Demand for dedicated US truckload capacity is reaching levels unseen in more than a decade, according to fleet executives, an indication that shippers are willing to sign multi-year contracts to ensure that a truck and a driver is available every week.
Shippers have told JOC.com that their rollover freight — loads not picked up on the scheduled day to ship — is rising. The freight may move the following day, but the additional time complicates shipping schedules and adds to costs. To prevent these delays, shippers are exploring several capacity alternatives: intermodal, less-than-truckload, and dedicated contract carriage.
The dedicated option requires a shipper to sign a long-term contract to ensure the guaranteed capacity. But given the US economic outlook and tight truckload capacity, such a commitment can make sense for shippers.
“We currently have more dedicated demand in the pipeline than we’ve seen in the last 10 years,” Werner Enterprises CEO Derek Leathers told JOC.com. “As rates have climbed, many shippers who were able to previously move freight one way at a low cost have now realized that dedicated is a better long-term solution.”
An evaluation of US truck sector’s supply-demand imbalance
Some transportation executives say the supply imbalance is the worst it has been since 2004, while others say it is the most out-of-whack market in history. One reason is the electronic-logging device (ELD) mandate, which strictly caps the hours-of-service regulations. Until now, drivers would manipulate their paper logs to make more money. Going over the legally allowed limit — 660 minutes behind the wheel — enabled a driver to accomplish more per day, thus increasing their paychecks.
While daily truck productivity declines with ELDs, the US economy is growing — meaning more goods are moving through the supply chain than in the past.
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 consecutive quarterly growth rates for the United States since the end of the Great Recession in June 2009.
GDP grew 2.3 percent in the first quarter, the first estimate by the US Bureau of Economic Analysis issued April 27, which will be revised twice more and could move upward.
Spot market rates have shot up 20 to 35 percent in 2018 and capacity contracts are up high single digits to low double digits over last year. Capacity contracts do not guarantee a truck, but rather dictate a per-mile rate that the shipper will pay for the next available driver. In any given day, however, fleets are already overbooked before the office even opens.
US trucking in April: a lull, but not for long
David Parker, CEO of Covenant Transport Group, said the April lull in demand was a welcome relief.
“Instead of being 125 percent booked like we have been, maybe we’re 110 percent booked, which reduces the pressure you get from your customers,” he said on an April earnings call. Leathers said that Werner is often 130 percent booked when he gets up in the morning. For shippers, this translates into hours on the phone to find a truck.
But dedicated contract carriage guarantees a predetermined number of trucks and a set roster of drivers exclusive to the shipper.
Sidney Brown, CEO of NFI Industries, recalled a conversation last month with a shipper in the manufacturing sector about the issue.
“I asked him, ‘How much time do you have to chase down available trucks?’ He said ‘That’s my problem. I’m spending a lot of time and I don’t really have the time, so that’s why I’m thinking about reconfiguring some of my freight into a dedicated model as opposed to a one-way model’,” Brown said. “Part of it is whether the shipper has the bandwidth to navigate the one-way market.”
NFI has more than 3,300 dedicated power units and plans to grow the fleet 10 percent this year. Werner Enterprises increased its dedicated truck size 8.6 percent on a year-over-year basis in the first quarter to 4,030 trucks. Covenant operates nearly 1,000 dedicated trucks.
The dedicated carriage solution: the upside and downside
There are tradeoffs in exiting the one-way truckload market to build a dedicated carriage solution.
Shippers must be willing to enter into multi-year contracts to get the guarantee of trucks. Covenant and Werner’s typical contract length runs two or three years, and sometimes longer. NFI typically requires three to five-year contracts. Lily Dedicated Logistics Systems, which exclusively operates in dedicated trucking, operates on five-year agreements.
“We’ve had folks come to us recently looking to do a one-year deal or a two-year deal, looking for capacity because they cannot find anyone to haul their product, but it doesn’t meet what we do and so we turn it down,” said John Simourian II, CEO of Lily Dedicated.
Price is also something shippers must carefully evaluate before making a decision. Dedicated will cost less than a one-way operation on per-mile basis, but a shipper is paying for a roundtrip in most dedicated contracts.
For example, a 600-mile haul may cost $1.25 to $1.50 per mile on a dedicated contract versus $2.00 to $2.25 on a one-way arrangement. The headhaul will total $750 to $900 in the dedicated solution and $1,200 to $1,350 on the one-way option. The dedicated solution, however, would double to $1,500 to $1,800 if the shipper pays for the backhaul.
There are also fixed costs built into the contracts to ensure that the trucking company and its drivers are covered in case of a sudden downshifts in the economy.
In some markets, the carrier will offer a flat weekly rate to the shipper for use of the truck and its driver.
Unlike the high turnover in the over-the-road sector, dedicated drivers are usually happy in their jobs because the pay is steady and they return home each day, according to fleet executives. So trucking companies recommend against a dedicated solution on longer lengths of haul.
Leathers said only one in 10 customers seeking dedicated capacity meet all the criteria for Werner's dedicated service.
“We are very careful with onboarding new dedicated opportunities. I think that’s an indication of the honesty that is needed both ways [between shipper and carrier],” he said. “Implementing a dedicated solution takes time, effort, and specific driver recruitment and hiring. We don’t want to do that if it’s not in the best interest of the shipper or Werner and the effort will ultimately fail.”
Contact Ari Ashe at firstname.lastname@example.org and follow him on Twitter: @ariashe_joc.