Ask shippers what they think about freight rates these days, and they're likely to say they feel as if they're being sucked into a vortex of higher prices, with no way to escape. A confluence of events—labor shortages, regulatory costs, record-high fuel prices, and rising demand that's outstripping capacity—have all come together to create a rate maelstrom in 2005.

It's no wonder shippers are feeling trapped. Those conditions have pushed up carriers' costs, forcing them to raise their rates. And there's no relief in sight. "We have a recovering economy with demand coming up, and we're out of capacity in every mode across the board," says Lee A. Clair, a partner in Norbridge Inc., a management consulting firm based in Concord, Mass. "There is no way to avoid cost pass-throughs."

Shippers can take small comfort from the fact that they and their carriers are victims of broader economic conditions. Demand for transportation services is being fueled by overall growth in the U.S. economy. Although 2004's Gross Domestic Product (GDP) had not been finalized at press time, most economists pegged last year's GDP growth at 4 to 4.5 percent—and they don't anticipate the economy will match that growth rate in 2005. (See Figure 1.)

Changes in federal policies make last year's growth rate unsustainable, suggests economist Aaron Smith of consulting firm Economy.com in West Chester, Pa. "We had tax cuts and refinancing to support the economy in 2004. Now it's on job and income growth to prop up spending," he says. "We're looking for 3.3-percent growth in GDP [in 2005]."

Economist Kenneth Kremar believes rising fuel prices will hold GDP growth down to 3 to 3.5 percent this year. "The consumer had been spending quite aggressively, but you're starting to see a negative impact from the fuel situation," says Kremar, a principal at Global Insight, an economic forecasting firm in Waltham, Mass.

Oil prices, in fact, have been so volatile that they could well determine the direction of the nation's economy as well as that of freight rates. The price of crude has hovered at around $50 a barrel for most of the fall as emerging nations like China have competed with industrial economies for the world's petroleum output. Kremar expects oil prices will decline this year, but not by much. "At the end of 2005, oil will be in the high 30s or 40s (dollars per barrel)," he predicts. "The risk is that it will be higher rather than lower."

Rising fuel prices have affected shippers across all modes, but truckload shippers have experienced some of the sharpest increases. (See Figure 2.) That's because many shippers have signed transportation contracts that allow their truckload carriers to pass on higher fuel costs in the form of fuel surcharges. Wayne Yee, president of Spectrum Transportation Consultants in Fall River, Mass., notes that fuel represented 24 percent of his clients' truckload costs on some lanes in 2004. Mike Regan, chief executive officer of Tranzact Technologies, a transportation software firm in Elmhurst, Ill., says he's seen surcharges of 16 cents per mile in some cases. With surcharges climbing, shippers should count on paying more to move their goods over the highways even if diesel prices hold at about $2 a gallon.

Fuel surcharges aren't the only factor pushing up truckload rates, though. Industry observers warn that base rates for those shipments will also rise as the enduring driver shortage continues to diminish truck fleet capacity. Regan, for one, says he expects truckload rates (excluding surcharges) to rise between 5 and 7 percent in 2005.

Others foresee somewhat smaller increases. Mason Kauffman, founder of Accuship, a transportation software firm in Germantown, Tenn., believes truckload rates (excluding surcharges) will increase by about 5 percent. Transportation analyst Gregory Burns, vice president of research at JPMorgan Securities Inc. in New York City, expects overall truckload rates (including fuel surcharges) will climb by 4 to 6 percent. "If fuel stays where it is, the rates need to go up 4 to 6 percent because the industry is still having trouble finding drivers," Burns says.

Less-than-truckload shippers can look forward to somewhat smaller rate hikes. Burns forecasts LTL pricing will rise between 2 and 4 percent. Kauffman, on the other hand, expects those rates to increase by 5 percent, and Regan anticipates a jump of 4 to 6 percent. LTL rate increases should be somewhat lower than truckload rate hikes, though, because there's more capacity available in the less-than-truckload arena. "It all really comes down to capacity, with the LTL guys still having more equipment, the ability to balance loads, and a faster turnaround on their equipment," explains Kauffman. Continued...

1 2 3 Next