Filled to capacity: increasing truckload freight volumes in a market where trucks are already bursting at the seams? Sounds like rate hikes ahead! (Truckload Services).
A number of circumstances have contributed to the truckload market's capacity crunch, among them a rash of departures by small and medium carriers, continued programs of freight consolidation by large shippers, and carriers' hesitation to purchase vehicles equipped with the new government-mandated cleaner-burning engines. And it doesn't appear that things will change anytime soon. Unless the economy takes a precipitous dive, truckload capacity is expected to remain tight for the next 12 months. And for shippers, that almost certainly means rate hikes ahead.
TL Service in Demand
For now at least, it's generally agreed that the truckload sector is experiencing a real crunch. "Capacity is pretty tight," reports Don Schneider, president of Green Bay, Wis.-based Schneider National Inc., the nation's largest truckload hauler. "If you were to ask most shippers out there, they would give you the same story.
The imbalance between supply and demand has pushed the market nearly to its limits. The truckload loads index developed by the American Trucking Associations provides evidence of that. Derived from a sampling of carrier reports, the index is a relative measure of the number of truckloads being transported each month. Seven years ago, the index hovered just above 110. It then rose steadily during the business boom of the late '90s, hitting a high of 165 in June '99 before it slipped downward and leveled off in the 150 range. Late last summer, the index turned upward again, hitting an all-time high of 182.1 in November. Although the index dropped back into the 160 range in December, it turned upward in March and soared back up to the 170s. It continued climbing through May, the last month for which figures are available, reaching 176.8 that month. (See graph at right.)
Market dynamics have played a big role in the developing capacity crisis. For one thing, there are fewer players right now than there were a mere year ago. In the last 12 months, a number of small and medium-sized carriers left the market, defeated by escalating insurance costs and diesel fuel prices. (See graph on page 40 for a look at how diesel prices have fluctuated over the past year.)
Though diesel fuel prices have seen wide variations in the last 12 months, rising insurance premiums have posed a bigger threat to the carriers' precarious financial stability. Fallout from the Sept. 11 terrorist attacks resulted in heavy losses for insurance corporations, forcing them to raise premiums for businesses of all types. Because interstate motor carriers are required by federal law to carry a minimum level of coverage to operate, truckers had no choice but to absorb hefty hikes this past year. Bigger carriers with good safety records have been better able to handle those insurance hikes than the little guys. "The insurance issue will continue to put tremendous pressure on smaller carriers who are forced to increase deductibles and lower their umbrella coverage," says Bill Riley, chief financial officer for Swift Transportation in Phoenix, one of the "big guys" in the truckload market.
In fact, rising costs have already taken their toll on independent truckers. Industry expert Robert V. Delaney, who publishes an annual report on the logistics market, says that in the past two years, an estimated 60,000 owner-operators have closed their doors. The departure of numerous smaller carriers has had serious implications for what was already a fragmented truckload market. Small, independent truckers have dominated the marketplace since federal motor carrier deregulation opened up the nation's highways in the '80s. In 2000, for example, the Wall Street investment firm Bear, Sterns & Co. estimated that while the for-hire segment of the truckload market amounted to $120 billion, the top 27 publicly held truckload carriers only accounted for 8 percent of that total.
The Big Get Bigger
Ironically, the capacity crunch has had the biggest impact on large shippers, which have helped create that situation for themselves. Over the past decade, large corporations have embraced the "core carrier concept, tendering their truckload business on a contract basis to a limited number of established truckers with track records of reliable delivery. "Shippers want to go with the guys who will be around and have operations with high on-time performance rates," comments David Ross, an analyst who follows transportation for Legg Mason Inc. in Baltimore.
The big truckload carriers tend to be the prime beneficiaries of these core-carrier arrangements. Because these agreements usually guarantee the carrier a set volume of freight on a specific lane, the carrier can plan ahead and balance outgoing and return trips to avoid moving empty trailers back to the terminal.
Because big carriers can operate more efficiently than their smaller brethren, they are in a better position to withstand rising cost pressures such as insurance or diesel fuel price hikes. "Saving a few cents here and there affects operating margins," notes Bill Rennicke, a vice president at the Lexington, Mass.-based consulting firm Mercer Management.
