Carriers ‘take the wheel’ in gaining upper hand in freight transport, pricing, says SoL report

As most shippers can tell from their rising freight bills, carriers have taken advantage of a seller’s market in transportation as the confluence of a strong economy, surging demand and labor and capacity shortages is causing multiple pain points for logisticians. That’s the conclusion of the 29th annual State of Logistics report produced by A.T. Kearney in partnership with the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics.

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As most shippers can tell from their rising freight bills, carriers have taken advantage of a seller’s market in transportation as the confluence of a strong economy, surging demand and labor and capacity shortages is causing multiple pain points for logisticians.

That’s the conclusion of the 29th annual State of Logistics report produced by A.T. Kearney in partnership with the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics. That report is released today at the National Press Club in Washington.

“Shippers looking to control logistics costs need creative thinking and innovation,” the report concludes. “That means opportunity for start-ups and new technologies offering novel solutions to transportation challenges.”

Entitled “Steep Grade Ahead,” the report discloses that U.S. Business Logistics costs, after declining in 2016 for the first time since 2009, were on the rise again last year. Business logistics costs rose 6.2 percent last year with the pace of spending increases tellingly and becoming “pronounced especially” in the fourth quarter of last year, perhaps foreshadowing more of the same for this year.

The main rising cost drivers were the “robust” economic climate coupled with growing demand, strong job market, rising wages and the truck driver shortage, now estimated by American Trucking Associations in excess of 50,000. The SoL report, while noting the driver shortage is “nothing new to the industry,” nevertheless says the shortage is contributing to sharply higher pay which eventually is being borne by higher shipping rates.

With Gross Domestic Product rising a “healthy” 2.9 percent last year, business logistics costs increased 10 basis points last year to 7.7 percent of GDP, up slightly from 7.6 percent in 2016. That is still a bargain by long-term standards.

By comparison, in 1979 (the last year before trucking was economically deregulated), logistics costs were approximately 19 percent of GDP—a sure sign that trucking was perhaps the ideal industry to be unshackled from federal economic regulation because of the low barriers to entry in the $641 billion trucking industry.

The recently enacted tax cut for some upper- and middle-income Americans is expected to add 0.7 percent to GDP this year. But the report noted that some of those gains could be erased by the Trump administration’s recently enacted tariffs on China, 28 European Union nations as well as Canada and Mexico—our allied North American Free Trade Agreement partners.

Lack of any expansion of infrastructure spending also is expected to be a drag on productivity in this country. The World Economic Forum’s Global Competitiveness report recently graded the U.S. a score of 5.9 on overall infrastructure quality—behind Netherlands at 6.2 but ahead of Spain at 5.5

“Logistics providers should not expect a sweeping modernization of U.S. infrastructure,” the SoL report said. “Modest upgrades in road, rail and airport infrastructure are likely in the near or medium term. As improvement projects move forward, logistics providers would face delays on affected routes.”

The American Society of Civil Engineers recently estimated that the U.S. needs to invest $4.6 trillion in roads, bridges, ports and other infrastructure. President Donald J. Trump has often touted an alleged $1.5 trillion, 10-year infrastructure plan that has gone exactly nowhere in Washington. The last plan was for a modest $200 billion federal spending plan, but even that is on a road to nowhere in this election year.

Transportation costs rose 7 percent annually last year with private or dedicated trucking setting the pace with a 9.5 percent increase. Less-than-truckload pricing rose 6.6 percent while full truckload rates were up 6.4 percent. Trucking overall remained the dominant mode of freight transport, garnering $641 billion of the $965 billion total of freight transport bill.

The $99 million parcel industry enjoyed a 7 percent rate gain with the $21.4 intermodal industry chalking up 10.7 percent YoY gains. The $80.5 million rail sector had a 8.2 percent rate gain with the 67 million air freight sector, dogged by overcapacity and skimming by the trucking industry, had a small 3.1 percent YoY gain.

The $41 million maritime industry eked out a 1.1 percent rate gain while the $36 million pipeline sector rose 5.8 percent. Inventory storage and financial costs rose a total of 4.6 percent with administration costs rising a similar 4.9 percent.

“No sector saw more change last year than motor freight,” the report noted. “Severe capacity pressures sparked sharp rate hikes. Carriers gained pricing power as demand rose and electronic logging devices exacerbated drive shortages.”

As trucking rates rose, rails were able to “raise prices sharply,” the report said, reversing a decline seen in 2016 rail pricing. Productivity improved among the Class I railroads, with the report noting some rails embraced what it called “precision railroading” principles. It did not elaborate.

While international trade accounts for 27 percent of U.S. GDP--$1.6 trillion in exports and $2.4 trillion in imports—such rising demand cannot be taken for granted. Trump has talked openly about opening a trade war with China and our allies, and that war apparently is under way with tariffs on aluminum and steel and the retaliatory tariffs already starting.

“It’s far from certain that strong global trade flows will continue,” the report noted somberly. “U.S. trade policy has become less predictable, as the current administration threatens established trade relationships in an effort to promote ‘reciprocal’ trade with better terms for U.S. companies.”

And in a dire warning directly to international traders, the report said, “The industry should prepare risk mitigation plans and consider raising rates or other strategies to protect profit margins as declining international shipments reduce revenue.”


About the Author

John D. Schulz
John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. John is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis.

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