Shippers bracing for future rate hikes

At a time when capacity across all modes of freight transportation is tightening, coupled with a slower-than-hoped-for economic recovery, many logistics, supply chain, and transportation managers responding to a Logistics Management survey report they are expecting to pay higher rates throughout the remainder of 2010 and into 2011.

The findings of the survey, which polled roughly 340 LM readers and was completed late in the third quarter, found that 65 percent of respondents are planning for higher rates, if they are not paying them already. Although shippers acknowledge higher rates are en route, securing capacity was not as much of an issue, with 64 percent indicating they are currently not having major capacity issues and another 34 percent saying they are.

“We have seen some capacity issues in certain areas of the country, however, I think many of the major asset-based trucking companies are pumping the capacity problem up, and it is not as severe as they are expecting,” said a transportation executive at a cosmetics company. “It is our view that we have seen a correction in inventory levels that has been viewed as new growth or sustainable growth. My view is that pricing will take a slight correction down this quarter and in the first quarter of 2011, and then we might gradually see an increase as our markets slowly recover and capacity becomes more of an issue.”

While this shipper sees the current capacity situation as being somewhat ‘built-up’ by carriers, other shippers signaled significant concerns that are likely to have them scrambling for capacity sooner than later. Among the most commonly-mentioned concerns were CSA 2010, pending legislation which will dictate how the federal government rates trucking companies and drivers, limited space on bid and dedicated core lanes, as well as concerns that capacity will sharply tighten as a result of improving business conditions and a subsequent rise in demand.

What’s more, with Class 8 vehicle production and orders well below typical replacement levels, tight capacity figures to play a more prominent role in supply chain planning for over-the-road transportation for an extended period.

And a research note by Stifel Nicolaus analyst John Larkin notes that volumes are sequentially flat, with shippers seeing moderating demand as fiscal stimuli have run their course and inventories being replenished to desired levels by shippers. Capacity, said Larkin, should continue to contract into the face of the resumption of modest economic growth, and the increased life cycle costs associated with Class 8 tractors and still tight credit markets should deter major fleet additions and also contribute to ongoing reductions in fleet size. And forthcoming safety regulations like CSA and Hours-of-Service over the next five years have the ability to “dramatically reduce available capacity,” according to Larkin.

Regarding pricing, Larkin noted that pricing power is already shifting from shippers to carriers and should—as the LM survey indicates—accelerate as 2011 evolves.

This was echoed by Doug Waggoner, CEO of Echo Global Logistics. In a recession, when there is not as much freight to go around, Waggoner said carriers do what they can to attract market share to keep trucks moving, and the main lever they have for that is to lower pricing.

“Lower pricing keeps tonnage intact, but it decreases the yield equation,” said Waggoner. “Conversely, when the economy improves, it allows carriers to be more selective about what business they take on and for the shipper that they gave rock bottom rates during the recession will now be told they have to absorb a rate increase. It is not customer-friendly, but it is how the game is played.

Eric Starks, president of freight transportation consultancy FTR Associates, agrees with Larkin in that a capacity crunch is coming, due to freight demand and regulatory issues at a time when capacity is already very tight in regard to the number of active trucks moving freight right now.

“We are already seeing very tight capacity within the marketplace with regards to the number of active trucks moving freight right now and that is a critical issue,” said Starks. “There is a difference there because we still have a large number of used pieces of equipment that are idled and not doing any work. And for those in active service it is a tight operating environment with closer to 95 percent of trucks in use [total national fleet utilization based on FTR estimates] so it is creating an environment that is difficult and when you add on top the impact of government regulations you are really going to be pushing the envelope for capacity and shippers are going to be bearing brunt of this.”