The bigger carriers are also better able to afford the information systems that large shippers now require for tracking freight movements. "[Investing in] information systems is a struggle for many carriers if they are not strong, profitable companies," says Jeffrey Crowe, president of the truckload carrier Landstar System Inc. of Jacksonville, Fla. "The customer wants to know who the driver of the truck is, where the truck is, where the trailer is, and what's in the trailer, and know it on a continuing basis." Crowe, by the way, predicts that the informational demands on carriers will only get tougher as the federal government begins making similar demands for reasons of national security.
Shippers have unintentionally contributed to their own difficulties by shifting their distribution patterns over the last few years. In an effort to contain transportation costs, sophisticated logistics managers have undertaken initiatives to consolidate less-than-truckload shipments into full truckloads. Over the past decade, they've deployed transportation management software that analyzes freight shipping patterns to find truckload shipping opportunities, or turned to third-party logistics companies for load consolidation.
"We encourage our clients to consider [truckload consolidation]," confirms Greg Stachura, president of GSA International, a truckload broker and third-party logistics company based in Livonia, Mich. Stachura says his company is increasingly consolidating less-than-truckload shipments into full truckloads for retail chains. "Even if [an LTL] discount applies," he explains, "it's cheaper for them to ship their goods as a truckload."
At the same time that shippers are creating more truckloads, the truckers themselves are deferring equipment purchases, citing concerns about the roadworthiness of new tractors with the cleaner-burning diesel engines mandated by the Environmental Protection Agency (EPA). "In October, the diesel equipment manufacturers have to comply with the EPA's new emission requirements," Schneider says. "The [engines] have not been road-tested. The big issue is reliability. You don't want to put these engines into trucks and have them break down."
Despite reports that truckers were buying up tractors with oldermodel engines this spring to beat the EPA rule, many analysts believe that motor carriers have failed to buy enough power units and trailers to keep up with the growth in truckload demand. But that's almost certainly a deliberate decision on the carriers' part. Having been burned in the past, carrier executives have learned that it's in the truckers' collective interest to hold off on equipment purchases to limit capacity. "Most of the carriers have more freight than they can handle," says Ross, "but they won't add equipment until they get their margins back. They plan on being more disciplined."
Rate Hikes Ahead
Should carriers successfully exercise that discipline, shippers can expect rate hikes. At the same time that truckload carriers are confronting mounting cost pressures, they are finally in a position to demand higher rates and make them stick. "With carriers facing high costs for paying drivers and buying trucks with new engines, rates are going to inch up. They have to," says Schneider. "Eventually, all these costs get passed on to the customer."
Rate increases, however, will be in the single digits, say most analysts. Depending on the customer, the nature of its business, and its shipping lanes, Legg Mason analyst Ross says, a shipper can expect to pay between 2 and 5 percent more for truckload freight shipments in the coming year. "Most [truckload] carriers are talking to their customers right now," he says, "asking for rate increases and getting those rate increases."
For his part, Greg Burns, a vice president of research at JP Morgan Chase in Manhattan, expects that truckload rates will go up 2 to 3 percent. He concedes, however, that not all of that will stick because a lot of the carriers have contracts.
The prospect of rate hikes notwithstanding, at least one carrier executive predicts that truckload haulers will face turbulent times in the coming year. Landstar's Crowe believes that many truckload carriers won't t survive the current tough market conditions. "You'll continue to see consolidation and bankruptcies in the surface transportation business because the cost drivers aren't going away," says Crowe. "It's going to be a sort-out time equal to or greater than motor carrier deregulation. We're in the midst of a lot of change."
The Top U.S. Truckload Carriers Schnedier National tops the list of the nation's largest truckload carriers, as ranked on the basis of revenue by Commercial Carrier Journal. Carrier 2001 revenue Schneider National $2.4 billion JB Hunt Transport $2.1 billion Swift Transportation $1.4 billion Werner Enterprises $1.27 billion New Bern Transportation $975 million U.S. Xpress Inc. $739 million Landstar Ranger $632 million Covenant Transport $547 million Prime $510 million Landstar Inway $459 million CR England $456 million
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