Truckload market is soft: Strike while the iron is hot

Truckload shippers are moving to take advantage of the current soft market, but industry experts warn against sacrificing long-term relationships for short-term gain.

By John D. Schulz, Contributing Editor -- Logistics Management, 3/1/2007

For most of the past decade, truckload (TL) carriers enjoyed pricing power unseen since the industry was deregulated in 1980. That's because the long-standing driver shortage worsened, the economy was sailing in most sectors, and shippers — burned by capacity shortages in 2002 and 2003 — moved to lock in capacity through contracts that often included rate increases in the high single digits.

But the market for truckload services has changed drastically in favor of shippers over the past nine months. Look at the market now: Capacity has slowly returned to the TL segment, putting downward pressure on rates. The spot market for truckload rates has “collapsed,” in the words of one Wall Street analyst, with prices down as much as 30 percent from a year ago. There's been a surge in purchases of new Class 8 trucks ahead of yet another federally mandated change in diesel engines. And motor carriers that had maintained pricing discipline for the last five years now seem to be on the brink of an all-out rate war in a bid to win shippers' business.

The first quarter is always slow in trucking, and many analysts and carriers expect the first half of 2007 to be a break-even proposition, so it may look like shippers are firmly ensconced in the driver's seat when it comes to rates. But it's best not to get complacent: Indications are that the market could swing the other way later on.

Here's a look at what happened over the past year, what's likely to happen in the coming months, and how shippers can make the best of the situation without hurting themselves — or their motor carriers.

What led the truckload market to change so drastically in 2006? Key U.S. economic sectors such as housing and autos, where truckload carriers have significant exposure, hit the skids. Vehicle capacity rose as U.S. sales of Class 8 trucks hit a record 284,008 units last year, even as fleets held onto older equipment, says Stephens Inc. trucking analyst Thom Albrecht. And the typical fourth-quarter “peak” shipping season never really materialized. That all added up to a classic case of supply and demand, with shippers enjoying an oversupply of capacity at a time when demand slackened.

All of those factors had a noticeable impact on truckload carriers. J.B. Hunt, the nation's third-largest truckload carrier, suffered spot-rate declines of 33 percent in the fourth quarter, mainly because of the soft freight environment and a supply/demand imbalance. That led to a 66 percent decline in the company's truckload earnings; fortunately Hunt has highly profitable dedicated-fleet and intermodal units to offset those declines.

Although Hunt is only one example, its performance is widely mirrored by others in the TL sector. It's no surprise, then, that Scott Flower, trucking analyst for Bank of America, says he is worried about shippers “seeing blood in the water” this year and pushing truckload yields and rates down even further.

What this all means for shippers is that bargains are currently available. That situation has tempted many to take advantage in the short term — thus the sharp decline in spot rates. Further fueling the bargain-hunting frenzy is a growing awareness that this situation may not last long.

One indication is that the housing market is showing a slight up-tick in some regions. Some analysts, moreover, believe that the auto industry has already hit bottom. And the forecast for 2007 sales of Class 8 units is only 150,000 — a harbinger of tighter capacity to come.

That's why many shippers and third parties are anxiously moving to take advantage of the current situation. Transportation consultant Hank Mullen, CEO of Mullen Associates in Alpharetta, Ga., says the truckload market is frenetic right now. “Everybody is jumping on [opportunities for lower rates] before those rate increases come later in the summer,” he says.

Not every shipper is jumping on the bargain bandwagon; some are leery of jettisoning long-term relationships with truckload carriers just to save a few cents a mile on a fleeting deal.

John Gentle, the former logistics chief at Owens-Corning and now an industry consultant and Logistics Management columnist, warns against dumping reliable, proven carrier partners in exchange for short-term cost reductions. “If you find a good business partner you should have an earnest conversation,” he says. “There's no advantage in putting people out of business. If you want good, reliable capacity this fall when things are expected to get tight again, you have to make sure you have that relationship in place.”

One shipper who subscribes to that philosophy is Steve Palmer, vice president of transportation for home improvement giant Lowe's in North Wilkesboro, N.C. Lowe's operates one of the most sophisticated and dynamic distribution systems in the country.

