New US truck pricing reality is here for the long haul

New US truck pricing reality is here for the long haul

Trucks traveling in Florida.

If you thought it was difficult to find a truck in the US in the first quarter, just wait. Photo credit: Shutterstock.com.


If US shippers thought it was difficult to find a truck in the first quarter, just wait. The era of the electronic logging device (ELD) is here, and it’s just getting started. Shippers need to act now to find and keep the capacity they will need not just this spring but also during the fall peak.

US truckload contract rates came in hot in the first quarter, rising by high single-digit or low double-digit percentages at some of the largest motor carriers as freight demand remained high enough to keep truck capacity tight. Shippers, even those that expected rate hikes, were stung.

Shippers tied the rate increases not only to high demand, but also to the impact of the ELD mandate, which took effect on Dec. 18. The mandate changed the calculus truckers use when determining whether to accept a load tender, and what to charge to haul freight.

“Freight is up a lot, and that’s a consequence of the change in regulation in terms of number of hours that the drivers can drive,” James Quincey, CEO of Coca-Cola, said during a first-quarter earnings call in April. He said Coca-Cola’s freight costs were up about 20 percent. In a survey from Wolfe Research, shippers predicted their transportation budgets would increase 7.5 percent during the next year.

Because the market isn’t about to change, shippers will have to make changes to attract and secure capacity and blunt rising costs. With trucking companies rejecting one of every three to four loads, according to conversations with fleet executives, shippers have only a few options.

One is to pay more for dedicated contract carriage, locking in a specific number of trucks each week rather than taking a chance on the spot markets. Another option is sticking more loads on intermodal rail despite poor service this past winter. That option could be short-lived, however, because shippers told Wolfe Research that intermodal rates are rising and are likely to go up another 3.6 percent during the next year. The same report found that there was a 0.3 percent net shift from rail to truck in the past six months because of the rails’ service problems, but that will shift 1.1 percent back toward rails in the next year because of the truckload environment.

Shippers also are passing some of the added costs onto consumers. Transportation, in general, accounts for 5 to 15 percent of the total costs of retail goods, so the effect would likely be only a couple of pennies per item, industry analysts told JOC.com, on the condition of anonymity.  

There’s plenty of evidence that contract rates are rising more rapidly than expected. As of mid-April, the average contract linehaul van rate was 11.3 percent, or 19 cents, higher than at the same time last year, according to DAT Solutions, a Beaverton, Oregon-based freight marketplace. FTR Transportation Intelligence now expects contract truckload rates to rise 13 to 14 percent.

“We are seeing high single-digit to low double-digit rate increases driven by strong market conditions and inflationary pressures, such as the expense of hiring and training drivers,” Kevin Knight, executive chairman of Knight-Swift Transportation Holdings, told analysts in the company’s first-quarter earnings call on April 25.

At Schneider National, the second-largest US truckload operator after Knight-Swift, rate hikes in customer contract renewals averaged low double-digit percentages in the first quarter, the company said on April 26. CRST International CEO Dave Rusch told JOC.com that contract rates were up slightly more than 10 percent across all equipment types and even higher in his flatbed division.

Course change unlikely

There’s no indication the US freight market is going to suddenly reverse course. “We expect more favorable market dynamics in terms of freight demand and constrained trucking capacity,” Adam Miller, Knight-Swift’s chief financial officer and treasurer, told analysts on the April call.

A trade war with China, the disintegration of the North American Free Trade Agreement (NAFTA), or overinflated interest rates could change the outlook, but otherwise, the US economy is on track for growth approaching 3 percent and unemployment dropping toward 3 percent, with no downturn on the horizon.

Strong demand, meanwhile, is buffering the rising transportation costs, and also likely to show sustained growth. Shippers surveyed in the Wolf Research report, for example, expect same-store shipments to increase 3.9 percent in the next year, the highest reading since mid-2010.

“Everybody is seeing an increase in the freight cost,” Graeme Pitkethly, chief financial officer of Unilever, said in another earnings call. “We think, overall, that they’re going to go up to the high single-digits to high teens.” Higher rates, however, aren’t the consumer goods company’s only concern.

“There’s also been issues on availability,” Pitkethly said, referring to availability of truck capacity. “There’s been some stock left on dock.” Not enough stock was “left on the dock” to materially affect Unilever, but “it was a bit of a watch there going into the quarter.”

If stock is being left on the dock, it’s not because there aren’t enough trucks, or even drivers. It’s because shippers can’t find a trucker willing to haul that freight. The reason could be price, but it also could be the location, mileage and time involved, the destination, or even the consignee.

Shippers have told JOC.com that their rollover freight — loads not picked up on the scheduled day to ship — is rising. The freight might move the following day, but when shipments stick to the dock an extra day, it complicates shipping schedules and adds to costs.

Now that the spring retail season and produce season are here, the time for shippers to tighten their belts and prepare for the fall peak shipping season is now. The full impact of the ELD mandate on transportation networks and pricing is just starting to come into focus.

