CSCMP CEO Panel addresses how current capacity is matching up with demand

There are few better ways to gauge market conditions in the supply chain and logistics markets than to go straight to the corner office to hear what the CEO has to say. Last week’s Council of Supply Chain Management Professionals (CSCMP) Annual Conference’s in Atlanta provided insight into myriad aspects of various markets at its CEO panel session.

But perhaps the most telling takeaways of the session had to do with how capacity among various modes is matching up with demand.

Atlas Air Worldwide President and CEO Bill Flynn led off the panel, discussing the balance of capacity and demand in what is currently a very challenging air cargo market.

“The last five years…for international air freight has been choppy,” said Flynn. “We had a good rate of growth from 2000 to 2007 at a 6-to-7 percent annual rate, but the market began to contract in 2008 and really fell off the cliff in the second half of 2008 as international air freight demand contracted by 25 percent and export demand from Asia fell by 35 percent and that contraction continued into the first quarter of 2009.”

And a real inflection point hit in the second half of 2009 leading into 2010, with the industry recovering all the demand it had given up in that six-to-seven month period and set a new high for air freight demand of about roughly 48 million tons, which remains the high water mark, he said.

Since 2010, there has been a slight contraction, with contractions beginning in February and March of 2011 and still continuing, although the rate of contraction is smaller because the annual comparisons are getting easier, Flynn stated.

In terms of market contraction’s impact on capacity for air cargo, Flynn said that typically when markets contract or grow, capacity responds more slowly. He said this was evident when capacity left the market in 2008 and 2009 and continued into the first half of 2010, with Flynn saying the market did not believe that type of demand existed and rates and yield expanded significantly.

“At this point, we are looking at a 3-to-3.5 percent growth rate in the next ten years, and it seems that the capacity in the market right now matches that growth rate,” said Flynn.

Shifting modes from air to ocean, CEVA Logistics CEO John Pattullo said he is seeing significant new capacity entering the ocean market, with larger vessels ordered two-to-three years ago moving cargo, while current demand is lacking to keep capacity fully utilized.

This, he said, leaves the ocean market more curtailed towards a global supply of capacity.

And on the trucking and intermodal side, Transplace CEO Tom Sanderson said the shortage is primarily in the long-haul truckload segment, where drivers are away from home for weeks at a time and is a very high-turnover business.

“There really is nothing that is going to serve to increase capacity, because you can build all the trucks you want, but you are not going to find drivers that want to live that lifestyle,” said Sanderson.

Due to this situation, Sanderson said it makes sense for shippers to reduce demand of freight by shifting to intermodal as there is plenty of available intermodal capacity.

And another strategy shippers should consider, said Sanderson, is to design networks that have more regional transportation and less-than-truckload alternatives, market segments that do not suffer from truck driver shortages, with dedicated trucking also an option that counters the impact of a driver shortage on a shipper.

J.B. Hunt President and CEO John Roberts agreed with Sanderson in that there is clearly a shortage of long haul truck drivers and added that the truckload business model is very unstable.

“Looking back over the last 20 years as a truckload carrier, we have only seen a few years that have met even a minimum return on invested capital,” he said. “As a big truckload carrier, we are deferring to intermodal capacity for longer lengths of haul and look at two sets of criteria for that capacity management: revenue quality and utilization.”

Roberts said there are some nuances with regard to intermodal that are not present in truckload when it comes to things like asset longevity, and he said J.B. Hunt is getting better at seasonally holding equipment, pre-ordering and allowing that equipment to come in as activity picks up. Dedicated freight fleets, he said, then plays the role of figuring out the balance between the mid-range length of haul.

But he cautioned that much of the capacity situation comes back to the truck driver shortage situation, which is very real, coupled with the fact that “nobody is raising their kids to be truck drivers,” which increases the need to make driver quality of life better.

What’s more, he said there is a wide gap between what private fleets pay their drivers and what common truckload carriers can pay.

“There are hundreds of thousands of common carriers in America so whenever we try to correct that difference we run into high headwinds there,” he said.

In addressing railroad capacity, Roberts said that rail carriers are doing a nice job of investing into their infrastructure with ramps that provide companies like J.B. Hunt with more lift capacity and shorter lengths of haul, coupled with rail cars being in good shape, and tracks being generally healthy.

“It is up to us to make sure we have the right number of boxes…overcapacity can lead to rate pressure, which we don’t like and we need to meter that out and stay in balance,” said Roberts.