US shippers' surface transport concern is capacity, not price

US shippers' surface transport concern is capacity, not price

The US economy is strengthening — something that is likely to increase demand for transport services. Photo credit: Shutterstock.

Capacity, not price, is king once again, at least temporarily, as shippers sweat to find and secure space for their freight on highways and rails in 2018. Beyond normal seasonal fluctuations, there is little sign elevated freight demand will subside soon.

As a result, expect calls for collaboration throughout the supply chain, but especially between shippers and their trucking partners, to grow louder as the year progresses, especially if quarterly GDP expands at a 3 percent clip or better this spring.

Such collaboration is the best way for shippers to mitigate higher transportation costs, which are likely to be inevitable in 2018, shipping, logistics, and transportation executives say. “The only unresolved issue is the magnitude of the increases,” Mike Regan, chief relationship officer of TranzAct Technologies and advocacy chair for National Shippers Strategic Transportation Council (NASSTRAC), said in a Nov. 14 webinar. 

The tone of shipper-carrier negotiations changed dramatically last autumn, trucking and rail executives said, as stronger-than-expected growth in the US economy, the aftershock of hurricanes Harvey and Irma, and higher holiday consumer demand put a temporary chokehold on truck capacity. That grip relaxed as the storms receded, but not completely.

“Customers are anxious to secure capacity,” Darren Hawkins, president of national less-than-truckload (LTL) carrier YRC Freight, said in November. “There’s been a little bit of sticker shock out there. The market was already tight, prior to the hurricanes, and they amplified the situation. That drove the spot market to some interesting times like we haven’t seen in years.”

Conversations with shipper customers last autumn “were much more centered around securing capacity than just ensuring pricing is what they want,” Hawkins said at the JOC Inland Distribution Conference in November. Other executives at the three-day event agreed. 

“It’s capacity first, price second,” said Andrew Fuller, assistant vice president of domestic intermodal at Canadian National Railway. CN experienced “a demand surprise” last year, when US-Canada cross-border intermodal demand doubled from what the railroad forecast. “We’ve added 15 percent more capacity in Toronto, 50 percent more in Detroit,” Fuller said at the JOC event in Atlanta. “It’s all about working together to bring capacity online in 2018.”

Capacity is not just an issue in the truckload, intermodal, or LTL sectors. Shippers complain of tighter capacity across the supply chain, from seaports to warehouses to intermodal yards. 

“We’ve had three or four intermodal carriers come back to us and say they’re at capacity,” said John Janson, global logistics director at apparel company SanMar. When capacity tightened, Janson said at the conference, it happened quickly, complicating Seattle-based SanMar’s eastbound supply chain. “We’re faced with severe challenges on the West Coast,” he said.

With fewer shipping lines sending ocean containers inland, more transloading near ports puts greater stress on available truckload capacity, Janson said. “We’re trying to get creative around trucking, to incentivize our carriers. We keep it simple: we try not to tie your equipment up, we have year-round volume, and we pay our bills. But even with that we have problems.”

“As much as shippers were focused on price in the last few years, they’re now very focused on actual access to capacity and service and reliability,” Bradley S. Jacobs, chairman and CEO of XPO Logistics, said in an interview in November. In the wake of the hurricanes, “our truck brokerage business was off the charts,” Jacobs said. “That continued in October.”

Some of that pressure eased by November, but in many places capacity remained in high demand. “The West Coast is extremely tight,” Jacobs said. “In many California metro markets, [truckload spot] rates have soared up to 20 percent.” XPO reached further into the spot markets as demand soared. “We’re now 50 percent spot market. We used to be 20 percent,” he said.

Tight capacity and rising transportation rates are a sign of faster economic growth. US real GDP expanded 3.3 percent in the third quarter, the US Bureau of Economic Analysis said Nov. 29, following a 3.1 percent increase in the second quarter, making the mid-year quarters of 2017 the best since 2014. Faster economic growth is welcome, especially as the US economy has expanded at an average annual rate of only 2.1 percent since the end of the recession in 2009. Growth closer to 3 percent, however, would put even more pressure on transportation capacity on roads and rails as well as warehousing and distribution space.

"All of our customers are saying fasten your seatbelts,” Jacobs said as 2017 drew to a close. 

