The dedicated contract carriage sector is set for another strong year after double-digit growth this year. Shippers seeking capacity or with special service needs are driving demand for dedicated services, as are private fleet operators striving to control ever-rising operating costs.
The dedicated industry will be a lucrative logistics sector in 2012 as companies rebuild dedicated capacity that was trimmed down by ultra-low common carrier rates over the past five years, according to Chainalytics, an Atlanta-based logistics consultant.
“The same folks who over the last two to five years were shutting down dedicated and private fleet operations are now expanding dedicated capacity,” said Michael Eaton, principal with Chainalytics.
Although the dedicated sector doesn’t always face the same challenges as the overall truckload market, the big issues in 2012 — capacity and truck drivers — are the same. The truck driver shortage will to put pressure on carriers across the trucking industry, but dedicated fleet operators, with shorter, more predictable routes that allow drivers to be home at night, likely won’t have as hard a time attracting and retaining drivers, Eaton said.
Hours of-service rules will probably have less of an impact on dedicated fleets, where shorter-haul activity is the norm and the number of hours driven is not as important.
The dedicated carriage sector took in $10.4 billion in net revenue in 2010, 10.6 percent more than in 2009. Projections for 2012 call for a 9 percent growth rate with net revenue of $11.5 billion, said Evan Armstrong, president of Armstrong & Associates, a Stoughton, Wis., research and consulting company specializing in third-party logistics.
Despite widespread concerns about capacity and the availability and quality of drivers, the dedicated carriage sector should continue to see strong growth in 2012, said Dan Van Alstine, senior vice president and general manager for the dedicated services division of truckload operator Schneider National.
“We remain cautiously optimistic,” he said. “Forward-thinking customers are sitting down with carriers and finding better ways to ensure strong partnerships and good processes to find drivers.”
Anticipating a capacity crunch, shippers are flocking to dedicated freight, but capacity is hardly the only driver of demand. Dedicated fleet operators are adding more value-added services and equipment to attract and retain customers in a broad swath of industries with specialized service needs.
Schneider has been focusing on niche elements of the market for value-added services, co-designing specialized equipment with customers. For shippers of heavy cargoes such as beverages, Schneider offers a lightweight tractor-trailer combo that allows for more products on board.
“We have equipment specially tailored for that space,” Alstine said. “We can put 52,000 to 53,000 pounds of payload on those trailers.”
There are also opportunities for dedicated contract service in temperature-controlled services, direct-to-store deliveries and high-value goods.
“We are still involved in standard solutions, but our focus is increasingly in value-added services,” Alstine said.
The recession had some profound effects on the dedicated sector and on the trucking industry as a whole, some of which are likely to be long-lasting. For one thing, carriers such as Schneider will exercise great discipline when it comes to adding capacity.
Schneider continues to be opportunistic in terms of expanding its dedicated services, but the growth will be calibrated to specific opportunities.
“Carriers in our industry are going to make sure that fleets are right-sized to generate the kinds of returns they need,” Alstine said.
The dedicated contract carriage sector still is recovering from the 2008-09 trough, said Raymond Wisniewski, president and chief operating officer of National Retail Systems, a Hasbrouck Heights, N.J.-based logistics provider. “We are getting a lot of bids from companies trying to buy capacity,” he said. “The spot market is not helping them as quickly as they would like.”
NRS operates its dedicated services with about 825 trucks in New Jersey, New York and Pennsylvania, in the Midwest and on the West Coast, where it recently expanded to Seattle. About 85 percent of the company’s business is in the retail sector.
Wisniewski believes the driver shortage is a serious problem for the dedicated freight sector and for the trucking industry, in general. It’s a definite problem for NRS, which serves the densely populated Northeast and often must deliver hundreds of loads a night to retail stores in the New York-New Jersey area. To do that on a consistent basis, the company needs a lot of reliable, experienced drivers.
NRS still has drivers in its line-haul fleets who were hired 20 to 30 years ago. Wisniewski isn’t sure where the next generation of professional drivers will come from after these older employees retire. “Real good drivers are not easy to come by,” he said.
