Shipper Expectations Run High

Carriers at the recent National Industrial Transportation League (NITL, www.nitl.org, Arlington, Va.) annual conference in Ft. Lauderdale were describing a shipping season that looks like two plateaus rather than the major peak that historically occurs in the Autumn run up to the holiday shopping season. Shippers, responding to the recent Morgan Stanley Freight Pulse Survey expect growth in freight volumes to continue, but their choice of modes is less constrained.

Along with slower volume growth, shippers forecast slower rate increases.

Morgan Stanley's semi-annual Freight Pulse Survey of U.S. and Canadian ship-pers indicates volumes will remain "ro-bust" despite recent softening in the U.S. economy. Some mode shifting is bound to occur as truckload capacity constraints ease. Carriers with good service, regardless of mode, still command better rates and attract volumes.

Over 350 shippers offered insights on their recent experience with rail, less-than-truckload (LTL) and truckload carriers as well as future expectations for volumes, rates and service. The bottom line: service sells.

Shippers report expectations for continued moderate improvements in the U.S. economy and, somewhat surprising, is the fact the automotive sector is not only the most bullish, it showed a minor up-tick in its outlook. The 7.4 ranking the automotive sector gave the economy was ahead of that offered by the manufacturing sector (6.9) and marginally better than the 7.2 of six months ago. (The 10-point scale sets 10.0 as a strong economy, 5.0 as no change, and 1.0 as a recession.) All sectors were at 6.6 or above.

On another important measure of economic well being, shippers said inventories were in line with or below planned levels. The 64% who said inventories were at planned levels was down from 70% in March 2006, but this was partly offset by a 3% increase in the number of respondents saying inventories were below planned levels. Though some industry reports have indicated inventories were on the rise, only 25% of survey respondents said their inventories were above planned levels. This compares with 22% in March and 27% a year ago. Since the question asked about inventory levels relative to plan and not about the levels themselves, the responses could be explained by companies shipping more goods early or planning for more pipeline inventory to avoid service failures in the critical run-up to the holiday shopping peak.

Rail Results
Shipper expectations on rail rates put the anticipated increase over the next six months at 6.4%, up from the 5.9% expected between the March 2006 survey and the current survey. This continues a trend in shipper expectations that started with the September 2004 survey. At that time, shippers reported an expected rise of 4.4%, well above forecast increases that averaged 2% in each survey from May 2001 through March 2004.

A number of factors could be driving these price expectations. In September 2004, shippers reported 46% of their rail contracts had not been renewed and repriced. Morgan Stanley estimates those contracts were 10% to 30% below market levels. In the last two years, many of those contracts have come up for renewal and the current percentage of rail spending that has not been re-priced since 2004 was reported at 18% in the September 2006 survey.

Service is also perceived as improving on the railroads. The average rating of "delivery when expected" reached 6.1 on a 10-point scale (10 = excellent) in the September 2006 survey. This compares with a 5.9 rating in March 2006 and a 5.8 in September 2005. The average has not been above 6.0 since June 2003 when it stood at 6.4.

Pricing comparisons may be difficult as carriers begin to roll fuel costs into their prices. With the drop in fuel costs in the second half of the year and lowered fuel surcharges due to pricing changes and lower costs, shippers may underestimate the impact of fuel on short-term pricing. Full-year expectations do appear to take potential fuel increases into account.

While the numbers tell a story of improved service and rising rail volumes, shippers are vocal about dissatisfaction with the railroads. One shipper noted he had reduced volumes on the railroads by 10% in the last year and plans to reduce it further in the coming year. Another commented, "We are working to move any freight we can away from the railroads. Their pricing policies and unwillingness to work with their customers is the main driver."

Where shippers can tolerate slower transit times, intermodal service has offered a price-competitive alternative to truckload. Shippers say they are seeing better transit times and improved-or at least consistent-service from intermodal. Truck capacity and truckload pricing continue to be drivers for intermodal use, but shippers responded for the first time that service improvements prompted them to use intermodal.

Imports from Asia were cited most often as the cause for intermodal growth (7.0 on a 10-point scale with 10 as "strongly agree"). More shippers agreed that truckload rates and fuel surcharges are also drivers. And, intermodal service improvements nudged onto the "agree" side of the scale at 5.1.

Motor Carriage Moderates
Capacity is becoming more plentiful in both truckload and intermodal as ship-pers characterize equipment availability as "balanced." Less-than-truckload (LTL) capacity in both regional and national markets tends to be more abundant. Along with a slower economy, this has moderated shippers' expectations on rate increases.

Truckload comparisons are also more difficult in light of the impact of recovery efforts following Hurricane Katrina. Shippers have also underestimated truck-load rate increases in every survey since May 2002.

Asked what steps they were taking to mitigate rising truckload rates, shippers were increasing the number of carriers and their use of brokers rather than shifting modes. At 3.7%, increases in intermodal volumes are dropping after hitting 4.4% in March and 4.3% the prior September.

On the subject of mode shifting, some shippers are migrating to intermodal as service improves, but others say they are moving from intermodal to truckload as intermodal prices rise and service levels stagnate or deteriorate. Some shifts are less apparent.

Comments by a number of shippers indicate volumes could be moving within a mode. In some cases, rail shipments are shifting to intermodal. In other instances, LTL freight that had moved on national carriers will shift to inter-regional or super regional carriers.

One wild card in all of this has been the acquisition of Watkins Motor Freight by FedEx and the formation of a national LTL service to complement the FedEx Freight regional group. At UPS, the integration of Overnite Transportation as UPS Freight appears to be going less smoothly. Shippers do indicate they will move more freight on FedEx and, in some cases, they are moving away from UPS Freight. But, while some of that FedEx National volume will come from other carriers, part of it is also moving from elsewhere within the FedEx network, i.e., from the regional LTL network to the national carrier.

Shipper Expectations at a Glance
Volume Increase Rate Increase
Rail 1.3% 6.4%
LTL Regional 4.0% 1.5%
LTL National 2.9% 1.6%
Truckload 4.7% 2.5%
Intermodal 3.7% 2.6%
Source: Morgan Stanley Freight Pulse 11


Railroad Service Perceptions
Delivery When Expected Rating % Saying Delivery Improved Last 3 Months Expected Price Increase Next 6 Months
Canadian National 6.8 8% 3.0%
Norfolk Southern 6.7 23% 4.5%
Canadian Pacific 6.5 15% 2.9%
Burlington Northern Santa Fe 6.4 20% 3.6%
Kansas City Southern 6.1 19% 2.4%
CSX 5.5 23% 4.1%
Union Pacific 4.8 15% 4.2%
Source: Morgan Stanley


Shippers Underestimate Rate Increases
Expected Rate Increase Actual Rate Increase
January 2002 1.5% 1.2%
May 2002 1.3% 2.1%
January 2003 2.1% 3.0%
June 2003 1.8% 2.5%
March 2004 3.7% 5.8%
September 2004 6.0% 9.9%
March 2005 4.7% 6.8%
September 2005 4.3% 6.8%
March 2006 3.6% 5.1%
September 2006 2.5%
Source: Morgan Stanley
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