Truckload Capacity in 2014

Transcription

1 DAT Freight Rates Truckload Capacity in 2014 What s Causing the Capacity Crunch and What Can Shippers Do About It? By Don Thornton, Senior VP, DAT Solutions

2 Truckload Capacity in 2014 What s Causing the Capacity Crunch and What Can Shippers Do About It? By Don Thornton, Senior VP, DAT Solutions Executive Summary: Lessons from a Difficult Year Freight transportation capacity has been subjected to enormous pressure from a number of sources in the twelve months beginning July 1, Factors that constrained capacity and drove rates higher include new and more stringent regulations, extreme weather, increased operating costs, and a chronic shortage of experienced drivers. Some of these factors were predictable, but the resulting capacity disruptions and skyrocketing rates were an unpleasant surprise to many transportation and logistics professionals. In some cases, long-standing business relationships were jeopardized, as transportation providers and their customers struggled to explain and understand the impact of all these factors on capacity and pricing commitments. Shippers can prepare for future volatility in the transportation market by utilizing supply and demand, as well as, rate trend data for North American lanes to better forecast potential capacity crunches and the impact on rates. In addition, shippers need multilevel contingency plans that include strategic engagements with third-party logistics (3PL) providers. Most 3PLs are well positioned to help their shipper customers tap into more nimble sources of capacity on the spot market. With solid contingency plans and 3PLs support, the shippers transportation and logistics managers can minimize the risk of service failures and forecast transportation costs more accurately, under almost any combination of economic, regulatory and weather conditions. 2

3 What s Causing the Capacity Crunch? Extreme Q1 Weather Draws Attention to Capacity Disruptions Extreme winter weather paralyzed transportation providers from December 2013 through March 2014, depriving shippers of capacity in some of the nation s largest origin and destination markets. The recurring storms disrupted supply chains for months, wreaking havoc on business-critical inventory levels at manufacturing and retail businesses nationwide. The rate pressure was extraordinary. As measured from mid-march to mid-april, spot market rates exceeded contract rates for vans in 45% of lanes across the U.S. During the same period in previous years, that ratio fluctuated between 20% and 25%. Spot market rates are the rates paid by 3PLs and freight brokers to the carrier. The shipper typically pays an additional 10%, 15% or 20% to the broker, who secures the truck, arranges transportation and pays the carrier. Spot Market Buy Rates Exceed Contact Rates on 45% of Hauls in April and May Spot market rates exceeded contract rates on 45% of hauls from mid-april to mid- May. In previous years, between 20% and 25% of spot market rates were higher than contract rates. As shown in the map, states that were most affected were those that had pent-up demand following the extreme winter of Q1, and/or had a high volume of outbound freight for 12% 19% 56% 21% 46% 42% 10% 20% 10% 25% 31% 16% 30% 22% 55% 49% 54% 43% 54% 27% 43% 43% 55% 76% 31% 29% 55% 65% 62% 60% 40% 49% 60% 32% 61% 54% 31% 37% 39% 34% other reasons. 75% Shippers typically negotiate annual transportation contracts in Q1. At that time, Christmas is over, demand is slack, and capacity is abundant. Against this seasonal background, when spot market rates are typically at their lowest point of the year, transportation and logistics companies bid on the shippers requests for quotes (RFQ) and the coming year s contracts are solidified. 3

4 In 2014, that model broke down for many shippers and their transportation and logistics providers. Capacity was scarce in the first quarter because the storms were so severe and widespread; major cities were pummeled repeatedly in the Midwest, Northeast and even the Southeast. Carriers were able to negotiate high per-mile rates on exception freight during that period, but the weather cost them a large proportion of their loaded miles, reducing overall revenue. (Exception freight is freight outside the contractual arrangements between a shipper and carrier.) Shippers began the bid process intending to increase their 2014 transportation budgets by less than 5%, but carriers were inclined to hold out for bigger increases. Fleet owners and managers were preoccupied with lost revenues and spiraling costs. In that frame of mind, they were more likely than usual to seek larger rate increases and limit their commitments, preferring to bid only on freight that dovetailed well with other business opportunities. Carriers who took on suboptimal routes, perhaps as a favor to a good customer, began to impose strict limits on the number of those commitments at a given contract rate. Anything beyond the contracted number of loads per week, for example, might be subject to variable, market-based pricing. Industry analysts have estimated that as much as 40% of truck freight is arranged on an exception basis, and much of that is priced on a transactional basis using spot market rates. So-called exception freight may comprise a larger portion of trucking cargo than was previously estimated, increasing the relevance to shippers of spot market capacity and rates. Until recently, spot market freight and truck tonnage followed similar trendlines. But the winter storms of Q and Q caused capacity shortages that were compounded by the impact of HOS regulations, fleet bankruptcies, and driver shortages. Consequently, spot freight availability soared and has remained at record highs through Q U.S. Spot Market Freight Index & Truck Tonnage - June

