Trucking and, in fact, all US surface transportation capacity is tight in early 2018. Shippers are finding it challenging to move freight within North America, and transportation rates are rising. The questions are: Why? How long will this last? What can shippers and exporters and importers do about it? This slideshow presents some observations, analysis, and suggestions.
Capacity is tight not just in the truckload market, but in the drayage, less-than-truckload (LTL), intermodal rail, and warehousing markets. Most sources say this current contraction is more like what the industry saw in 2004 to 2005 than in 2014. Sustained economic growth is leading to sustained capacity problems. The good news is manufacturers and retailers are producing or selling and importing or shipping more. The bad news is that it is harder and more costly to bring goods to market. Shippers are being asked to move goods more quickly, while tight capacity slows them down.
This is not an ordinary market cycle in transportation. The industry has seen these cycles, notably the two soft patches in the current nine-year expansion. GDP goes up and down. But this time the endemic lack of qualified truck drivers, tighter enforcement of driver work rules, and the economic and operational changes wrought by e-commerce are three factors raising the floor for the transportation marketplace and creating new challenges for shippers. The problems the industry is facing in early 2018 will probably be around for some time to come.
Regarding truck pricing, truckload contract rates apparently are rising by anywhere from the high single digits to double digits. Spot market rates are still up 30 percent or more year over year. And this is before the real spring freight peak hits the market, and the produce season gets under way. Intermodal rates are rising too. Carriers are getting more sophisticated when it comes to costing and pricing and focusing on specific lanes. And they are less and less willing to take unprofitable freight in one lane and balance that against another lane.
The truck market seemed to flip a switch in September, as the impact of hurricanes Harvey and Irma slammed into rising freight demand as the economy began to expand faster. The result was what many saw as an almost overnight transformation of the truckload market from roughly balanced to extremely tight. FTR estimates truckload utilization rates topped 100 percent last autumn. Tellingly, large truckload carriers began to report they were consistently overbooked, some by as much as 130 percent before the day even starts.
Truckstop.com made an interesting discovery last autumn. The amount of partial truckload freight moved through their load boards in the second half more than doubled, with daily volume rising to 20,000 to 30,000 partial loads out of a total of 500,000 shipments per day. Shippers had such high demand they could not wait to build full truckloads. If one depends on large truckload carriers to ship freight, expect to see tight capacity and higher rates for some time. With their capacity still about 20 percent below pre-recession levels, they cannot add enough trucks and drivers.
As tight as capacity was last autumn, it got even tighter after Dec. 18, when the electronic logging device (ELD) mandate took effect. The ELD mandate is having a bigger impact on trucking and supply chains than expected. Regarding how much capacity contraction is attributable to ELDs, Zipline Logistics did a study of transit times on various routes based on data from 40 shippers before and after the ELD mandate. On lanes of 450 to 550 miles, transit times increased 16 percent post-mandate, a four-hour gain. That is enough to make a one-day trip a two-day trip.
The ELD mandate lifted the supply chain rug to reveal a multitude of inefficiencies swept under the carpet. Most of those inefficiencies were shifted straight to the weakest point in the supply chain, the driver. Shippers have made things easier for themselves by making life harder for truckers, and are now paying for it. That has to change, if the driver shortage is ever going to end. Shippers that want to secure capacity need to be driver-friendly first, carrier-friendly second. Truckers also need to rethink transit times and delivery promises to receivers in light of the ELD era.
As the transit time map for goods moving across North America is redrawn, the industry is bound to see some modal change. Because of a lack of drivers, and service issues in other modes, the ability of shippers to move freight from one mode to another is effectively limited. Intermodal still requires a drayage driver at each end of the track. E-commerce demand is also changing the map, forcing some shift among modes and sectors. It is hard to say how much, but it is there. LTL carriers are picking up heavier shipments and more e-commerce freight.
Regarding whether capacity is tight, shrinking, or just imbalanced, there is evidence that points to the latter. QualifiedCarriers.com has reported the number of motor carriers and trucks has grown, and grown significantly, since the last recession. But the growth is mainly in the 1 to 6 truck fleet segment of the market, not among larger carriers. The problem is, large shippers tend to use large carriers and have few of them in their routing guides. The 50 largest US trucking operators command about 25 percent or a little less of total for-hire trucking revenue.
There have been reports that record new truck orders will soon restore equilibrium in truck capacity, bringing rates down. This is unlikely. For one, net orders are a good measure of trucking sentiment, but not capacity. Trucks ordered now will not show up until much later this year. There is the issue of cancellations — how many truck orders will be dropped because of a lack of drivers? How many of these trucks are replacement models, and how many of them will go into specialized services rather than general over-the-road work?
Look at truck registrations, tracked by IHS Markit, as a measure of change in capacity. They were up 40 percent at the end of last year, on a very weak comparison with late 2016. Even that 40 percent increase in registrations, reflecting trucks on the road, not order boards, did not avert the capacity contraction. Numbers did spike but evened out.
More and more shippers are turning to dedicated trucking to source and secure capacity. Trucking companies know this. That is why they are expanding their dedicated fleets and shrinking their over-the-road fleets. Even LTL companies are offering more “dedicated LTL” services. Technology is key to doing this. The industry is in the midst of an explosion of transportation technology enabled by the internet and the smartphone. In an increasingly real-time world, it is beginning to add automation and artificial intelligence or machine learning to the mix.
Time is a key element of capacity. It has been ignored as the industry focuses on drivers, trucks, and containers and builds leaner, more efficient, faster supply chains that suck time out of everything driving. So now, when a driver comes up short on hours, the impact on the supply chain is greater than expected. Shippers focused on the driver’s impact on their business, not their impact on the driver. That is why even shorter haul runs are running afoul of the ELD mandate. Shippers need to look for ways to create “buffers” that give drivers more time.
Larger US shippers heavily dependent on large trucking firms need to rethink their carrier programs and build a bigger, more diversified carrier base. They also need to work more closely with their core carriers and with core brokers and third-party logistics providers (3PLs). The 3PL or broker cannot be just the last resort in the routing guide. Core 3PL programs and diversified motor carrier sourcing strategies are needed, and that is just a start on the road to securing capacity.