb 35.0 percent in 2002. Then next year, rates will rise another 5.9 percent on average. All-cargo air carriers, which have been picking up business from passenger carriers, face many of the same upward pricing pressures.

Shippers should be prepared for higher aircargo rates in 2003, not just because airlines are facing higher costs, but because demand trends mean carriers will likely have a negotiating advantage. The outlook for international aircargo traffic is improving. According to the Organization for Economic Cooperation and Development (OECD), aircargo demand is forecast to increase 3.0 percent in the second half of 2002 after a 1.0-percent gain in the first half and a 7.7-percent drop in 2001. OECD projects that aircargo demand will rise a solid 9.0 percent in 2003. That optimism comes from the overall outlook for global trade.

Indeed, forecasts from the International Monetary Fund call for worldwide imports and exports from industrialized countries to rise more than 6.0 percent in 2003, after growing less than 2.0 percent in 2002 and declining in 2001. This boost in international trade, however, depends largely on the United States, which is the locomotive behind a global recovery.

The need to move shipments to and from far-flung locales also will help the global cargo business. Imports and exports from developing countries such as China, India and Brazil are forecast to rise more than 7.0 percent next year. Although that gain in trade volume among developing countries is less than half the growth rate the world enjoyed in 2000, it is a marked improvement over the meager 3.0-percent growth rate recorded in 2001.

Ocean carriers will enjoy the projected upswing in international trade as much as air carriers. Unfortunately, in order to correct the supply and demand imbalance in the global liner business, worldwide trade will have to expand much more rapidly than currently projected. On the supply side, capacity in the industry continues to grow. According to the United Nations' latest Review of Maritime Transport, the world fleet expanded 1.2 percent (measured in terms of tons of cargo carried per deadweight), while containership capacity grew 8.8 percent in 2001. Without a stronger surge in world trade volumes, ocean liners—and containerships in particular—will continue to see freight rates decline, at least in the near term.

U.S.-owned water carriers will be among those experiencing rate declines in 2002 before prices begin to firm up in 2003. Surveys of domestic carriers from the U.S. Department of Labor show that rates for shipping freight over water slid 1.7 percent in the final three months of 2001 and another 1.4 percent in the first three months of 2002. By the fourth quarter of 2002, average rates for all water transportation services will be down 1.1 percent from the previous year's levels. However, that will turn around soon enough. According to forecasts from Thinking Cap Solutions, average rates for shipping freight over water will rise 5.0 percent between the final quarter of 2002 and the final quarter of 2003.

Shippers who contract with domestic carriers to move freight between U.S. and foreign ports overseas will face a relatively modest inflationary environment next year. Rates for moving overseas freight inbound and shipping freight outbound will fall 8.0 percent and 6.0 percent, respectively, in the final quarter of 2002 from year-ago levels. Overseas inbound and outbound rates will then rise 10.2 percent and 6.6 percent, respectively, in the fourth quarter of 2003 from prior year rate levels. For inbound deep-sea service at least, next year's inflation rate can be called modest. That's because rates for inbound deep-sea transportation of freight grew 14.5 percent in the final quarter of 2001, rose 17.5 percent in 2000 and jumped a shocking 55.0 percent in 1999.

As usual, the outlook for shipping over inland waterways is much calmer. Rates for shipping freight on the Mississippi River will fall 4.5 percent in 2001 and then rise 1.8 percent in 2002. In a similar vein, average rates for transporting freight between the United States and Canada on the Great Lakes-St. Lawrence Seaway will drop 3.4 percent in 2001 and then remain unchanged in 2003.

Improvements in foreign trade flows and a recovery in U.S. industrial production mean railroads could gain some negotiating power in 2003. But any leverage gained from the improving economy will be slight and uneven across the various sectors. As a result, overall freight rates charged by linehaul operators will increase 1.7 percent in 2002, about on par with the previous year's inflation rate. Rate hikes for shipping freight via rail will slow to 0.6 percent, on average, in 2003.

Strong volumes for coal sustained the railroad industry during the 2001 economic slump, but the near-term outlook for coal does not support higher rail freight rates. Already in the first quarter of 2002, the number of carload shipments of coal declined 4.7 percent from year-ago levels, according to the Association of American Railroads. Railroad operators were unable to get much relief via rates, which were up only 0.9 percent over the same period. Thinking Cap Solutions forecasts coal production in the United States will decline 4.5 percent in 2002 and rise just 1.2 percent in 2003. As a result, average rates for shipping coal via rail are expected to fall 0.3 percent this year and to be up only 1.0 percent next year.

On the other end of the spectrum, the number of carload shipments of automobiles increased 4.9 percent from year-ago levels in the first quarter of 2002. Railroad revenues grew even faster because average rates for shipping transportation equipment via rail also soared, shooting up a surprising 22.2 percent over the same period last year. Some of that rate hike was no doubt the result of pent-up demand, given that U.S. production of motor vehicles and parts plunged 8.3 percent in 2001. Looking ahead, U.S. production of motor vehicles is forecast to rise 4.0 percent in 2002 and another 3.5 percent in 2003. Average rates for hauling cars and other transportation equipment over the rails will be up 9.3 percent from 2001 to 2002 but will drop 3.3 percent in 2003.

Although accounting for a much smaller slice of the rail transport business, the lumber and wood products sectors are also providing some encouragement for rail carriers. The number of carloads filled with lumber jumped 8.1 percent in the first quarter of 2002 from year-ago levels. U.S. production of lumber is forecast to rise 1.7 percent in 2002 as a whole and 2.4 percent in 2003. Those growth rates look modest but represent a solid improvement from the 2.7-percent and 4.9-percent respective declines in lumber production recorded in 2000 and 2001.

Meanwhile, U.S.-based freight forwarders and third-party logistics providers are certainly being squeezed in the middle. The carriers—especially airlines, ocean lines and truckers—are imposing rate increases to cover their own rising costs. At the same time, freight forwarders are finding their recession-battered customers unable or unwilling to pay more for services. Even with an improvement in the U.S. economy, freight forwarders will be hard pressed to raise their rates. After rising 0.9 percent in 2001, average rates in the U.S. freight forwarding industry are forecast to drop slightly in both 2002 and 2003.

So at least where freight forwarders are concerned, shippers will have the edge in the tough rate negotiations that the coming year promises. And carriers, most still shell-shocked from last year's falling cargo volumes and the resulting deflationary environment, will continue to express only cautious optimism for their profit prospects.

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