Trucking companies and their customers, parched by a three-year decline in freight shipping followed by a recession that amounted to a depression in consumer demand, are eager for any sign that economic recovery is within sight, if not yet within reach.
Higher-than-expected pre-holiday shipping, a slight rise in production and a late-year increase in global trade are raising hopes the economy, and therefore shipping, is no longer stuck in reverse, even if it is struggling to shift into high gear.
“There’s a sense that things are rebounding,” said Jim Butts, senior vice president at C.H. Robinson Worldwide, an $8.6 billion third-party logistics company. “There’s a belief from both shippers and carriers that the economy hit the bottom” in 2009.
But that rebound could just as easily come to a screeching halt, he warned, raising costs for shippers and sending teetering carriers over the brink. “There are many motor carriers who seem to be operating on — and I hate to use the word — borrowed time,” Butts said.
It’s going to be some time, in other words, before trucking is “fun again,” as one less-than-truckload carrier executive described the booming trucking business in 2004.
Truckload and LTL rates will increase this year, shippers, carriers and third parties say, but not very fast and not very much — at least in the first half. The recovery isn’t likely to return trucking quickly to pre-2006 market conditions, when tight capacity gave hungry carriers enormous pricing power, barring an unforeseen surge in the economy.
Just how high trucking rates go in 2010, after falling by double digits in 2009, depends on how quickly freight returns, and how fast capacity shrinks.
|“You still have too many trucks chasing too little freight,” said Bob Costello, chief economist at the American Trucking Associations. “But freight volumes don’t need to recover to their pre-recession peaks before capacity feels significantly tighter.”
The market saw mixed signals in the first month of 2010, with at least some indicators showing increased freight shipping. Volume on the spot truckload market was up 45 percent over January 2009, said David Schrader, senior vice president of freight business services at TransCore, which owns the DAT network of load-matching services.
“We’ve actually been very encouraged,” Schrader said. “The American Trucking Associations has reported an uptick in freight volume, and our December TransCore Freight Index reflects a pretty healthy increase, certainly on a year-over-year basis, though you have to remember it was a horrible environment in December 2008.”
TransCore’s index, which reflects more than 50 million truck postings and load postings a year, jumped 103 percent year-over-year in December and increased 11 percent from November, a period when spot market truck volume typically declines, he said.
The ATA Truck Tonnage Index fell 3.5 percent year-over-year in November, an improvement after 12 months of steeper declines. “Freight volumes have come off their bottom,” Costello said, “but they’re growing at very low levels.”
There seems to be no “panicked rush” to rebuild inventories, however. “A lot of people expected to see an increase in demand due to an inventory buildup,” Butts said. “But because retailers are managing inventory much better, we haven’t seen that yet.”
It’s not an increase in volume, some suggest, that will drive pricing higher in the short term, but more capacity exiting the market as weakened truckers shut down.
“I think trucking will see a faster return to prosperity than the general economy, because there are fewer truckers,” said Duff Swain, president of consulting firm Trincon Group. Trucking’s winnowing isn’t over, he said. “The failure rate is going to spike again.”
That has some shippers concerned. “We’re going through a cycle that will bite us pretty hard when the market comes back,” said Wayne Johnson, director of logistics at American Gypsum, the fifth-largest producer of gypsum wallboard in North America.
|Although he thinks there are “too many carriers out there right now,” he’s worried about a sudden contraction. “We don’t need another Arrow, that’s for sure,” Johnson said, referring to December’s sudden collapse of Arrow Trucking, a flatbed carrier in Tulsa, Okla., that stranded hundreds of truckers and shipments nationwide.
American Gypsum was lucky. “We noticed things were awry early on,” Johnson said, and when the carrier’s drivers began complaining of bounced paychecks, it stopped shipping with Arrow, so none of its customers were affected by the shutdown.
Too many “Arrows,” however, “will tighten up pricing,” he said. “Then we’d have a pricing issue in a down market, which would be a problem for everybody.”