5 Regulations Impair Fleet Productivity Commercial fleets had already absorbed productivity losses due to change in the Hours of Service (HOS) regulations that went into effect the previous July. Other federal and state regulations also impair fleet productivity, but the HOS rules have proved to be an especially difficult hurdle. Hours of Service (HOS) Since the new HOS rules were enacted in July 2013, fleets gave up an estimated 5% to 7% of their productivity on longer hauls. Drivers are permitted to be on duty for no more than 14 hours per day, with only 11 hours behind the wheel. A mandatory, 30-minute break must occur within the first eight hours. After seven days on duty, the driver must reset his clock with a 34-hour off-duty period that includes two segments from 1:00 AM to 5:00 AM. That last requirement is especially troublesome. The restart provision puts a disproportionate share of big trucks on the road in major metro areas during the morning rush hour. Timing mandatory breaks can also be tricky for long-haul drivers who are under time pressures and may not find legal, safe parking spots at precisely timed intervals. The combination of these rules has made it more difficult for drivers to operate safely while adhering to tight delivery schedules. The HOS-induced productivity loss led directly to a rate increase. Instead of a typical Q3 decline, rates rose when the new rule took effect in July 2013, and they remained elevated through the third quarter. The Perfect Storm: a) HOS introduced July 1, 2013, b) Winter Storms shift freight to spot market, and c) Spot market freight and rates remain elevated Van Line Haul Rates & Load-to-Truck Ratios - June

6 California Air Resources Board (CARB) It has become increasingly expensive for trucking companies to conduct business in California, and emissions controls from the California Air Resources Board (CARB) only add to carriers woes. The regulations are phased in according to the model year of the truck s power unit, with additional age-based restrictions on the Transportation Refrigeration Units (TRU) that control cargo temperature on both trucks and trains. Historically, the economic output of the Golden State has accounted for more than 12% of U.S. GDP, including more than 20% of the country s dairy products and most of its domestically grown fruit and vegetables. When harvests are curtailed, as they have been during the 2014 drought, produce may be transported through California from nearby states, as well as Mexico and South America. Every truck crossing the Golden State must comply with CARB emission standards, the strictest in the U.S. Even if they are not based in California, both the for-hire carrier and the company that hired that truck are held responsible for CARB compliance. Carriers who wish to do business in California must deploy their newer-model vehicles and TRUequipped trailers or purchase after-market devices to reduce emissions. Moving Ahead for Progress in the 21st Century (MAP-21) Until last year, some trucking companies extended their own capacity by occasionally brokering excess freight to other for-hire carriers. This allowed the original carrier to continue serving a good customer while earning a profit. Federal legislation called Moving Ahead for Progress in the 21st Century (MAP-21) required all freight brokers to secure a $75,000 bond up from $10,000 before the enforcement deadline of October 1, Carriers who wished to continue brokering freight after that date were required to establish a separate business entity for that purpose, and the new bond was part of the licensing process. MAP-21 affected capacity and rates in two ways. First, by discouraging fleets from brokering their own freight, the law reduced the margin of error at those companies and made them more wary of over committing their assets on a long-term basis. Second, the marginally profitable and/or part-time freight brokers were likely to surrender their brokerage authority, and the principals either left the industry or signed on with larger firms as salesmen or agents. Those who moved to larger companies were likely to follow pricing guidelines provided by the new employer. To the extent that larger companies offer more services or maintain higher margins, this trend also exerted upward pressure on rates. 6