There is no coordinated system in the U.S. for driver training and development or for promoting the truck driving profession as a viable career option, and that is part of the problem. A long-term solution to the driver shortage, it will have to involve a cultural change through which truck drivers are regarded as professionals.
Sidebar: Finding the True Cost.
A federal regulation greatly hampers the ability of trucking companies to hire younger drivers. While persons under 18 years of age can get commercial drivers’ licenses, they can’t be granted interstate endorsements until they turn 21.
Regulations such as hours-of-service rules and CSA 2010 requirements will continue to drive freight costs. “If you take hours away from an ever-shrinking pool of drivers, it adds costs across the board,” Wisniewski said.
There is increased collaboration among contract carriers and shippers, especially in the use of backhauls — a lingering impact of the recession. NRS splits profits with customers when the two parties can arrange to fill backhauls between cities in which both operate. “It eliminates empty miles and reduces carbon emissions,” Wisniewski said. “Dedicated freight operators are really pushing backhauls.”
As rising energy, equipment and commodity prices have strained transportation budgets, the costs of acquiring, fueling and operating a fleet continue to rise.
Logistics managers at companies that use in-house fleets are being asked to justify those costs versus alternatives such as dedicated contract carriage, said Andy Moses, senior vice president of global products for Penske Logistics.
In the dedicated freight business for more than 20 years, Moses isn’t surprised to see more active buyers of dedicated services among the tire kickers. The costs of operating a private fleet have never been higher when you factor in driver, fuel and equipment costs. Commodity costs have risen, too, driving up tire prices by nearly 10 percent in just a year.
Costs are so high for private fleet operators and over-the-road carriers that empty miles aren’t an option. As a result, more truckload carriers have started to offer dedicated services that Moses believes are not truly dedicated, blurring the definition of dedicated carriage and making cost comparisons difficult.
“It really gets our attention when we see folks throwing the term around,” he said. “When you peel back the onion, you find that the equipment is not particularly dedicated.”
If dedicated drivers are dispatched to serve other customers, if a different driver appears on the return trip or if the driver’s activities are not executed solely for the shipper, then it’s not really dedicated service. Eaton questions whether service requirements can be met over time under such arrangements.
For Penske, contract carriage is a specialized, value-added service by definition, and each industry vertical requires a different type of specialization. In health care, one of the fastest-growing industries in terms of demand for dedicated services, drivers deliver shipments directly to nursing stations at hospitals. In convenience store applications, teams of drivers sometimes make 500 to 600 deliveries before 5 a.m. Drivers go into stores unattended as they do for automotive and food service clients. They punch in keypad codes, open gates, stock shelves and turn alarms off and on.
Contract carriage drivers have to know the consignees and be familiar with their operations. In industries where products are more commoditized, such as paper and packaging, the service component can be the competitive difference. If you’re delivering wood products to a customer whose end-user is Lowe’s or Home Depot and you’re scheduled to make 12 to 18 stops a day, you have to make them all, on time.
“In a service-sensitive application, you might be shut out if you don’t,” Moses said. “It’s not just about hauling freight for different shippers. “
Companies tend to migrate to dedicate carriage when capacity is tight, and that appears to be the trend going into 2012. According to a recent survey of Chainalytics’ freight benchmark consortium, which includes 57 Fortune 500 companies, 63 percent expect capacity to be “very tight” or “somewhat tight” in the next 12 to 18 months.
In industries such as consumer-packaged goods that have historically used a combination of dedicated and private fleets, customers are starting to expand the dedicated portion of their overall capacity.
Dedicated carriage isn’t necessarily the lowest-cost alternative, although direct comparisons between dedicated carriage and over-the-road service are difficult. Key components of the dedicated sector’s value equation are certainty in pricing and capacity and specialized services and equipment.
Dedicated carriage contracts are also generally flexible, in the three- to five-year range with fairly easy walk-away clauses to account for changing demand.
“The attraction of dedicated contract carriage is that it takes unpredictability out of the equation,” Eaton said.
Few companies today are willing to invest in the employees and assets that it takes to set up a private fleet. A number of current private fleet operators are downsizing their fleets through attrition and by taking equipment off road.
“I would say there is an incremental migration to dedicated contract from private fleet as the latter get smaller,” Eaton said.
Contact David Biederman at email@example.com.