US truck, intermodal pricing bump against record highs

US truck, intermodal pricing bump against record highs

A truck travels on a US road.

Most shippers say they can’t remember a US transportation market with capacity as tight and pricing as extreme. And shippers say securing capacity is still their priority, despite rates rising by double digits. Photo credit: Shutterstock.com.

Trucking analysts are running out of superlatives and stretching farther for comparisons to describe the current US trucking market, as truckload spot, contract rates, and less-than-truckload (LTL) rates continue to climb, pulling up intermodal rail pricing as they rise.

Initially, the current bull market for trucking was compared to the surge in freight demand and pricing from the second to fourth quarter of 2014. As that comparison paled, industry experts invoked the boom of 2003 to 2005. Now even that comparison seems inadequate.

“We believe that this is the strongest normalized percentage level of [truckload] pricing achieved since deregulation,” Donald Broughton, analyst and commentator for the Cass Information Systems transportation indices, said Monday when releasing Cass’s April data.

Shippers can’t remember a modern US truck market as tight

In person and in quarterly earnings reports, shippers back that claim. Most say they can’t remember a US transportation market with capacity as tight and pricing as extreme. And shippers say securing capacity is still their priority, despite rates rising by double digits.

Broughton referred to the Cass Truckload Linehaul Index, and by “normalized” he meant excluding extreme periods of recovery from recession. The truckload linehaul index, which measures fluctuations in pricing sans fuel surcharges, jumped 8.2 percent year over year in April.

To say current truckload price increases are the strongest since deregulation is basically saying that they are the strongest ever, as deregulation in 1980 practically created the modern irregular route truckload business by lifting US restrictions on truck pricing, routes, and services.

That 8.2 percent year-over-year gain is the largest for the index to date. (Its base year is 2005.) The second largest, 7.9 percent, came in January 2015. And although the pricing wave that began in early 2014 ebbed after that, the current tsunami shows no signs of receding.

The Cass Truckload Linehaul Index has not only been positive now for 13 consecutive months, but the strength is continuing, Broughton said. “Our realized contract pricing forecast for 2018 is 6 to 8 percent [an increase], and current data is clearly signaling that the risk to our estimate may be to the upside,” he said. “The current strength being reported in spot rates is leading us to believe contract pricing rates should keep rates in positive territory well throughout 2018.”

Truck price increases ripple across transportation modes

As spot and contract truckload rates rise on the back of constrained truck capacity, pricing in other transportation sectors follows. The Cass Intermodal Pricing Index rose 6.6 percent year over year in April and was just short of an all-time record high for the index in March.

“Tight truckload capacity and higher diesel prices are creating incremental demand and pricing power for domestic intermodal,” Broughton said. The 6.6 percent increase in intermodal rail rates [including fuel surcharges] in April was the best reported by Cass since January 2012, when the index rose 7.2 percent, following an 8.4 percent jump in December 2011.

However, intermodal spot market rates are climbing at an even faster pace. Domestic intermodal spot rates were up 53.3 percent from a year ago in the week that ended May 15, and were up 21.8 percent from 90 days ago, according to Intek Freight and Logistics.

Outbound spot intermodal rates from Southern California continue to climb, Intek president and CEO Rick LaGore said in his blog on May 17. “[Union Pacific Railroad] announced last week it would not be offering new, committed rates out of Los Angeles,” LaGore said.

However, the largest US railroad will still offer spot rates from the largest US port complex “as capacity allowed,” according to LaGore. That’s a clear sign that capacity of all kinds commands a high price as freight demand continues to exceed available space for freight in the United States.

Publicly owned LTL carrier pricing power holding up

First-quarter earnings reports show publicly owned LTL carriers retain pricing power as well, though rate hikes likely average in the mid-single digits, rather than low double-digit percentages. LTL trucking companies are raising contract and general tariff rates.

Multiregional LTL carrier Saia, for example, reported increases in contract rates averaged 7.6 percent year over year in the quarter. “The rate environment remains constructive,” Rick O’Dell, Saia’s president and CEO, said April 27. Saia’s revenue rose 22 percent to $393 million in the quarter, while LTL shipments and tonnage rose 8.4 percent and 12.2 percent, respectively.

Old Dominion Freight Line (ODFL) on Monday said it would hike general tariff rates charged to non-contractual customers 4.9 percent on average June 4, a signal the LTL market isn’t slowing.

ODFL’s general rate increase is well-timed, following a 10.5 percent increase in the carrier’s LTL shipments in the first quarter, said Satish Jindel, president of SJ Consulting Group. “Timing is a function of market demand,” he said. “This year is a year-long Christmas for LTL carriers.”

For shippers, it may feel more like a perpetual Lent. Some of the largest US shippers acknowledged higher freight costs pinched their budgets and profits in the first quarter. Heavy equipment manufacturer Deere and Company on Friday said it would use “pricing actions” to compensate for higher freight costs in its agriculture, construction, and forestry businesses.

Deere “benefited from higher shipment volumes, partially offset by higher [research and development costs] as well as increases in production costs, comprised largely of higher freight and material costs,” Brent Norwood, manager of investor communications, told analysts.

How much of the higher freight tab will shippers pass on to their customers? Price inflation doesn’t worry Jindel. “When shippers are raising prices, it’s music to my ears,” he said, “because trucking shouldn’t be subsidizing cheap prices for products people need to buy.”

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