Further, look for a bull rush in last-mile holiday deliveries. XPO opened eight new last-mile hubs last autumn, bringing its total number of last-mile hubs in the United States to 53. “You’ve got 2 to 3 percent economic growth in most countries and yet [transportation] capacity is going down,” he said. “The see-saw has moved toward an imbalance, with tight capacity and upward demand.” 

Barring an unexpected downturn in the US economy, which does not seem to be in the cards for 2018, at least, that imbalance is not likely to be corrected soon. “It’s just a supply constrained environment and there’s no easy way out,” Derek Leathers, president and CEO of truckload carrier Werner Enterprises, said in a Nov. 14 webinar by NASSTRAC and TranzAct Technologies. “In terms of supply, we’re still below where we were pre-recession,” he said.

Capacity levels in the publicly owned truckload sector, mainly large companies, are about 19 percent below what they were before the 2008 to 2009 recession, Leathers said. “That’s been masked by bloated inventories and advances in packages that allowed retailers to fit more in a trailer, but if you look across the last several years, you see some increased reduction in fleets.”

Those companies “shrank to survive,” Leathers said, selling or scrapping older equipment and replacing fewer trucks. Truck sales surged in 2014 and 2015, buoyed by stronger economic growth, but cancellations jumped in 2016, as the US economy hit its latest soft patch.

Truck orders took off again as the economy sped up last autumn, with October Class 8 heavy truck orders rising 161 percent year over year on an easy comparison with a depressed 2016 market statistic, according to FTR. With production backlogs, those trucks will reach motor carriers this year, perhaps putting some flexibility back into trucking operations that will be hard pressed to maintain truck utilization rates as the US electronic logging mandate is enforced.

The JOC Truckload Capacity Index, recently adjusted to reflect truckload carrier mergers, rose less than 1 percentage point in the third quarter, to 79.3, indicating truck counts at the large publicly owned carriers in the JOC index group were more than 20 percent below 2006 levels.

“Over the last 12 months, American Trucking Associations [ATA] data show large fleets have shrunk and small fleets have held flat” in terms of size, Leathers said. “The reasons are the returns aren’t there, and there are obstacles to growth, the leading one being the driver shortage.”

Werner, the sixth-largest US truckload carrier ranked by revenue, increased its truck count 2 percent year over year in the third quarter, bringing its total number of tractors up to 7,315. That is still slightly below its most recent quarterly peak truck count of 7,450 in the fourth quarter of 2015, and 11 percent below its count of 8,250 tractors in the fourth quarter of 2007.

The qualified drivers needed to operate those trucks are elusive, and the biggest constraint on expanding capacity, Leathers said. By September, Werner already had received more than 100,000 applications for truck driving jobs in 2017 alone. “That sounds like there’s no shortage, but we hired less than 2.5 percent of them,” he said. “There are drivers out there, people who have [commercial drivers licenses], but finding the professional driver is more difficult than ever.”

That is despite increases in truck driver pay. Truck driver wages and benefits grew for the fourth straight year in 2016, rising 7.6 percent on average, the American Transportation Research Institute (ATRI) said in its annual analysis of trucking operational costs, released in October. The 7.6 percent average increase reported by ATRI, an affiliate of ATA, was the largest since 2010, when the initial economic recovery pushed driver-related costs up 14.5 percent. ATRI launched its annual study in 2008.

In a letter to customers last autumn, J.B. Hunt Transport Services executives warned transportation costs could rise 10 percent or more, largely because of difficulties finding qualified drivers. “The core issue is centered on qualified driver availability,” the J.B. Hunt executives said.

One reason for what Leathers and other trucking executives call a worsening shortage is the 4.1 percent US unemployment rate. That rate is close to, if not already in the range, of what economists consider “full employment,” meaning anyone who wants a job can find one. 

The JOC For-Hire Trucking Employment Index hit a ceiling of 101.8 in April and fluctuated between that number and 101.7 through October. That indicates trucking employment is actually 1.8 percent higher than pre-recession levels in late 2006 and that carriers are having a hard time bringing new employees on board. Higher paying jobs are now available in industries such as construction, which added 11,000 jobs in October, while trucking employment was flat.

That month, the average hourly wage for transportation and warehousing was $21.03, while construction workers earned $26.28 an hour, according to the US Bureau of Labor Statistics. Construction employment increased in 243 out of 358 metro areas between October 2016 and October 2017, according to the Associated General Contractors of America, with cities in California’s Inland Empire leading the way with 14,700 jobs, a 15 percent increase.

