Freight Transportation Adjusts to a Resetting World Economy
The year 2011 was another momentous one that was shaped by events on all continents of the world. Uprisings in the Middle East and the overthrow of Hosni Mubarak and Muammar Gadhafi, the European debt crisis, the Occupy Wall Street Movement, the assassination of Osama Bin Laden, the earthquake and tsunami in Japan, the wedding of Prince William to Kate Middleton, and the premature passing of Steve Jobs were just a few of the signature events of another action-packed year.
Closer to home, the three countries in North America all faced significant challenges. The powerful drug cartels in Mexico are threatening its very existence as a democracy as the country gears up for elections in 2012. The untimely death of Jack Layton, the very popular leader of the New Democratic party and the demise of Michael Ignatieff and the Liberal Party have given Steven Harper a majority government and a free hand at steering the Canadian economy over the next four years. The U.S. situation is exactly the opposite as Democrats and Republicans cannot reach agreement on almost anything and as a result the country is in gridlock on most economic initiatives to spark its economy.
Against a background of 8.6 percent unemployment in the U.S., millions more underemployed, one in four homes is worth less than the value of the mortgage, tight credit, anxiety over job security and a possible relapse into another recession, the economy is resetting. Americans are saving more. As various generations of families live together to better withstand the current economic uncertainties, home builders are erecting homes with two master bedrooms to address the social consequences of these challenging times. Smartphones, tablets and the internet are reshaping so many of our day to day activities. The economies of North America and around the world are being reset by this confluence of forces and by the rise of China and other developing nations around the world.
In 2011, freight transportation in North America was impacted by many of the above listed events and by a slow moving recovery from the Great Recession of the late 2008-2009. During that period, between 15 and 20 percent of fleet capacity was taken out of service either through the departure of carriers from the industry or the parking of equipment by many companies. The dynamic of tight freight capacity and a slowly increasing shipment demand made for some interesting capacity challenges this year. Here is my list, not in order of importance, of the major transportation related activities in 2011.
The Freight Economy Disconnects from the General Economy
The news media do a great job of reporting on a broad range of economic issues, both domestically and internationally. But there is an economy that is not properly scrutinized and reported on and that is the freight economy. The big news this year was that this economy held up better than the general economy. Despite the high unemployment numbers and other negative data, consumers showed surprising confidence and spent money. For many carriers business volumes held up better than expected. Consumers have defied the experts and have been spending their way out of the recession. Carrier bankruptcies are down from the dark period a few years ago.
Peak Season shifts from October to August
Another element of the freight economy that has been playing out the past five years is that August is replacing October as the peak shipping month. This phenomenon was confirmed in recent data presented by the Intermodal Association of North America. There seem to be a number of elements that are causing this shift. With capacity tight, smart shippers are moving their freight earlier to beat the crunch and to be in a better position to take advantage of lower cost modes of transport. Unlike the U.S. housing market where there is glut of homes on the market and more foreclosures every day, a good segment of the freight capacity has come back. The early peak shipping season reflects the requirement for shippers to be proactive to protect the integrity of their supply chain.
Diesel fuel sneaks back up to $100 a barrel/The Keystone Pipeline Project is deferred
Diesel fuel has quietly found its way back up to $100 a barrel. The U.S. consumes 15 million barrels of oil each day and imports 10 to 11 million barrels per day. Industry forecasts predict oil consumption will continue at these levels for the next two to three decades, so a secure supply of crude oil is critical to U.S. energy security. With fuel at $4.00 a gallon (U.S.) of $1.20 a liter (Canada), fuel surcharges are on the rise again.
One of the disappointments of 2011 was the postponement of the Keystone Pipeline, a pipeline system designed to transport synthetic crude oil and diluted bitumen from the Athabasca Oil Sands in northeastern Alberta, Canada to multiple destinations in the United States. At its peak the pipeline could deliver 590,000 barrels of oil per day. In November, 2011, President Obama postponed the decision until 2013. Keystone XL is shovel-ready. TransCanada is poised to put 13,000 Americans to work to construct the pipeline - pipefitters, welders, mechanics, electricians, heavy equipment operators, among other jobs - in addition to 7,000 manufacturing jobs that would be created across the U.S. Additionally, local businesses along the pipeline route will benefit from the 118,000 spin-off jobs Keystone XL will create through increased business for local goods and service providers. The postponement, a calculated political move, is a most unfortunate development for the economies of the United States and Canada.
YRC Survives to fight another day
After losing billions of dollars the past few years, YRC made news again in 2011 as it restructured its balance sheet with a $500 million capital infusion, right sized its terminal network and changed its leadership team. The company brought back James Welsh, a former YRC executive, as CEO of the YRC group to see if this LTL veteran can restore consistent profitability. YRC now has enough liquidity to survive in 2012 but it must deliver consistent service and profits to remain in the LTL business.