ELD enforcement looms large

Estimates by shippers and third-party logistics providers last year that the ELD mandate’s impact would be “short term” and moderate slightly missed the mark. The mandate disrupted shipper networks where they least expected it: in the short haul.

By February, shippers reported that loads that used to be accepted without a hitch were being refused with regularity. Often, these were loads that would take five to seven hours to deliver. Suddenly, truckers didn’t have the additional hours to find parking, or get to the next load.

The loss of those extra hours for truck drivers translates to longer transit times for shippers. A Zipline Logistics study found a 16 percent increase in transit times on 450-to-550-mile hauls, traditionally one that drivers would complete in single day. Smaller carriers now are rejecting such freight, said Andrew Lynch, president of the Columbus, Ohio-based logistics company.

“Those runs are now two days for those guys, so they don’t want them,” he said. “The smaller carrier will lose a day or a half day on that load, between staying within hours of service and getting the delivery done. To keep them in the fold, the rate has to go up dramatically.”

The biggest impact of the ELD mandate on capacity hasn’t come from drivers exiting the business, but from the loss of wiggle room when it comes to recording hours of service. In other words, it’s much harder to falsify an electronic record than a paper logbook.

Also, the number of drivers put out of service for falsifying logs rose 14.8 percent in fiscal 2017, according to Federal Motor Carrier Safety Administration data. There’s been no reported surge in out-of-service orders for ELD violations, but such enforcement just began on April 1.

US truckload capacity may get even tighter and prices rise to record highs during this fall’s peak season. While March and April brought brief pauses in the intense demand witnessed in January and February, trucking companies are only able to make a small dent in business coming in from shippers during the respite — attributed in part to a chilly spring.

“I’m glad we had a little bit of weather going on in the Midwest in April because we’re still overbooked,” David Parker, CEO of Covenant Transport Group, said during an April 25 earnings call. “Instead of being 125 percent booked like we have been previously, maybe we’re 110 percent booked, which reduces the pressure you get from your customers.”

Werner Enterprises CEO Derek Leathers said the same is true with his carrier. “We’re waking up at 6 a.m. and we’re already overbooked by 30 to 40 percent. And that’s before the phone calls you get during the day,” he said.

“What we are into today is not like 2014. The closest resemblance that I have to what we’re going through is the 2003-to-2005 time period,” Jeff Tucker, CEO of Tucker Company Worldwide, said during an April JOC webinar. “New hours of service came into play January of 2004 … ELDs are the 2018 equipment to the hours-of-service change in 2004.”

Freight demand remains robust

In many ways, the ELD mandate was the final straw for transportation capacity in an expanding economy generating robust freight demand. Truck utilization already was in the high-90-percent range before last fall, according to FTR Transportation Intelligence.

US real gross domestic product expanded 2.3 percent last year, but 2017 closed strong with 3.1, 3.2, and 2.9 percent growth in the second, third and fourth quarters, respectively — the most consistent growth run for the United States since the end of the last recession in June 2009.

Economists generally consider 3 percent GDP growth as a threshold for a robust freight environment. The US economy expanded 2.3 percent in the first quarter, according to the first estimate of quarterly GDP released by the US Bureau of Economic Analysis April 27.

That number will be revised twice before being fixed and could well move upward. The lower GDP expansion rate in early 2018 was attributed to a decrease in state and local government spending and exports and residential fixed investment in the quarter.

Imports depress GDP but create freight that fills trucks and intermodal trains. Imports grew 7.6 percent, to 5.7 million laden TEU in the first quarter, according to PIERS, a sister product of JOC.com IHS Markit.

Retail sales rose 4.5 percent year-over-year in March, up from 4.1 percent in February. The Conference Board Consumer Confidence Index increased in April, following a dip in March, and at 128.7, the index is just short of its 18-year record reading of 130, reached in February.

The Institute for Supply Management’s PMI index, a measure of US manufacturing, was 59.1 percent, 60.8 percent, and 59.3 percent, respectively, in the first three months of the year. That’s better than the 58.2 average during the previous 12 months and higher than the 50 percent threshold for expansion. Industrial production rose 4.3 percent in March and 4.4 percent in February, the best year-over-year results since January 2011, according to the US Federal Reserve.

As a result, freight demand is significantly outstripping supply in trucking. The FTR Trucking Conditions Index in February hit its highest level since its 1992 inception, meaning motor carriers have unparalleled pricing power heading toward the fall peak season.

The Cass Freight Index in March showed shipments rose 11.9 percent and expenditures jumped 15.6 percent year-over-year. DAT Solutions reported there were 102.2 loads per flatbed truck in the week ending April 21 — one of the highest load-to-truck ratios in DAT history. The flatbed ratio, at that time, had been above 100 for four weeks. The Truckstop.com Market Demand Index in April hovered between 50 and 60, double the levels of 2017.

FTR’s truck utilization ratio has been running at the 100 percent mark since last September, and the ratio is only expected to dip to 98 or 99 percent by next year. “We’re not looking at anything that would be considered a dramatic loosening of capacity. Maybe we get to 98 percent by the end of the first quarter of 2019,” said Avery Vise, FTR’s vice president of trucking research.

