This is the second and last in the series of our posts on the subject of trucking capacity crunch. In Part-1 we provided the background and the series of events that led to the current situation. In this post we will cover how shippers and carriers, including some of our customers, are handling the situation and what to expect in near future.
How are shippers and carriers handling the current situation?
Shippers say they are increasingly forced to choose between postponing shipments and paying sky-high rates for truck capacity amid one of the worst trucking shortages in years. In addition to ordering new rigs, truckers are stepping up incentives to drivers. But in the meantime both carriers and shippers are sending freight to railroads. That benefits trucking companies that provide intermodal services, where freight is moved by truck and rail. Truck-trailer traffic on the rails, referred to as Intermodal, is growing at a double-digit pace - 10% in January from the year before, according to the Association of American Railroads. Intermodal option keeps goods moving even if they’re not going as fast as shippers want.
Substantiating the above scenario, Mark Rourke, chief operating officer at Schneider National Inc., observed that most of the freight in the interior of the country is going intermodal. This is likely a factor in a 33% boost in fourth-quarter operating profit and strong rise in the gross margins at Hub Group Inc., an intermodal specialist. Norfolk Southern Corp. says it’s also seeing increased demand. In spite of this modal shift railroads aren’t convenient for all shippers, and the sector could soon face capacity issues of its own. Already, national truckload carriers offering intermodal services are managing their freight volumes in high demand cities by turning down or levying surcharges on less preferred loads. Some of them are imposing higher accessorial and detention charges ranging from $75 to $150 due to backlogs and long turn times at the rail ramps. All this could mean months—or even years—of elevated transportation costs, delayed deliveries, and higher inventories.
Carriers are renegotiating long-term contracts with large shippers. Those rates, which make up the majority of business for many large trucking firms, could rise 6% to 8% this year, per Brad Delco, a Stephens' analyst. When we surveyed our customers, most of who are major truckload carriers in the country, they have confirmed the same. They are not complaining about a significant up-tick in the number of dedicated capacity opportunities being awarded and are focused on driver experience and retention. Some of them have invested heavily in equipment, terminals, technology and talent, all with the focus on retaining quality drivers. They are also being creative with wages and working hard to ensure frequent home time and predictable schedules for their drivers. Surveying drivers about stops and passing information back to shippers to address hot spots and create fewer bottlenecks at delivery points, eliminating empty trailer chases, loading equipment more efficiently, and holding customers accountable to agreed-upon terms are other means being deployed to improve drivers’ quality of life. As an integral step of these initiatives, carriers are using our planning tools, Continuous Move Planner and Paradox Routing Tool, to optimize their customers’ networks, create ‘home daily’ jobs for drivers, and match back haul and inbound freight within their dedicated operations. More importantly, they are able to, using our planning tools, turn bids around quickly and handle the upsurge with the same resources.
What to expect?
First, the bad news for shippers - trucking capacity shortage is not going away any time soon. Tight capacity is giving trucking companies the upper hand in negotiations over long-term freight contracts. Contract rates are expected to rise as much as 10% in 2018 as customers try to lock in trucks in a strong economy while spot-market pricing has been growing at double-digit pace. That should translate into bigger profits for trucking companies. However, their costs are also surging, as they look to bring in drivers and step up their orders for big rigs to handle the loads. Addition of more trucks could stabilize the freight market, helping shippers, but relief could be months away. Many trucks ordered in January won’t be delivered until the second half of the year, and fleets are having trouble recruiting enough drivers to fill existing big rigs. With the U.S. labor market tight, hiring drivers has never been more expensive, but freight volumes show it’s more urgent than ever. Also, full enforcement of ELD begins in April potentially removing some trucks from the road.
Analysts expect the momentum in truck orders to continue this year and next. That’s good news for truck makers. It’s even better news for retailers and manufacturers that have worried whether trucking companies have the capacity to handle their strengthening demand. Most of the new orders are from big operators looking to replace existing trucks rather than add capacity. But many older vehicles will move to the secondary used market, providing capacity as long as companies can find drivers to take the wheel.
Trucking companies, including smaller carriers taxed at the owner’s personal tax rate, are expected to benefit from the tax reform passed in January giving them more money to spend on newer and more energy efficient equipment. Also, federal tax overhaul could lower carriers’ tax rates from as high as 40% to between 25% and 28% though driver pay hikes are likely going to offset some of the benefit. But even before we get to tax savings, fleets say they are plowing a hefty portion of the extra revenue from shippers into recruiting drivers. Many expect to raise pay later this year. Even then, trucks-without-drivers phenomenon should persist. Many veteran drivers are retiring, and potential recruits often balk at the prospect of long hours behind the wheel and nights sleeping in cramped cabs. In 2015, the last time freight demand was this strong; many fleets raised pay multiple times. Some fleets hope to lure drivers by investing in new vehicles with features such as automated manual transmissions, which are easier to drive.
The hunt for drivers could get even more frantic this year, analysts say. The unemployment rate was 4.1% in December, compared with 5.7% at the start of 2015, according to the Labor Department, meaning the pool of potential truckers is smaller. The ELD rule that will make it easier to enforce limits on drivers’ time behind the wheel is also expected to spur recruiting. Autonomous or platooning vehicles, however appealing, would take years before having a real effect. For now, systems remain so complex, a fully trained driver remains necessary. Just as this article is being posted, news about acquisition of Abilene Motor Express, a niche carrier, by Knight-Swift Transportation, country’s largest truckload carrier, hit the public forum. Abilene, with its profitable business and 400 trucks, makes for an attractive buy and its acquisition could be a trendsetter for similar acquisitions as means to get more trucks and drivers.
Tight capacity and increasing supply chain complexity is accelerating the ongoing drive toward supply chain automation and “digitization” of manual transportation processes, according to Tommy Barnes, president of project44, a supply chain execution technology vendor. On top of rate increases shippers are faced with more demanding customer delivery times. These circumstances are pushing supply chain visibility to the top of shippers’ priority list. “The most expensive part of the supply chain is the inventory segment and companies that are seriously thinking of it are tying global visibility into demand planning,” adds Tommy Barnes.
Looking ahead, the first few weeks of February, per industry experts, provide a better bellwether for the state of freight, as they are generally the low point of the year for freight activity. Tight capacity in February is a trigger for carriers and shippers to go into corrective mode and be more proactive as it’s going to get tougher in spring and summer.
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