Palmer warns fellow shippers not to go overboard and dump carriers in mid-contract to save a few dollars. “You can't bid the market at every moment. You can't drop every carrier you have to gain an advantage of ten cents a mile,” he says.

The transportation executive says that long-term relationships with truckload carriers are necessary to achieve the level of service that Lowe's demands. “We're looking for consistency and high service,” he says. “We have a 99.45 percent on-time mark in Florida and 99.3 across the network. It takes long-term carrier relationships to hit those numbers.”

Like other companies, though, Lowe's will take advantage of today's pricing opportunities. “We're constantly looking at ourselves, and we're constantly looking at the marketplace,” Palmer says. “We like to lock in long-term relationships with carriers. But the market is a bit softer with more capacity. We're changing some rates.”

For that reason, Palmer has issued bids “selectively” to carriers that offer high levels of service on specific lanes where Lowe's needs capacity. He's also seeking long-term capacity guarantees that will offer some protection when the situation changes again. “It's not the time to put out the whole thing,” he says. “I think when the economy comes back, capacity will get tight fairly quickly.”

Palmer is well aware that even when it's a buyer's market, carriers still need to make a fair profit. “We're looking for fair, competitive prices over time with great service, collaboration, and capacity,” he says. “We're getting better and better at forecasting our freight levels. So the carriers get something out of this too. They're getting predictable volumes of freight.”

So what's the best strategy in a market that's favorable now but is expected to change sometime in the next few months? Some shippers say it's best to bid out freight in certain lanes such as the Southeast, where capacity had been tight because of Hurricane Katrina and other factors but now has loosened. Others say this might be a good time to test out a new truckload carrier to see how its service/price matrix works. But most agree with Palmer that now is not the time for wholesale bidding out of one's entire freight package, largely because nobody is sure what this summer will bring.

Derek Browning, manager of business development for LeanCor LLC, a consulting firm and third-party logistics provider that specializes in “lean” logistics practices, says the pricing pendulum has not fully swung toward shippers in every sector.

“In some cases yes, others no,” Browning says. “When dealing with specialty equipment we find carriers still have an advantage. There's a lot of variation depending upon regions; some regions are harder to get into and out of during different times of the year.” He advises that shippers keep those variations in mind as they rethink their truckload strategies to take advantage of the current situation.

“Call it “lean,” operational excellence, culture of continuous improvement — whatever. We recommend that shippers lower lot sizes, increase frequency of shipments, and level the flow of material to create a more stable environment that isn't plagued with overproduction and the cost of carrying unnecessary inventories,” Browning says. “The truckload market is giving shippers a great opportunity to embrace 'milk runs' (short hauls) and LTL consolidation strategies while focusing on total cost.”

Trucking is a cyclical business. And perhaps that's reason enough for shippers to think long-term rather than focus entirely on a situation that may not last past the summer.

“I believe that everything is cyclical and cannot overstress the value of partnerships in the supply chain,” Browning says. “Regardless of who has the bigger bat in times of negotiation, the world is constantly changing.”

In order to keep up with the changes, Browning says, it's crucial for shippers to team with their logistics providers in an effort to realize both the lowest total cost and the best service rather than cut transportation costs alone.

Gentle recommends that shippers and carriers have a mutually agreeable formula for sharing the risks (and rewards) when capacity is fluctuating, as it is now.

“The marketplace is going to go up and down,” he says. “You have to agree ahead of time what is a reasonable float and adjust it quarterly.” The concept of “do unto others as you would have them do unto you” also comes into play: “If you want to be treated like another commodity and pick the cheapest one off the deck, why should a carrier invest in a shipper who has no loyalty?” Gentle asks.

In the end, the advice from both sides of the shipper-carrier relationship is this: Find the best business partners you can, and carefully craft a long-term solution that includes flexibility to allow for rate increases and changes in market dynamics. Decide in advance in a collaborative manner on how to deal with rising prices, perhaps by adopting a predictable percentage rate increase that will apply regardless of which way the market jumps in the short term.

Gentle believes that this is no time for shippers to act selfishly. If you have a truckload contract in place, he says, keep it. If you're legitimately shopping freight, try to be fair to the carriers in the long run.

“You can't allow that concept [of selfish opportunism] to overrule good business judgment,” he says. “We need more people with integrity in the marketplace and fewer people breaking contracts.”