Shipper outlook remains mostly the same from April to May, reports FTR Associates

The market environment for shippers remained essentially the same from April to May and is in line with previous months, according to the most recent edition of the Shipper Conditions Index (SCI) from freight transportation consultancy FTR Associates.

May’s SCI, which represents data for the most recent month available, was -7.5, representing a modest step back from April’s -6.9. March came in at -7.3. A reading above 0 suggests a favorable shipping environment, and FTR describes the SCI as an indicator that sums up all market influences that affect shippers, with a reading above zero being favorable and a reading below zero being unfavorable and a “less-than-ideal environment for shippers.” May 2011’s -11.4 was the worst SCI reading of this current economic cycle.

FTR said that May’s SCI is indicative of tight capacity with modest truckload carrier rate increases, noting that the current rate outlook is relatively quiet compared to a year ago, with the help of lower fuel surcharges. But the firm said that could change in the second half of the year as federal regulations—like the recently introduced new Hours-of-Service (HOS) rules—take effect, which could result in the SCI taking a material plunge in the coming months.

“The sluggish economy and freight environment that has persisted for nearly two years now, has created an environment in which shippers have been able to secure low rate increases despite fleets operating with fairly small amounts of spare capacity,” said Jonathan Starks, director of transportation analysis for FTR, in a statement. “The introduction of more restrictive Hours-of-Service regulations for drivers on July 1 means that the amount of excess capacity in the system has shrunk even more. As long as freight levels continue to inch upward truck rates are likely to begin a more significant pattern of increases. If nothing else, fleets will be looking to cover their increased operating costs for drivers, in addition to taking advantage of the reduction in spare capacity that generally drives upward movement in truck rates.”

Despite the prospects of HOS having a negative impact on capacity and truck productivity, with estimates for lost capacity ranging from 3 percent to more than 10 percent, shippers have told LM more time is needed working with carriers under the new regulations to see how things shake out, as the new rules have been in effect for less than three weeks.

John Larkin, Stifel Nicolaus analyst, observed in a research note that with flattish/modestly growing demand and stable supply characterizing the current industry environment, we appear to be within striking distance of a capacity shortfall in the truckload industry.

“However, in order for the current environment to improve to the point where carriers can secure more significant rate increases (say mid-single digit and up), we will need one or more of the following factors: (1) increased demand due to pent up demand created by the elongated winter season this year, recovery in the auto and housing sectors, or strength in manufacturing related to an increase in personal consumption or (2) reduced supply related to fleet shrinkage or the implementation of FMCSA rules and regulations that either reduce the size of the driver pool or reduce the upper limit on driver productivity,” wrote Larkin. “Only then will rate increases outstrip the rate of cost increases, especially for large, purchasing-advantaged truckload carriers.”