The Current State of the Freight Recovery and its Projected Impact on Freight Rates
Much has been said and written about the Great Recession and its impact on the freight market. The question on the minds of many shippers, carriers and consultants as we approach the end of quarter 1, 2012 is what is the current state of the freight recovery and where are freight rates going? When one tries to assess the state of demand for freight services and the level of capacity, how do these compare to pre-recession levels?
This week considerable light was shed on this topic during a webinar hosted by the Journal of Commerce. The webinar focused on the current and projected state of supply and demand in order to provide some insight into projected changes in freight rates over the next 6 to 18 months. Here are some of the highlights.
John G. Larkin, Managing Director, Transportation & Logistics Equity Research at Stifel Nicolaus made the case that retail sales (excluding food) in America, despite lingering high unemployment have returned to pre-recession levels. The ISM Purchasing Managers’ Index has been above 50 since January 2010, signaling a growing economy. The Weekly Market Demand Index (MDI), a measure of relative truckload demand, has been In favor of the trucking industry since January 2011.
Large fleets (with greater than $30 million in revenue) are now at 9.5% below their capacity at the peak (Dec.06) while smaller fleets are 17.9% below their peak (in December 2003). Drawing on other sources, Mr. Larkin highlighted that truck fleet removals are forecast to remain at historically low levels. Since peaking in May 2007, the number of LTL power units has declined 19.3% as of December 2011. October and November 2011 saw slight year-over-year increases in the tractor fleet, which had last occurred in March 2008, but December 2011 reverted back to a slight year-over-year decline.
Drawing on data supplied by the American Trucking Associations, Mr. Larkin then showed that after the huge disconnect in 08 and 09, with truckload capacity tightening, truckload demand and supply have come back into line. Surprisingly, Mr. Larkin’s data also showed that LTL demand is now exceeding supply.
Gary Girotti, Vice President, Chainalytics PLC then took the microphone to talk about the impact of market dynamics on freight rate pricing, present and future. Drawing on his company’s data base of 92 shippers of various sizes with $15 billion in freight spend, he presented some very interesting findings.
With supply and demand in balance, shippers are able to find capacity today. One big issue is going to be driver availability which will be determined in part by compensation. Driver pay was reduced during the downturn and it has not kept pace with the growth in consumer price index or with the salaries of private industry workers. The lifestyle of the long haul driver is not attractive to many unemployed people. To attract enough drivers to meet the needs of the shipping community, this will likely put upward pressure on driver wages and freight rates.
The average length of haul of truck fleets is decreasing as intermodal transportation is gaining market share at distances down to 500 to 550 miles. Trucking companies are showing more of a willingness to work with railroads. The rails have spent $40 billion in capital investments over the past 5 years and have improved their service, particularly on short haul lanes in the eastern USA.
Mr. Girotti highlighted that smaller shippers tend to pay less than larger shippers since the former are better able to find niche carriers at more competitive rates. He talked about the “sweet spot” of $1 million to $5 million per carrier per annum in the United States (probably $100,000 to $500,000 in Canada) being the level at which to secure optimum pricing. Shippers tend to receive less favourable rates as carriers are tendered volumes beyond the $5 million range.
Participants in his shipper consortium expect capacity to tighten over the balance of the year. Freight rates will rise about 2.5% over the next six months and about 5% in a year’s time. Dedicated fleets, which became less attractive during the downturn and the subsequent decline in freight rates, are expected to become a growth area as freight rates increase. The webinar provided some very useful information to practitioners in the freight industry.