7 Capacity is Further Reduced by Chronic Driver Shortages Experienced, professional truck drivers are a vanishing breed. The long-haul driver leads a solitary, mobile life full of stress and inconvenience. Drivers are typically paid by the mile, so any conditions that reduce fleet productivity also take a bite out of drivers paychecks. The profession requires dedication and experience, but few fleets offer apprenticeships, modified schedules or other enticements to attract young people. As a result, the average age of over-the-road drivers has climbed to 55 in recent years. The American Trucking Associations assert that the current shortfall of 30,000 truck drivers could widen to a gap of 200,000 in the next ten years. Driver turnover is high, especially at larger fleets. Trucking companies offer signing bonuses and other perks to woo employees away from the competition. It is common for carriers to have a number of unseated trucks that cannot be used for lack of trained drivers. Without drivers to operate the trucks they have now, these fleet owners are understandably reluctant to expand their businesses. Costs Rise Faster Than Rates Fuel, labor and equipment are the major cost components for any fleet, and all of those costs are trending up. Fuel costs have been hovering at or near $4.00 per gallon for more than a year, and the best drivers demand higher pay per mile, plus benefits and improved working conditions, to compensate for reduced productivity. Equipment costs rise every year, as do the expenses associated with tires, maintenance, repairs, insurance and other direct and indirect costs. On a per-mile basis, carriers today might require an average of $1.75 to $1.80 or more per mile for all miles, loaded and empty alike, in order to break even. For that reason, for-hire carriers cannot afford to run an empty truck, and a low rate can be acceptable in one direction only if a high-paying return trip boosts the round-trip average comfortably above a breakeven rate. Owner-operators might operate with less overhead, but they also lack the pricing power of a larger fleet. Further, these micro-fleets may not have the benefit of a steady stream of business directly from even a small shipper. Instead, they work with a handful of favored brokers or turn to trucking load boards to find freight. Such cargo is priced according to the prevailing market rate for each lane and trailer type. 7

8 How Shippers Can Gain Capacity Outsource Logistics for Access to Spot Market Capacity Many shippers are unaware that the spot freight market is even relevant to their business, when in fact it plays a critical but unseen role in their transportation planning. Whenever the shipper has freight that was not covered by a regularly scheduled, contracted carrier, the freight is likely to be moved with involvement by the spot market. Suppose the shipper is a retailer with a lean inventory policy. The retailer faces unexpected demand for a seasonal item, but two distribution centers are running low. Rather than move inventory from a different distribution center, the shipper re-orders the item from its manufacturer. The manufacturer does not have trucks available to move this previously unscheduled freight, so the retailer calls his contract carriers. They are also unavailable to handle the freight, which is an exception to their contract terms. After calling several carriers on the routing guide, the retailer s transportation manager calls a 3PL or freight broker, who accepts the job. The 3PL may have a routing guide as well, or the freight may be offered on to a broader network via a trucking load board, a matchmaking system where freight providers find available trucks and vice versa. In this way, the shipper indirectly gains access to a vast network of small, independent carriers on the spot market. Van Line Haul Rates & U.S. Freight Index - June Van rates track seasonal freight availability on the spot market. Extreme weather in Q created an atypical peak in volume and rates. $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun Van LH Rate U.S. Spot Mkt Freight Index (Y2K = 100) Reefer Line Haul Rates & U.S. Freight Index - June Rates peak in June for refrigerated vans, when average spot market rates (paid by 3PLs) typically exceed contract rates paid by shippers to carriers. $2.00 $1.90 $1.80 $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun Flatbed Line Haul Rates & U.S. Freight Index - June Flatbeds are in highest demand in spring and summer, and rates rise. Flatbed freight is associated with construction and excavation, when the ground is not frozen. 8 $2.00 $1.90 $1.80 $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 Reefer LH Rate U.S. Spot Mkt Freight Index (Y2K = 100) Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Flatbed LH Rate U.S. Spot Mkt Freight Index (Y2K = 100)

