It’s taken more than two years, but Debra Pluchino just hit a breakthrough with one of the largest shippers on Long Island, scoring an agreement to run test shipments because they’re not satisfied with their current less-than-truckload carrier.
Pluchino, vice president of asset-based third-party logistics company GMG Transportation, Deer Park, N.Y., said the shipper, which has a $5.7 million transportation budget, is willing to pay more for a carrier that can provide timely service, hands-on attention and long-term financial stability. Unfortunately, she said, shippers like that are almost extinct.
“Long-term, intelligent decisions are not going on right now,” Pluchino said. “Right now shippers are looking only at price, supporting an event that will eventually happen — more carriers pushed out of business — rather than aligning with a carrier that will move their freight in the future.”
The trouble is, with so many name-brand retailers struggling to stay alive and trucking companies struggling as much for cash as cargo, that future looks too terribly far away for shippers and carriers to see.
Sharp price-cutting on the spot market, fueled by weak freight demand, is feeding a frenzied free-fall to the bottom of the rate barrel. One example: $50 pallet rates between Long Island and New Jersey. “That’s all-in, inclusive of fuel, 45 miles over the George Washington Bridge,” Pluchino said. “That’s ridiculous. Tolls alone eat up most of that. The rate should be at least $125, and even that barely covers costs. At what point does it stop?”
Throughout North America’s LTL freight market — whether it’s a load of mining shovels or packages of cheese — there’s little evidence the bottom of the market is in sight. Industry observers say carriers are clawing for anything they can get at almost any price to keep trucks loaded and moving.
Michael Regan, president of TranzAct Technologies, a technology and freight payment company, said the company has seen base LTL rates run from flat to down 4 to 5 percent this year from a weak 2008. Regan said it appears domestic shipping is down 30 percent from last year.
“We’re seeing anywhere from a 5 to 12 percent rate reduction on LTL right now,” said one large home products importer and exporter, who spoke on condition of anonymity.
He said the rates are down dramatically even in and out of the Chicago area, where strong demand usually has kept pricing relatively stable or rising in the past.
The rate declines are hitting LTL carriers hard, starting with YRC Worldwide, the nation’s biggest heavy-freight trucking company, which is already under pressure by Wall Street and its financial lenders to streamline operations and pare down debt.
Cargo volume in October and November declined roughly 12 percent year-over-year at YRC National, which includes subsidiaries Yellow Transportation and Roadway. The fourth-quarter decline was worse, with volume falling approximately 15 percent as December traffic fell fast and pricing competition increased.
“While some of YRC National’s tonnage declines were likely due to its efforts to reduce its exposure to unprofitable accounts, we believe the large year-over-year declines in tonnage are alarming as shippers appear to be reducing their exposure to the company,” said Justin Yagerman of Wachovia Securities. He blamed that in part to concerns about the carrier’s financial situation.
Big LTL customers such as Caterpillar and General Electric are taking advantage of the market, flexing market power like never before by hammering down rates and upending contract terms.
“It’s the big companies that are the most ruthless,” said one LTL carrier executive who declined to be identified, fearing negotiation repercussions. “We’re in the middle of a two-year contract renewal with one of these guys, and our 30-day payment terms were suddenly doubled to 60 days. They’re confident that carriers won’t fight it, because if they do, they can take their business somewhere else.”
But shippers aren’t willing to take too much of the blame, because they also face pressure to keep costs down in the face of a brutal recession.
“As would be expected of the largest food manufacturer in North America, our transportation expense is significant,” said Mike Cole, director of transportation for Kraft Foods, whose revenue exceeded $42 billion in 2008.
Kraft’s carrier portfolio is primarily large national and strong regional asset-based carriers, Cole said. And while LTL is a relatively small part of Kraft’s total business, “generally speaking, we feel our providers are delivering the service we require at competitive rates.”
Two years of falling freight demand is keeping the competitive edge on those rates sharp. Truck tonnage tracked by the American Trucking Associations plunged 11.1 percent in December 2008, marking the largest month-to-month reduction since April 1994, when the LTL industry was in the midst of a nationwide strike.