“As we see inflated spot rates and capacity tightness stretch out over time, we think there will be some improvement in productivity on the side with more shippers agreeing to schedule changes to match hours of service better and additional interest in trailer pools as a way of keeping the supply chain moving,” Vise said.

Dedicated contracts on the rise

Transportation Analyst Donald Broughton often says, “volume leads pricing.” It’s simple economics: When shippers move more goods and capacity gets tighter, transportation prices rise. When shippers don’t have as much freight, transportation prices fall.

As capacity tightens, though, carriers get to make more choices. A carrier can reject unprofitable freight, choose the best shippers, and let the others wait on the sidelines. Trucking executives told JOC.com they are rejecting about one in every four loads or more, simply because of overwhelming demand, putting the turndown rate in the 25 to 30 percent range.

This is giving rise to the question of how to become a so-called shipper of choice, and although anyone asking how to become one now is already late to the game, treating carriers and drivers with respect and quickly moving them through gates and docks is a good start.

The latter is even more important in the ELD era, because drivers also must complete other tasks during their 14 available on-duty hours a day, such as weighing, inspections, maintenance, filling out paperwork, refueling, finding their next load if they’re an owner-operator, and searching for an overnight parking space. That’s not to mention dealing with bumper-to-bumper traffic on the highways and congestion caused by accidents.

With inefficiencies rife in this part of the supply chain, it’s only natural that carriers prefer shipments that maximize their returns during a workday. Efficient shippers of high-paying freight get a leg up on less profitable business.

Shippers have increasingly studied new options to alleviate the rising transportation costs in their contracts and the so-called tweener trips being eliminated under ELDs. One option is dedicated trucking service. Usually, these are multiyear deals that provide protections to both sides to address the concerns about rates and equipment commitments.

Covenant Transport and Werner Enterprises typically sign two- or three-year dedicated contracts. CRST and NFI Industries have been locking in three- to five-year deals. “With the spot market up the way it is and (with) the capacity shortages, shippers are saying ‘We’re going to have to lock into dedicated trucks just to be sure,’” CRST’s Rusch said. “Most of the ones that (CRST subsidiary) Gardner Trucking does are small: six, 10 or maybe 15 trucks. But the customer knows the capacity will be there, guaranteed.”

“A year or two ago, dedicated carriage may have seemed too expensive compared with one-way, but the combination of better service, guaranteed capacity and, now, rate competitiveness have just increased demand for dedicated service,” Werner Enterprises’ Leathers told JOC.com.

“We currently have more dedicated demand in the pipeline than we’ve seen in the last 10 years.”

More than half of Werner’s 7,385 truck fleet is now in its dedicated business. NFI, too, made the decision a few years ago to move the majority of its assets from one-way to dedicated service. “I was recently speaking to one of our manufacturing customers and asked, ‘How much time do you have to go and chase down a carrier to get a truck?’ He said, ‘That’s my problem. I’m spending a lot of time right now that I don’t really have,” NFI CEO Sidney Brown told JOC.com.  

Like Leathers, he said there is more demand for dedicated carriage than at any point in the last decade.

New trucks, but empty seats

To meet pent-up demand, US truckload fleets are ordering more trucks. Truck orders averaged 45,400 units per month in the first quarter, according to ACT Research. It’s the second-highest average for net Class 8 orders in history. No amount of orders, though, can add capacity on the highway unless there are qualified drivers to fill truck seats.

“When we look at the vocational labor that is scarce already, it’s on its way to be even more scarce,” Knight-Swift CEO Dave Jackson said in April. “Every vocation seems short on labor.” And trucking “seems to have a disproportionate number of baby boomers still as a significant portion of our workforce. We shouldn’t jump to the conclusion that these new trucks will find their way into the marketplace immediately with the driver.”

The question is, how do shippers, especially larger businesses shipping higher volumes, build bridges that can connect them to that otherwise hidden pool of capacity? The answer may lie in technology developed by 3PLs and brokers and digital marketplaces such as Convoy.com, Uber Freight, Trucker Path, and NEXT Trucking. Many of these drivers are equipped with more and better technology than was available a decade ago to help them manage their business.

At the same time, though, there is no definitive answer on how much capacity is untapped by the traditional third-party logistics providers and whether these technology platforms are finding new drivers as much as adding known drivers onto another platform.

There is also the labor perspective that the driver shortage is a pay shortage and that if annual salaries were high enough, every single piece of freight would move, even with the ELDs. Whether the threshold is $70,000 or $100,000, the number is well short of what the average driver currently makes.

For the shipper, the reality is the storm front is now here. Strong economic growth means more freight is on the move, but drivers cannot accomplish as much in an average workday operating on an electronic log unless they can quickly move in and out of the docks.

The answers exist, but shippers must ask themselves tough questions about what they are willing to do to survive the market storm.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @ariashe_joc

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter:@wbcassidy_joc.

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