If you are in the U.S. transportation industry it is impossible to be unaware of the growing shortage of trucking capacity. Shippers are paying, in some cases, over 30% above typical rates to book last-minute transportation for cargo. It is then not a surprise that some of the shippers have reported that the cost of moving freight is weighing on earnings. Sysco Corp. the world’s largest food distributor attributed steep freight cost increase for lower than expected profits. Others, including candy sellers, pharmaceutical distributors and agriculture suppliers, have been pointing to higher shipping costs for lower profits in the most recent quarter. Tyson Foods Inc. projected the nationwide shortage of trucks and drivers to add $200 million to its costs this year. The company is already talking to customers about raising prices. Cereal-maker Kellogg Co.’s logistics costs rose at a double-digit rate in the fourth quarter, with about the same increase expected in 2018.
The big winners in the current market conditions are the freight brokers that connect shippers to trucking fleets with their financial results showing revenues and profits turning sharply upward. Among those reporting strong growth in brokerage business are C.H. Robinson Worldwide Inc., Echo Global Logistics and XPO Logistics.
Per The Wall Street Journal (WSJ) Logistics Report, trucking companies in January ordered 48,700 heavy-duty trucks, the most in nearly 12 years. But it may take longer for those trucks to reach the market, as the backlog of orders is now at 159,000 trucks, from 134,000 at the end of December, according to ACT Research. Production of heavy-duty trucks in North America is expected to grow by about 25% this year to about 320,000 vehicles (boosted subsequently to 330,000 by freight analysts FTR) per the same report.
How did we get here?
Driver shortage has been a thorn in the side of carriers for some time now. Driver availability tends to follow the unemployment rate. When the economy is suffering, and unemployment is high, workers are more likely to take jobs that don’t perfectly match their ideal work. Since trucking pays competitively, even if the lifestyle is hard, it is seen as a stable gig. But when the economy is as stable as it is now, drivers who took the job as a gig may leave for more suitable jobs in construction or manufacturing causing a supply-demand imbalance. Estimated driver shortage is about 50,000, according to the American Trucking Association.
Per The WSJ's Jennifer Smith and Bob Tita, trucking companies over procured new trucks in 2014 creating capacity glut when freight demand slumped in late 2015 and 2016. This led to a sharp cut back on orders subsequently, helping to set up today’s shortage. During this time truck manufacturers shut down production lines and laid off workers, though many began raising output last year as the market began to improve.
Current shipping demand far outstrips truck capacity. According to DAT Solutions LLC only one truck was available for every 12 spot-market loads needing to be shipped by the end of 2017. The heavy demand is tracking the strengthening economy, which just went through its biggest jump in holiday sales since 2011. Imports at the nation’s seaports in January kept up the strong pace that began midway through last year. The WSJ's Erica E. Phillips reports strong economic demand and a rush to restock ahead of the Lunar New Year slowdown boosted freight business. Trade analysts Panjiva set overall U.S. import growth at 7.7% in January, a signal that international shipments remain a major force filling domestic road and rail distribution networks. It was further corroborated by Cass Information Systems Inc., a freight payment company that tracks road and rail shipments, which reported a rise of 12.5% year-over-year of U.S. domestic shipping demand in January.
Electronic-logging device (ELD) regulations that came in effect in December and a harsh winter also contributed to throwing the market out of whack. Before the ELD rule, a trucker could squeeze in more miles by not recording waiting on paper logs. Since ELDs automatically record that time the miles driven are reduced. Strict enforcement of ELD could result, in some cases, 10% fewer miles, or more than $100 a day in lost productivity, according to Edwin Lopez of SupplyChainDIVE. ELD regulations also have kept some trucks off the road and lengthened delivery times.
Check out Part 2 of this post next week when we share our firsthand experience with how carriers and shippers are handling this challenge and also what to expect the rest of the year.