In fairness, other major LTL players made changes as well. As an example, FedEx Freight purged 100 terminals, consolidated its Watkins acquisition into FedEx Freight and changed leaders. The LTL industry reduced capacity in 2011 to bring it more in line with demand.
Domestic Container Traffic Drives Intermodal Growth
Spurred by a nine percent year / year gain on the U.S. domestic container front, intermodal volumes for the third quarter of this year resulted in annual gains for the seventh straight quarter, according to third quarter Market Trends report published by the Intermodal Association of North America (IANA). “Part of what is driving this is the aggressive approach towards intermodal by motor carriers to moving freight on the rails. Service has improved as has the reliability, service integrity, and transit times, which are all within supply chain managers’ plans,” commented Tom Malloy, IANA Vice President, Policy and Communications.
While we have not seen data to support this, some people are asserting that some of the gains in domestic traffic are on shorter lengths of haul (e.g. less than 550 - 600 miles) where intermodal is now better able to compete with truck on rates and service. The multi-billion investments by CSX and Norfolk Southern in double-stack corridors are in the process of restructuring rail traffic along the east coast of the United States. CSX’s National Gateway, designed to capture more east-west container traffic and NS’s Crescent Corridor, designed to strengthen its network in the northeast and southeast, are key investments in the growth of intermodal transportation.
Pricing discipline the key in a tight capacity market
In 2011 surface transportation carriers held together to increase freight rates. Tight capacity and stronger than expected demand for freight services created an environment conducive to rate increases. In recent years many carriers have acquired the necessary tools to calculate their operating costs. Better tools coupled with tight capacity and better discipline have helped carriers secure increases in contract rates and GRIs. As an example, truckload rates are up 8.5 percent year-to-date as of the end of November 2011.
Carriers expand into new markets
For many years, logistics service providers have been building their businesses by assembling and managing an array of transportation and warehousing services. During this same period, global trade, free trade agreements, the ascent of the big three, China, Brazil and India, have significantly changed the supply chains of many North American companies. To respond to changing shipping patterns, both on a domestic and global basis, many North American carriers and LSPs have been upgrading their portfolio of services. George Abernathy, executive vice president and COO of Transplace expressed it this way. “We are looking at verticals where we already don’t have a broad footprint.” As examples, DHL purchased a mid-west less than truckload carrier and Averitt Express, a major regional LTL provider launched an intermodal service.
Cyber Monday drives growth in E Commerce and home delivery business
ChannelAdvisor, a global e-commerce software provider that helps retailers sell more across online channels, announced that its customers experienced a tremendous Cyber Five, the five-day shopping push beginning Thanksgiving Day that culminated in a record-breaking Cyber Monday. Amazon was a clear winner with more than 50 percent growth year over year - well over twice the growth rate of overall e-commerce. As big box retailers competed to see who could open first on Thanksgiving, online retailers, including Amazon, pushed up their promotions as well. This resulted in steady growth throughout all of November as opposed to the more concentrated numbers we’ve experienced the past few years during the Cyber Five.”
The rapid growth in sales of smartphones and tablets is also playing a part in online shopping. Along with the growth in E Commerce is the growth in home deliveries, an important trend in freight transportation that took another leap forward in 2011.
Dedicated Trucking shifts into full gear
As shippers faced the reality of capacity shortages, regulatory changes and the rising costs of fleet upgrades, fuel and driver wages in 2011, they looked for ways to preserve cash and reduce risks. One such option is dedicated contract carriage. In 2011 this option became attractive as a means of locking up capacity, without making the capital investment, at savings of 10 to 15 percent. For shippers that reduced staff during the recession, this allowed them to outsource the management of its fleet operations to companies that have this as a core competence.
A potential NAFTA – Part 2 is unveiled at year end
U.S. President Obama and Canadian Prime Minister Harper met in early December to unveil a set of agreements for freight and passenger traffic between the two countries. From a freight transportation perspective, the two leaders discussed a set of pilots to expedite the border clearance processes, to move towards a more common set of standards and regulations for dealing with the movement of goods and services, with particular emphasis on food, agriculture and health-care products and to adopt a variety of “trusted trader” programs. The countries agreed that by December 2012 they would seek to implement joint cargo inspection and clearance of goods that arrive by land, rail and sea. The security-focused plan calls for harmonization of the U.S. Customs-Trade Partnership Against Terrorism and Canada’s Partners in Protection program by December 2013. Both programs call for voluntary participation by importers to secure their supply chains, but PIP includes import-compliance provisions that are not part of C-TPAT. With an election looming in the United States in 2012, time will tell if these much needed initiatives will be the stepping stone to a NAFTA part 2 program or will dissipate over time.
What a year! Next year should be even more interesting. Happy holidays!