“We know that as housing [construction] starts to increase, truck drivers leave the industry and pound nails,” Bob Biesterfeld, president of North American Surface Transportation at C.H. Robinson Worldwide, said at a logistics conference last autumn. “I’m concerned about what the second and third quarter look like [in 2018] as drivers turn to construction.”

“The driver constraint is a real thing” for LTL carriers, too, Rob Estes, president of Estes Express Lines, said during the NASSTRAC/TranzAct webinar. “We worked very hard in 2016 and 2017 to add drivers, and we’re at net zero. There’s a competition among LTL carriers to bring drivers on, and we have an aging driver population that’s exiting the market and retiring.”

At the same time, freight volume is rising, and LTL shipments are getting heavier, Estes said. 

"We have seen shipment weight go up about 100 pounds since the beginning of 2017,” he said in November. “That’s about a 9 percent increase, which is significant. As we try to sell space, if the density of freight doesn’t get any better, that 9 percent takes up more room.” And that is a further cut to available capacity. The end result is the heftiest rate hikes in years.

“Shippers are being caught off guard by carrier pricing decisions,” Regan said. Anecdotal reports indicate carriers are seeking price hikes ranging from the low single digits up toward 20 percent, depending on the customer, lane, and other factors. “Certainly, the people who have looked out for us, we look at them a whole lot differently,” Estes said. “Their increases will be in the 3 to 4 percent range.” Shippers that take a more “transactional” approach will get higher rate hikes. “We look aggressively at shippers who are labor intensive on the pickup or delivery end,” Estes said. “If somebody wants our driver to shrink wrap their freight and do the heavy lifting so they don’t have to hire a $15 an hour person on the dock, they’re really fooling themselves.”

Several sources document higher spending by shippers to move freight in the second half of 2017. In the third quarter, the US Bank National Spend Index, which measures shipper expenditures, jumped 8.3 percent from the second quarter and 12.6 percent year over year. That was the largest quarter-to-quarter gain since the end of 2014 and the biggest year-over-year leap since the third quarter of 2011, US Bank said. In October, the Cass Freight Shipper Expenditures Index rose 3.9 percent from September and 11.2 percent year over year.

Another measure of transportation costs, the Cass Truckload Linehaul Index, rose 5.5 percent year over year in October, hitting an all-time high. “Linehaul costs have not only been up over 2016 for the last seven months, but these increases have been growing larger,” Donald Broughton, founder of Broughton Capital, said in his commentary on the Cass index.

Spot market truckload rates climbed even during the short Thanksgiving work week, pushing the national average spot dry van rate up 1 cent per mile to $2.07 for the week that ended Nov. 25, according to load board operator DAT Solutions. “Heading into December, the spot van outlook is strong and rates from key markets are surging,” DAT said in a statement Nov. 28.

With capacity priced at a premium, shippers will be challenged to “create” capacity in 2018, not by building or buying tractors, trailers, or containers, but by finding and eliminating inefficiencies that eat into drivers’ time and identifying better ways to utilize existing capacity.

“Collaboration is how you create capacity, especially in times like this,” CN’s Fuller said. “We had a major retailer importing freight unload containers and leave them at a [distribution center] in western Canada. We’re working with the steamship line to find export opportunities there. That collaboration involves many stakeholders but it creates capacity,” he said.

When it comes to drivers, “We hear two common complaints,” said Leathers. “The first is ‘Shippers delay me too often,’ and, ‘I don’t feel properly compensated.’ The second is, ‘I’m always being asked to do things that are untenable.’” He also said shippers that better forecast how much capacity they need, and when, will be more likely to get that capacity at a good price.

“Last year, one of my shippers told me, ‘Your team is absolutely crushing it for us during peak season right now.’ My team had been telling me in April and May of that year how good this customer’s predictive forecasts were,” he said. “When you can predict those surges in orders and demand, then carriers can perform, because we can plan to that number.”

Advances in technology are helping shippers get there. “The biggest change for us has been the introduction of a lot of data scientists to Home Depot,” Michelle Livingstone, vice president of transportation for the retailer, said at the JOC Inland Distribution Conference. “That’s made a huge difference in the decisions we can make and the quality of those decisions. When you have a data scientist and an operations person sitting side by side, great things happen.” 

Contact William B. Cassidy at and follow him on Twitter:@wbcassidy_joc.

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