Trucking freight rate pressure building heading into peak season

Trucking rates are rising and will continue to outstrip the pace of inflation as carrier capacity has tightened, experts and industry officials are predicting.

One key indicator of tight capacity is the spot market. TransCore, which has analyzed spot vs. contract rates, has analyzed billions of dollars of rate agreements between brokers and carriers, has discovered a shift in freight buying habits that are a harbinger of the rate environment most shippers are facing.

Usually, the spot market rates are about 15 percent lower than contract rates. But this year, according to TransCore’s analysis, on a national average about 24 percent of lanes had spot market rates that were higher than contract rates during the second quarter.

Geography seemed to play a role as well. In April, nearly half the lanes with higher spot market rates originated in the Midwest. But in May and June, the action shifted to the Southeast where half of the higher rates originated in Southeastern states.

Where spot market rates were higher than contract rates, the average difference was 19 cents a mile in April and 24 cents in June. When contract rates exceeded spot rates, the difference was between 30-33 seconds in April-May but only 22 cents in June. That’s because dry van rates rose in June across the board, according to Mark Montague, TransCore’s industry rate analyst who has spent decades developing and analyzing market-driven rate structures for transport companies.

“What we know the spot market has had a robust year and continues to be a great source of freight,” Montague told LM. “Things are tracking nice.”

What this means for shippers is tighter capacity across the board that can become ultra-tight in some geographic regions, depending on time of year. But it’s worth analyzing the spot rate trends because they usually dictate what’s ahead for contract rates. About 75 percent of all truck freight moves under contracts, usually one year in length, but occasionally longer.

“The spot market is leading edge for contract world,” Montague says. “Some of the contract shippers are holding back to see what develops. That creates more activity in spot market.”

David Schrader, TransCore’s senior vice president for operations, said the headlines about a slowdown belie what his data are telling him what’s happening on the loading docks.

“What we’ve seen is very robust,” Schrader said. “There is a 40 percent in freight volume year over year in August. Now, August 2010 wasn’t a banner month but it wasn’t terrible either. Carriers have seen a nice uptick. There is a lot of freight looking for capacity and a lot of capacity looking for freight. We haven’t seen a lot of slowdown in our market place.”

One thing is for certain: “There’s pressure for rates to rise,” Montague flatly predicts.

There are several reasons. One is that so much capacity—as much as 20 percent—came out of the truckload market during the 2008-09 recession, truckers have been slow to re-enter the market. Truck equipment costs are growing by double-digit percentages. Even though Class 8 truck sales are booming, analysts say that is nearly all replacement vehicles to make up for the lack of fleet capitalization that occurred during the recession.

“There are a lot of factors impeding capacity in the short term,” Montague says. “It’s like what you see in airlines. They used to flood the skies with capacity. Not anymore. So far trucking fleets seem to be very disciplined in adding trucks.”

Flatbed trucks are a good example. One thing unusual this year is flatbed capacity has been in tight supply.

“There is not sufficient supply to meet demand,” Montague says, so flatbed rates have continued to rise the entire year. “That equipment is in strong demand.”

Refrigerated transport seems to be following suit. Reefer rates seemed to have a “second peak” during the third quarter. Again, that was because of tight equipment supplies, lack of   drivers, and increasing demand even in this so-so economic environment.

“What is interesting is that volumes we’ve seen are indicative that brokers and shippers are going to the spot market when they’re having trouble finding capacity,” Montague explained. “Assuming moderate economic growth, if things pick up, I only see this getting worse from a capacity perspective. This tightness is going to continue. I don’t see anything in the near term would change that.”

Finding drivers for those trucks is another issue. There is an impending shortage of drivers for a variety of reasons, including the government’s new CSA 2010 initiative which some experts predict could eventually take away as many as 150,000 long-haul drivers because of poor driving records.

“There are a number of factors standing in the way of a significant uptick in capacity in the short term,” Montague said.

Shippers are advised to keep their eyes on the spot market, where oftentimes bargain rates can be had

“You need good analytical tools to track what’s going on,” Montague says. “If shippers think it’s always business as usual, they can miss opportunities. If you’re a carrier, you can improve your yield in the spot market. If you’re a shipper, you can improve your buy. It pays to pay attention in this market.

The dynamic quality of spot market cannot be underestimated. But it takes work. TransCore provides shippers tools such as its TL freight index, a weekly report designed to show where the rate spikes are. There is even daily feed comparing spot to contract rates so shippers can get a sense of what’s happening on any given lane.

“There are a lot of opportunities to move freight at rates less than contract but you have to be very careful,” says Schrader. “These lanes are very dynamic. There are lanes where spot rates are below contract, but that could reverse.”

The spot market and its load boards are often maligned, especially by small carriers, as a source of cheap backhaul freight. Spot market rates vary with the season, however, so that carriers in certain lanes, markets and with desirable equipment types often command top rates on the spot market during periods of high demand.

TransCore compared spot market rates for dry vans side-by-side with contract rates that were recorded in April, May and June of 2011 in 7,600 high-volume van lanes throughout the United States and Canada. The rates were excerpted from TransCore’s Truckload Rate Index.

Contract rates are derived from 800,000 actual freight bills per month, based on carrier invoices that were paid directly by the shipper according to an ongoing business arrangement. Contract rates are updated monthly in Truckload Rate Index and in TransCore’s premium load board products. It sampled 30-day rolling averages, rather than a daily snapshot, to represent each month’s rates.

An analysis by trucking analyst David Ross of Stiefel Nicolaus of more 40 public and private trucking companies and shippers recently showed that industry growth was “minimal,” but that no slowdown was imminent. While West Coast imports have slowed and retailers are being cautious about building inventory, he concluded that no inventory “destocking” was occurring, which is positive for trucking volumes.

“Any abatement of current fears should lead to a nice pickup in demand, in our opinion, as there is no housing bubble left to pop, no auto bubble left to pop, fuel prices have been declining, unemployment is relatively stable, borrowing rates are expected to remain low and the population is growing,” Ross concluded. “That’s why our fear of a recession is less than others. We could be wrong, but we still see more upside than downside over the next couple of years.”