December’s drop was the third-largest single-month decline since the ATA began collecting the data in 1973.
The January Cass Freight Shipment Index declined 6 percent sequentially from weak December levels and was down 25 percent compared to January 2008 as the economy continued to slow. The Cass Freight Expenditure Index declined 12 percent from December and 23 percent compared to January 2008.
“Motor carrier freight is a reflection of the tangible-goods economy, and December’s numbers leave no doubt that the United States is in the worst recession in decades,” said Robert Costello, the ATA’s chief economist. “It is likely truck tonnage will not improve much before the third quarter of this year. The economy is expected to contract through the first half of 2009 and then only grow slightly through the end of the year.”
Business edged up slightly in January from December, but the tonnage measure was still 10.8 percent behind the January 2008 level.
Declining fuel prices may have slowed a capacity contraction, giving carriers with thin margins a reprieve but hurting stronger carriers looking for a boost in rates in the third year of a trucking downturn. No large carrier has failed entirely since Jevic Transportation shut down last spring, but industry observers say it may be a matter of time.
“We had expected a large number of carrier failures early in 2009, but we have since tempered back these expectations with the recent declines in fuel prices, which have allowed some carriers to temporarily stave off bankruptcy,” Morgan Keegan analyst Art W. Hatfield said. “That being said, the pricing environment remains competitive and has worsened in some lanes as weaker carriers look to sacrifice on pricing in order to keep their trucks full.”
For shippers, a positive consequence of the fight for freight beyond the low rates is an uptick in service, said Brian Everett, executive director of the National Shippers Strategic Transportation Council, an LTL advocacy group. “Service seems to be pretty tight primarily because carriers realize they want to make sure that they keep freight by keeping customers satisfied,” he said. “I think carriers are focusing on delivering good quality service.”
But as much as LTL shippers are enjoying the lower costs, Everett recommends they avoid taking advantage of the situation.
“I’ve never seen as much pressure because of such a deep recession to do whatever possible to keep costs down. The unfortunate thing is there’s only a certain price point a carrier can bear without going out of business,” he said. “We’re really trying to discourage shippers from just looking at price. Smart transportation buyers are looking at it from a longer term partnership standpoint, and to negotiate in terms of service parameters, delivery requirements and everything that goes into the supply chain management process.”
Shippers and carriers are looking for any sign pointing to a break in the cycle of too much capacity trying to move too little freight. One comes from FTR Associates, which tracks freight capacity with equipment order forecasts as one of its guides. Demand for heavy trucks weakened in January, and factory shipment forecasts were revised down by 10,300 units to 125,000 in 2009 and revised down 13,600 units to 148,000 in 2010.
FTR’s forecast for trailers also is deteriorating, FTR said, with the 2009 forecast recently slashed 11,300 units to 76,200. It’s the lowest level since 1975 when only 68,816 units were produced.
Some shippers are seeing some evidence of a bottom to falling rates. “Rates have come down pretty steadily over the last six months as carriers compete harder for our business,” said Rob McDonald, vice president of Alloy Cladding, which ships welding equipment to pulp and paper manufacturers.
“But we’ve seen those rates start to stabilize, probably because fuel prices have stabilized, and fuel surcharges are not as high. So overall rate cuts have started to slow down as fuel prices have dropped,” he said.
Others are looking ahead to what could be a drastic change in rates when capacity begins to tighten.
“Right now, we are not experiencing any capacity shortages,” Kraft Foods’ Cole said. However, he said, “we believe once the economy turns around and capacity tightens that it will take longer for additional resources to enter the market due to asset sales internationally. As the economy recovers, we expect capacity will tighten with the refrigerated category being the first affected, followed by intermodal, dry truckload and then LTL.”
Even carriers weary from the constant rate pummeling are trying to stay optimistic. “Last year, during March and April, things steadily picked up month after month,” said Harry Smith, costing manager for NEMF, a major northeastern regional LTL carrier.
“When winter ends, business starts to blossom, especially from our retail customers,” he said. “We’re hoping that’s the case this year, too.”
Contact John Gallagher at email@example.com.