At a time when capacity tightness in some ways has become the new normal, the differences between fixed and variable capacity are different than they used to be in some ways, according to FTR Associates Partner Noel Perry.
Speaking at last week’s Council of Supply Chain Professionals Annual Conference in Philadelphia last week, Perry explained that fixed capacity—roads and highways, railways, and facilities—peaked in 2006 and absolute usage of fixed capacity is below the previous peak.
“If we had enough capacity in 2006, and there was some tightness, we have more than enough to survive now,” said Perry. “Making this easier is that passenger transportation, primarily cars, is down probably 5 percent from the previous peak. The demand on the fixed system is well below its previous peak. It used to be that every year traffic would rise faster than roads are being expanded; it is not the case now.”
Variable capacity is defined by Perry as drivers and tractors for crews and locomotives, which he said changes pretty quickly as was the case during the most recent economic downturn, when railroads, motor carriers and air cargo operators cut their variable capacity significantly.
As an exampled he noted that LTL trailers are down 15 percent since the previous peak, with similar reductions occurring for tractors and drivers.
“When the economy expands, it is very difficult to hire drivers,” said Perry. “If you are an executive that has just been stung by the worst recession in recent history, you are not going to gamble on hiring drivers and buying tractors before your business expands and your margins go up. Every upturn in this industry lags behind the economy as freight goes up.”
During the previous recession, Perry said the trucking industry was about 190,000 drivers short at the peak of the driver shortage and now that number is down to roughly 125,000, because the economy is not expanding as rapidly.
And while the driver shortage is not as bad as it was in 2004, it is bad enough to cause the current pricing scenario.
What’s more, this shortage is in the process of being made worse by various safety agendas from the DOT’s Federal Motor Carrier Safety Administration, including CSA and proposed Hours-of-Service changes that he said are sure to remove capacity.
“It looks like—depending on what comes out of Washington—the additional shortage caused by changes in regulations will peak at around 300,000 drivers,” said Perry. “This would make the total shortage equal to 2004. It will feel like 2004 by the end of next year, but the difference between 2004 and 2012-to-2014 is that there are more regulations spread out over a longer period of time.”
For shippers and their supply chains, Perry said this basically means that sometime next year there is a reasonable probability of sporadic supply chain failures based on capacity, which he firmly stated is the worst thing that can happen to a supply chain.
This is something that shippers are not typically used to as trucking capacity has been something that is abundantly available over the last 30-to-40 years, according to Perry.
“This is no longer the case, because the people who hire the drivers to fill the trucks are fundamentally more conservative than they were [before], and another reason is that costs have gone up,” he said. “Between 1980-2000, that was the end of 60 years of transportation inflation that occurred for lots of reasons but principally the invention of the truck and also re-regulation,” said Perry.
He added that the costs of freight transportation between 1980-2000 fell by about 65 percent in real terms and by even more between 1960-1980 because of the advent of the Interstate Highway System.
But since 2000, transportation costs have since reversed and are going up by 60-70 percent in real terms, due to increasingly expensive equipment costs, despite lower interest rates. The reason for this is that equipment now is cleaner and more complex.
“A new driver is 30 percent more expensive than the one replaced, labor is getting scarcer in trucking and drivers are harder to hire for lots of reasons,” said Perry. “Fuel is the second biggest cost in trucking, and margins are going up. When margins were going down for 60 years, truckers did not have to worry about pricing and now that costs are going up it has taken them at least ten years to learn how to survive in that environment. And we are seeing the first signs of a mature year of smart pricing in trucking to recover from the problems they had over the last ten years.”
To get a sense of how this feels, Perry said the railroads are a good example, as railroads in the first five years of the last decade needed to figure out how to set prices differently and they did, which made customers angry but led to margin gains.
“All the important things that drive trucking and rail costs are going up and that means that rather than the old school which was based on declining cost and higher capacity, we now have higher costs and less capacity,” he said.