A Hazy Look Ahead For Trucking

Words like “flat” and “lackluster” dominate forecasts for the trucking segment at the start of 2008. Often looked to as a barometer of US economic performance, the view ahead is hazy to gray. Expect some significant changes by this time next year.

The American Trucking Associations (ATA) reported its latest unadjusted tonnage index fell 8.5% from October 2007 to November 2007. Seasonally adjusted, the result looked somewhat better, showing a 0.8% rise. ATA Economist Tavio Headley points out, however, that every tonnage rise in the seasonally adjusted index since March 2007 was followed by a decline the next month. These and other indicators lead the ATA to describe first-half 2008 tonnage expectations as “lackluster.”

Trucks hauled 10.7 billion tons of freight in 2006, according to the ATA, and collected $645.6 billion, or 83.8% of total revenue earned by all modes. If the year-to-date performance for the first 11 months of 2007 holds when the final month’s volumes are reported, the industry will finish about 2% behind 2006 (actual 11-month volumes were 1.7% behind the same period for 2006). If the same is true of revenues, the industry will drop $13 billion in 2007 and begin 2008 with volumes trending even lower.

Shippers reinforced this expectation, responding to the Morgan Stanley Freight Pulse Survey that they expected truckload volumes in the last quarter of 2007 and first quarter of 2008 to increase just 2%. This was a slower pace than forecast six months earlier covering the second and third quarters of 2007. National less-thantruckload (LTL) volumes were expected to grow only 1.1% in the period, and regional LTL volumes were predicted to rise only 1.5%, half the rate forecast in the prior six months.

Troubling for carriers, given the cost pressures they are laboring under, shippers forecast rate trends with lower increases in each mode. Lower volumes and more available capacity were clearly contributing factors in shippers’ rate expectations. As the Morgan Stanley report stated, “Shippers still see plenty of excess capacity. Shippers indicated capacity for all modes is more abundant than in any of our [12] prior surveys.”

The dynamics of a market with ample capacity and decelerating volume growth lead Morgan Stanley analysts William Greene and Adam Longson to conclude that LTL carriers will “likely continue to use price discounting to attract and/or defend volume.” This could be a Pyrrhic victory of sorts for shippers who are aggressive on price and carriers who pursue market share and volumes through price discounting. Should the economic downturn worsen in 2008, a number of the smaller or more-leveraged carriers could become insolvent, warn the Morgan Stanley analysts.

Survey responses suggest shippers will offer the greatest volume increases to carriers with higher service levels. While those carriers’ public face is one of rate discipline, anecdotal evidence would suggest they too are discounting rates to fill their lanes. For shippers, this can spell a bargain, gaining higher service performance using carriers that had commanded a premium price. It may also be part of a strategy to avoid carriers with weaker balance sheets who might find service levels difficult to maintain as pricing and margins erode. And for shippers who have been through these downturns before, an attendant concern is when will weaker carriers begin to fail and close?

On the truckload side, predicted volume increases were at their lowest since Morgan Stanley’s first semi-annual Freight Pulse Survey in January 2002. Despite what the analysts described as firm intermodal rates helping to drive more freight to truckload, overcapacity leads shippers to forecast almost non-existent rate increases. The analysts do suggest the situation has not led to “hostile negotiations” because both shippers and carriers recognize capacity will get tighter when demand does pick up.

Service continues to be a major differentiator for shippers, leading the Morgan Stanley analysts to conclude FedEx Freight, Con-way, and ABF are the “gold standard” for LTL. Pushing hard on many fronts is Old Dominion Freight Line. And on perceived value, Old Dominion and YRC Regional enjoy a slight margin over other some carriers—suggesting shippers feel LTL carriers are pricing appropriately for their level of service.