As 2010 gets under way and truckers seek a turning point in their fortunes, shippers and carriers — and trucking and other modes — are moving toward a new balance.
Businesses from industrial suppliers to retailers are rethinking how they source, move and deliver goods to cut transportation costs, better manage inventory and improve sustainability. Regulations likely to boost trucking costs are on the way.
Add the potential for higher fuel costs and it becomes clear the recovery will be as challenging as the recession for motor carriers of all types.
Trucking is fast headed into what Charles L. Hammel III calls a “new normal,” though “until we have some experience, we won’t exactly know what that ‘new normal’ is.” The president of Pitt Ohio Express knows what it won’t be: “what we’ve had in the past.”
It’s an evolution, not a revolution, Hammel said, but the new decade may usher in the most significant change for trucking since deregulation rewrote its playbook in 1980.
“This is going to be a transitional year,” said Mike Regan, chairman and CEO of TranzAct Technologies, a freight payment and management company that, like C.H. Robinson, straddles the divide between trucking companies and their customers.
Regan is one of many observers who say shippers and carriers need to shift their attention from pricing to productivity to survive a coming wave of cost increases that could hit the trucking industry and its customers just as they find their footing.
“If you’re a carrier, you really have to be looking at your business model,” he said. “At some point, you have to ask, ‘Am I making money?’ ” Shippers, Regan said, need to better understand “what’s driving” their global and domestic transportation costs.
“A lot of supply chains today are being run on decisions made five to 10 years ago when the logistics and transportation climate was so much different,” he said.
In 2011, “the absence of good data about supply chain operations is really going to hurt. If you’re not doing scenario planning with your supply chain, it’s really going to hurt. If you’re not taking a look at this stuff in 2010, you’ll be in firefighting mode in 2011.”
And he’s talking about a pretty hot fire. “I could easily construct a scenario in which transportation costs would be up 8 to 12 percent in 2011 versus 2009,” Regan said.
Transportation costs will almost certainly increase for shippers in 2010, as carriers from container lines to railroads to trucking companies attempt to raise rates.
For trucking, the initial test will be the round of annual contract negotiations under way in the first quarter. In early February, the largest publicly owned carriers will release fourth-quarter earnings reports, which will indicate whether freight volumes continued to gain the kind of strength necessary to support price hikes early this year.
Some carriers are already out of the gate. Multiregional LTL carrier Old Dominion Freight Line led the charge this month with a 4.4 percent general rate increase, followed by FedEx Freight, which will increase rates in North America 5.9 percent on Feb. 1.
|Those hikes, which affect non-contract freight, signal a retreat from an LTL price war that cut deeply into some carriers’ third-quarter earnings and continued toward the year-end as the largest trucking operator, YRC Worldwide, fought off bankruptcy.
“We saw contracts being offered that said these prices are good for a year, or until YRC goes out of business,” Regan said. Discounts were as high as 90 percent off base rates.
YRC’s survival into 2010 after a successful debt-for-equity swap with bondholders changed the competitive picture. “We had one carrier offer one of our customers a 14 percent discount without even being asked for it,” Regan said. “That’s stopped now.”
Pitt Ohio’s Hammel expects LTL rates to rise incrementally in 2010. “I think it’s going to be a pretty interesting year given the fact that YRC has continued life,” he said.
Pittsburgh-based Pitt Ohio competes head-to-head with regional LTL carriers YRC New Penn and Holland, but Hammel didn’t think YRC would fold in 2009 — and he doesn’t now. “When you have the full support of your banks and your labor working on your side, that’s two legs of a three-legged stool. The other is your customers,” he said, “and they’ll stick around if the pricing is right, and they believe you’ll stay in business.”
YRC’s survival will likely lead to a series of second- and third-tier carrier failures, Hammel said. “We’re going to see a lot of midsize and smaller ones that won’t be around,” he said. “It’s going to be a difficult environment to keep everybody in freight.”
Contact William B. Cassidy at email@example.com.