Shopping for better rates

May 9, 2006
Increasing capacity in the truckload sector and rapidly rising costs for domestic intermodal service along with a growing antagonism toward the rail industry's

Increasing capacity in the truckload sector and rapidly rising costs for domestic intermodal service — along with a growing antagonism toward the rail industry's collection of fuel surcharges — are leading more shippers to seek motor carriers to move their freight. Truckload rate increases above historic 2%-per-year levels are leading shippers to use smaller carriers and transportation intermediaries to lower costs.

The latest Freight Pulse study — a semi-annual survey of shippers conducted by equity research firm Morgan Stanley with Logistics Today and the National Industrial Transportation League — reflects a consistently solid economic outlook. As they did in September 2005, shippers rate the current economy with a score of 7.0 on a 10-point scale (10 = strong economy). Shippers have been consistent in their view of the economy since March 2004, when the Freight Pulse recorded a 6.9. Surveys prior to 2004 put the economy at 6.0 or below.

Inventories are under control, according to shippers. With 70% of the respondents reporting their inventories are inline with plans from the beginning of the year, this is the most balanced level reported in years. The number reporting inventories above planned levels dropped from 27% in September 2005 to 22% in the most recent survey. Only 8% report inventories are below planned levels.

Rail rate increases expected from now through September 2006 are at record levels and will continue to accelerate through 2007, according to Morgan Stanley. Shippers' predictions for rate increases of 5.9% topped the previously high of 5.6% level reported last September. Based on shipper responses, Morgan Stanley projects rate increases at a 7.4% rate through 2007.

One possible explanation for the dramatic expectations in rail rate increases is that an estimated 21% of contracts have not been re-bid since 2004. Those contracts, says Morgan Stanley, can be from 10% to 30% below current market rates. Meanwhile, truckload capacity has been on the rise lately. Shippers report truckload capacity is at a 5.2 level on a 10-point scale (5.0 = balanced). From the shippers' perspective, this is the best level since March 2004 when the Freight Pulse reported a level of 6.1. During last fall's peak shipping season, trucking capacity was at 7.1, which was an improvement from 7.7 in September 2004.

Based on comments offered by the shippers, some companies are convinced that the railroads are pricing certain commodities unreasonably high to drive them off the rails and, ultimately, help the railroads improve their own operations. The pricing strategies are also pushing volumes away, say shippers who are planning to convert more freight to truckload as contracts expire. The railroads may find that after all of their capacity and service improvements come into play, they may have lower volumes as disaffected shippers shift modes.

Other shippers voiced concerns over the unregulated railroads abusing captive shippers, and suggested that reregulating the rails might be the answer. One shipper observes: "The Class 1 railroads are really pushing their luck with large shippers like my company. As service deteriorates and prices continue to escalate, we will be forced to move forward with legislative efforts."

Rate increases also come into play in the truckload sector. With capacity more in balance, shippers are shifting freight back to truckload from rail, based on service, and less-than-truckload (LTL), based on cost. But within truckload, shippers are also seeking lower-cost carriers to avoid some of the rapid increases in truckload rates.

Though shippers predicted truckload rate increases above 3% in the last four Freight Pulse surveys (and in the current one), actual rate increases have exceeded expectations. In March 2004, shippers forecast their rates would rise 3.7% in the coming six months; the actual increase averaged 5.8%. In September 2004, shippers predicted a 6% increase; actual was 9.9%. In March 2005 and September 2005, actual increases averaged 6.8%, though shippers predicted rates would go up 4.7% and 4.3%, respectively.

Shippers responded to higher truckload rates by increasing the number of carriers they use and by using more transportation intermediaries to find lower-cost carriers.

Running counter to the general rail category, rail/intermodal rates are expected to increase at a slower pace. Shippers expect a 3.6% increase in intermodal rates, down from the expected 3.9% increase reported in both March and September 2005. Intermodal volumes will continue a relatively strong rise for the next six months. Shippers report they expect to increase intermodal volumes by 4.4%, nearly identical to the volume increase of 4.3% projected in September 2005.

Service reliability is a major concern for intermodal shippers, and many plan to move domestic shipments to truckload. Imports from Asia are the driving force behind rising use of intermodal.

While capacity is less an issue than it was a few months ago, shippers still report lane-specific issues. Whether truckload or intermodal, a heavy lane will have capacity constraints and potential service issues. It doesn't appear shippers are assigning the easing of capacity to any significant economic slowdown or general volume decrease.

Rail rates on the rise

Shipper frustration with the Class 1 railroads seems to be increasing almost as rapidly as the cost of using the rails. The perception that some of the railroads are using fuel surcharges as a cost center, while offering less service, is driving shippers off the rails and back to motor carriers. Looking forward to the peak shipping season, shippers expect to see rates in all modes to continue to rise, though more modestly than in 2005.

Mode Rate Increase Volume Increase
Rail 5.9% 0.9%
Intermodal 3.6% 4.4%
Truckload 3.6% 4.4%
National LTL 2.8% 2.0%
Regional LTL 2.7% 3.3%

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