9 Validate Pricing against Prevailing Market Rates In recent years, as spot market pricing data has become readily available, savvy analysts are able to use this information to predict changes in shippers contract freight rates, often on a lane-by-lane basis. Even when shippers do not seek direct access to spot market capacity, shippers rates are strongly influenced by the same market forces that drive spot market rates. Shippers are slower to respond to these trends, however, because they typically accept bids and negotiate contracts only once or twice per year. The spot market, therefore, provides advance intelligence of trends in carrier capacity and pricing. This information, when included in even the simplest spreadsheet models, can help shippers, 3PLs and carriers to negotiate capacity levels for yearround availability at a sustainable price. Based on historical data, for example, a carrier might prepare to bid on the shipper s request for proposals (RFP) by first comparing his own pricing to the annual average rates in those lanes. The shippers or 3PLs, for their part, might analyze carrier bids against the backdrop of a matrix of prevailing rates, to spur discussion with the carrier about variable pricing or trade-offs on lanes where the carrier s bid is not competitive. This kind of transparency can lead to a dialogue between shippers and their vendors, so that instead of offering a rate increase of 5% or 7% across the board, for example, the shipper might institute market-based pricing strategies that support carriers more effectively in high-volume lanes and seasons, while adjusting some rates downward when lack of market pressure or the carrier s costs allow for that. Harness Big Data to Improve Forecasting Transportation and logistics managers have begun to harness big data in new ways, as the necessary computing power and expertise are increasingly available and economical. Data from the company s own history is used to build operational models of costs, revenues, opportunities and challenges associated with transportation and logistics choices. Managers then apply different variables to create scenarios that help them with forecasting and contingency planning. This type of modeling is currently most common among large shippers and the 3PLs and consultants who serve them. Large, for-hire carriers also perform ongoing analyses to assess their operational performance and return on assets, most often using internal benchmarks for comparison. 9

10 In the past, external benchmarks were less common, partly because they provided only a broad, high-level overview of trend data that was too general to be truly actionable. With the advent of market-specific and lane-based data, however, any transportation department or company can now conduct in-depth trend analysis of current and historic demand, capacity and rate data. This new transparency, often achieved with the help of DAT RateView, enables transportation and logistics professionals to benchmark their own costs or prices against prevailing rates and marketplace conditions, to ensure that their own pricing strategies are aligned with the market. In addition to potential cost savings for the shipper, this data-powered analysis can help carriers to rationalize their service networks. This approach to modeling also offers 3PLs an opportunity to provide a more consultative approach to transportation management, in addition to the traditional role in capacity procurement. Contingency planning, distribution strategies, warehousing and facility location can all be improved with the addition of capacity and rate data to operational models and forecasts. For example, shippers can use this wealth of market-based data to model trade-offs between truckload and rail intermodal transportation, or to choose among different shipping routes for imported goods, incorporating capacity and pricing trends of domestic transportation modes outbound from various port locations. This type of analysis, which could have been critical in the event of a West Coast port strike, can also help shippers to plan for the new routes that will be enabled when the Panama Canal project is completed next year. As we saw in Q1, the weather can often defy prediction. Armed with rate and capacity data, shippers can draw lessons from Hurricane Katrina, Super Storm Sandy and the Polar Vortex of 2014 to design models, strategies and even tactics such as contingency clauses in vendor contracts to help them cope effectively with future catastrophic weather events. In the end, the addition of these data streams and tools can make supply chain management more efficient and cost-effective for shippers and their supportive 3PLs and carriers. The enormous volume of and specificity of the historical truckload freight data adds precision and a new measure of predictability to supply chain design. 10

11 About Don Thornton Don Thornton is Senior Vice President of Sales and Marketing at DAT Solutions. Don has more than 30 years of experience in transportation technology and sales. Prior to joining DAT in 2001, Don served as vice president of business development and technology at Market Transport in Portland, Oregon. Don holds an MBA from Pepperdine University and is a member of the Board of Directors of the Transportation Intermediaries Association. About DAT Solutions Based in Portland, Oregon, DAT Solutions provides actionable information to transportation professionals in North America. It operates the industry s largest network of load boards and is a trusted source of supply and demand trends, rate benchmarking, and capacity planning information. Related services include a comprehensive directory of companies with business history, credit, safety, insurance and company reviews; broker transportation management software; fuel tax, mileage, vehicle licensing, and registration services; mobile resource management; and carrier onboarding services since Founded in 1978, DAT Solutions LLC is a wholly owned subsidiary of Roper Industries, a diversified growth company and constituent of the S&P 500, Fortune 1000 and Russell 1000 indices. Call or visit DAT.com 2014 DAT Solutions. All rights reserved. All trademarks are the property of thier repective owners