Transportation professionals at leading U.S. companies fully expect the rise in freight volumes, tight capacity and other underlying factors to continue to drive costs higher through the end of 2004 and into 2005. That's according to the latest Freight Pulse survey, conducted semi-annually by equity research firm Morgan Stanley (www. morganstanley.com) in partnership with Logistics Today.
Any optimism that guided shippers to expect modest rate increases when surveyed this past spring had evaporated by September when we again asked shippers about their expectations for the coming months.
The biggest bite will come out of the truckload sector, where shippers anticipate rate increases on the order of 6% in coming months. When surveyed this past spring, the expectation was for a 3.7% rise. But since then, oil prices have topped $54 per barrel and the capacity constraints shippers were beginning to see have worsened.
The effects of the truckload crunch are pushing more freight to rail/intermodal, less than truckload (LTL) carriers and private fleets. This is pushing rate increases in the LTL sector, which is expected to reach 3.8% among national LTL carriers and 3.9% from regional carriers.
Though those increases are substantially lower than the truckload percentage, they do represent a steeper incline than in past surveys. In June 2003, LTL shippers expected 2.2% increases in both national and regional LTL rates. LTL carriers, especially regionals, have been able to pick up some of the former multistop truckload freight as those prices increased. But despite some of the same fundamental issues, the LTL sector still maintains some excess capacity. This may have helped hold rate expectations in this segment below 4%.
We also asked shippers to rate intermodal capacity, and the result approached truckload responses. Truckload capacity, at 7.7 on a 10-point scale, is considered very tight. Some shippers commented that in some lanes they cannot find capacity at any price because the equipment in those lanes is contractually committed. Intermodal capacity, which Morgan Stanley analyst Mike Manelli says is traditionally plentiful, hit the ground on a run, registering 6.7, well beyond the 5.0 "balanced" center point.
Shippers rank national and regional LTL to the more plentiful side of the scale at 4.4 and 4.3, respectively. These represent modest tightening of capacity. The March 2004 survey ranked national LTL at 4.0 and regional LTL at 3.9.
The correlation between tight capacity and rates is consistent with intermodal. As with truckload rates, shippers expect unprecedented rate increases for intermodal. The Freight Pulse indicates shippers' expectations for 4.1% rate increases on intermodal — more than double the 1.9% they reported in March and nearly six times the 0.7% forecast in June 2003.
With oil prices 70% ahead of 2003 levels, shippers have been directly and indirectly influenced on their mode choice, says Morgan Stanley senior analyst James Valentine. The impact of fuel costs is most significant for LTL carriers who pay $0.015 per ton mile for fuel. Truckload carriers pay $0.012, exclusive of out-of-route miles. And rail intermodal comes in at $0.004 per ton mile.
Few of the companies actively hedge with forward fuel buys, according to Valentine, electing instead to have aggressive fuel surcharge programs. Whether built into the price or carried as a separate surcharge, fuel costs have played into the shipper's price and thus into the mode choice.
Railroads, in addition to claiming higher fuel efficiency per ton mile, hedged fuel consumption for 2005 as much as 54% (Burlington Northern Santa Fe) or around 40% at CSX, Canadian National and Norfolk Southern. Canadian Pacific hedged 10% of its 2005 consumption.
With roughly 2 million trucks on the road, the industry needs to purchase about 20,000 new trucks each month to keep the industry's fleets steady, says Morgan Stanley analyst Chad Bruso. He reports the industry has underpurchased new tractors since late 2000 into mid-2004.
Though orders picked up in late summer, production levels have only exceeded the critical 20,000 units per month in the last two months. Put another way, says Bruso, the industry produced about 4,000 more trucks than it disposed of over the past two months after having underpurchased by 210,000 trucks over the past four years.
It's likely to take at least another year of strong production before the industry will even begin to run the risk of seeing any overcapacity, says Bruso. One contributing factor is the potential for carriers to make a lot of equipment purchases in 2006, ahead of new emissions requirements that go into effect in 2007 (see related article, p. 29). This might lead to a glut of equipment on the market, says Bruso, but not in 2005.
That's only part of the story. Whether or not carriers can take delivery of new equipment, if they can't fill the seats with drivers, the capacity shortage will continue. Driver shortages have been a factor for the truckload segment since deregulation in 1980, but they are at their worst in the 24-year history of the deregulated industry.
Adding to the problem, driver wages and benefits have not kept pace with private industry wages or with the rise in the consumer price index, Bruso notes. So, where does all of this leave shippers? Asked how they were coping with the peak shipping season, 49% of shippers say they are simply paying higher truckload rates. Another 17% had not planned an alternate strategy as of late September. Intermodal is an option for 13%, as is shifting to regional LTL (12%). Private or dedicated fleets are being used by 5% of shippers.