“The simple truth is, customers base their purchase decision on which carriers provide the best perceived value,” says Kevin Huntsman, Mastio & Company. Mastio conducted its third LTL Customer Value Benchmarking Study of key decision makers who each rated their carriers on 23 attributes. The findings are based on 2,485 telephone interviews with shippers providing a total of over 9,700 total observations. Those shippers rated 263 LTL carriers they do business with, of which 40 had sufficient ratings to be included in the 2007 report.

Huntsman offers the top five shipper needs as: 1) Shipments delivered with no shortages or damage. 2) Shipments delivered when promised. 3) Shipments picked up when promised. 4) Competitive pricing. 5) Effective problem resolution.

Shippers are most likely to recommend carriers based on on-time, damage free performance, consistent transit times, and effective problem resolution.

Mastio offers seven indexes or categories for grouping carrier results. In addition to an overall index and a national carrier group, it offers inter-regional and regional break outs.

For its overall index, Mastio included the 21 carriers that exceeded the industry benchmark (see box). Included in the 21 are some of the same carriers highlighted by shippers’ responses to a more limited set of questions in the Morgan Stanley survey. Notably, FedEx Freight, Con-way, and ABF appear on both lists.

Reviewing the national LTL carrier group, FedEx Freight, Con-way, ABF, and Old Dominion occupy the top half of the list. Mapped by customer value, FedEx Freight, Con-way, and ABF rank above the midline on “premium offering” and near or below the midline on price.

If there’s a positive note to the cost pressures on both sides of the motor carrier/ shipper equation, it is when cooperation and collaboration occur. Opinions of carriers range from, “National LTL carriers do a lousy job and are price-only competitive,” to the shippers who are working proactively to improve their own network efficiency and are being approached by carriers who want to explore new opportunities.

Shippers are reexamining options such as multi-stop truckload, pool distribution, or dedicated contract carriage to balance service and cost.

Carriers have also been watching the market for opportunities, and surprisingly, some seem to think that opportunity is in national LTL. Despite the consolidation of giants such as the FedEx acquisition of Watkins or UPS acquiring and integrating the former Overnite Transportation Company to add a national LTL capability, regional carriers like Old Dominion have been expanding their footprint. Estes Express Lines is another regional carrier claiming national capability. It says that by March 1st, it will expand direct service by opening terminals in North and South Dakota, Nebraska, Minnesota, Iowa, and Wisconsin. This will complete its nationwide footprint and provide 100% direct coverage to all 50 states in the US, leading Billy Hupp, COO and executive vice president, to comment, “Our growth in the Midwest will open up a number of direct and next-day lanes, which in effect reduces both transit times and freight handling. This enhances our ability to meet our customers’ growing needs in the next-day market.”

National LTL networks are hungry monsters. They demand volume to support the underlying infrastructure. And without density in key lanes, carriers can find themselves on a slippery slope trying to balance operating costs and service commitments.

Most carriers already have 48- or 50- state operating authority. The regulatory barrier to entry was minimized as a result of the Motor Carrier Act of 1980, and carriers obtained operating authority in order to be grandfathered in should the regulatory pendulum swing back to a more restrictive form. Many of those carriers had neither the desire nor the means to operate under that full authority, but it did grant them the freedom to expand when and where customer volumes dictated.

Market consolidation may have reduced the number of national LTL operators, but is there an opportunity for more players? A strong regional player with a good reputation for service and reasonable pricing could easily over extend its capabilities and pull down the performance of its total network as it struggles to support its expansion. Some names now absent from the industry could speak to that first hand. Also, the regional and inter-regional operating model is different from the national network model. It relies on fewer terminals and less rehandling of freight by building more direct loads. That’s where lane density and volumes come into play in expansions.

With volumes already low and predictions bordering on dire, will there be sufficient freight to feed expanding LTL networks? And, can newly expanding carriers sustain their effort in the face of established national carriers who are pricing aggressively to win freight away from other national and regional carriers?

There are certainly plenty of questions to be answered in coming months. One thing that does seem to be clear is that the landscape of the trucking sector won’t look the same at the end of 2008 as it does at the beginning.