Priced to Move?

Priced to Move?

Copyright 2004, Traffic World, Inc.

The pricing bar is moving up. In a dramatic shift across modes and regions, a surging demand for freight with less equipment to move the goods is causing a fundamental shift upward in the price paid for transportation.

Many operators are pointing to rising fuel prices as one reason for the rising rates, but the pricing muscle transport operators are showing goes beyond the fuel pump. Experts say a recovering U.S. economy and expansion in China has boosted demand for goods, from raw materials to finished products. At the same time, a tight supply of ships, planes, trucks and rail equipment has put space at a premium.

Logistics industry experts say the rate increases pushing through freight transport markets are no longer a matter of seasonal changes in supply and demand. Instead, the higher prices demanded of shippers will likely stick for the long term and be passed down the supply chain.

"The concern isn''t that freight won''t get moved, but when and at what cost," said transportation consultant Ted Prince. "Ultimately someone at the bottom of the pyramid gets knocked off. The problem is that over the last few years, shippers have been used to paying a lot less for a lot more. But the prices that you''re seeing out there right now are market prices."

"It''s not like companies are going to stop shipping," said Donald Cameron, a consultant to shippers and the former head of logistics at Bose. "This economy is on the move and companies are profitable - that''s what matters."

There is pent-up demand not just for goods but among transport carriers for higher returns. "I think we''re catching up to where we should have been," said Cameron. "We haven''t paid what we should have paid for fuel for years."

How high is high? According to the Department of Commerce, prices of exported goods rose 11.5 percent through April over the same period a year ago; import prices were up 10.4 percent. That growth is expected to increase as the peak shipping season hits in mid-summer and early fall. Combined with rising fuel costs, it means carriers across the supply chain can seek new price benchmarks.

The reports on indexes are being reflected in a growing number of announced rate hikes in all modes.

FedEx Freight and Old Dominion Freight Lines announced healthy hikes in LTL rates last month and Pitt Ohio added its own version by raising prices on a selective basis.

Ocean rates are soaring, particularly on the trans-Pacific lanes, say maritime industry observers.

At container shipping company CP Ships, where more than 80 percent of the business is North American exports or imports, average freight rates increased 8 percent in the first quarter over the same period a year ago.

P&O Nedlloyd said the prices it received in the first quarter were up 15 percent over last year.

In the air cargo arena, American Airlines, Lufthansa Cargo and Northwest Airlines Cargo are planning their third fuel surcharge increase since December. That goes along with what observers say are increases in the general level of pricing in the international air market.

The Department of Labor''s Bureau of Labor Statistics said air freight pricing for goods coming into the United States jumped 6.3 percent in March compared to the same month a year ago. It cost 0.8 percent more to ship goods out of the country.

Air carriers, particularly the combination airlines facing continuing pressures in the passenger trade, recognize that merely raising rates will not solve underlying problems within the industry.

"The current crisis resulting from sky high fuel prices once again highlights the industry''s vulnerability to external shocks," said Giovanni Bisignani, Director General and CEO of the International Air Transport Association, which represents the world''s biggest airlines. "We need to build a new industry structure capable of withstanding external shocks and delivering sustained profitability. Airline cost-cutting, restructuring, and re-engineering are not enough."

The Freight Carriers Association of Canada is recommending a 5.8 percent rate increase by July 5. Even Union Pacific Railroad, in the midst of the biggest service crisis in years, is getting price increases from its customers.

"We''ve experienced significant increases compared to 2001-2002, when (rail rates) were very depressed," said Mark Huston, director of transportation for commodity trader Louis Dreyfus, which moves much of its grain exports by rail. Huston said that rail freight rates have increased some 35-40 percent since that time. "Those (early) numbers look cheap in comparison. Overall they''re up significantly, and maybe we''re not going back to those years."

Some shippers say they already are having a tough time coping with price increases.

"It''s not like we can pay four to five times more to move freight - the margins just aren''t there for us," said Dale Farmer, senior distribution manager for BP Solvay''s polyethylene division. "We''re stuck with the railroad and the bulk trucking network that we have. With trucking capacity tight, and rail service very poor, we''re trying to balance as best we can. Giving more money to the railroads doesn''t necessarily translate to better service, as we''ve seen in the past."

Finding the equipment to meet the demand has become an even bigger priority this year for carriers.

"I think it''s going to be the granddaddy of all equipment shortages, at least as I''ve seen in my 20 years," said Bob LeGrand, intermodal director for truckload carrier Werner Enterprises. "In areas that we handle freight with a single drayman, single railroad, or type of equipment, we''re having to use multiple drivers, railroads and equipment to cover our capacity needs. There''s definitely a lot more work involved at the operations end in procuring and getting moves completed for our customers."

LeGrand said there''s "more pressure than ever" for rate increases from the railroads and from the drayage side of the intermodal move. He said he''s already seen impacts on rates after protests and strikes by intermodal drivers at California ports last month and it is all affecting Werner''s ability to move loads.

"Two years ago, a shipper could call and say they''d like a load picked up today, and we could do that. But it''s harder and harder in this market. Now we need at least 24-plus hours notice to provide the capacity."

But it shouldn''t affect Werner''s ability to get a higher price for its services.

"We believe Werner and others will fully pass these costs along to customers by the third quarter as the tight truckload market creates some of the best industry fundamentals in 20 years, with carriers walking away from customers not willing to pay for fuel surcharges," said James Valentine, transport analyst for the Morgan Stanley investment firm.

Even railroads, notorious for their inflexibility - will go beyond price increases in dealing with the capacity crunch this year. CSX, which has had almost as many problems moving freight this year as UP, will be making changes affective June 28 to simplify and improve on-time train performance throughout its intermodal network. Certain intermodal terminals and trains will be designated for containers only and will expand the use of doublestack trains, while other terminals and trains will handle trailers only.

"We anticipate strong import and export activity in the second half of 2004, and this program positions CSXI to handle that growth through our East Coast and West Coast ports," said Jeff Provow, assistant vice president-International. Container-only will include Charlotte, N.C.; Mobile, Ala.; Nashville, Tenn.; New Orleans; Portsmouth, Va.; Buffalo, N.Y.; Philadelphia; South Kearny, N.J.; Detroit; Evansville, Ind.; and the Hulsey terminal in Atlanta.

CSX said service will be discontinued in some lanes, nearly all of which are secondary corridors with light customer use. In some lanes, schedule cutoffs and availabilities will change. "Our goal is to have the new plan in place before the fall traffic peak, ensuring the service quality customers expect during this prime shipping period," said Mike Parrotta, CSX assistant vice president-parcel/motor carrier.

But BP Solvay''s Farmer said the real test will be when the Christmas season surge combined with the fall grain harvest actually kick-in.

"We''re all looking to see whether this will be a ''perfect storm'' in the transportation industry, or if the carriers will have recovered and truckers have adjusted to new hours of service regulations. Hopefully within the next three months both will have made significant progress, or else it could get real ugly out there."