Relieving the Trucking Jam By Mark Alexander and Alexander Neuhaus

Transcription

1 Relieving the Trucking Jam By Mark Alexander and Alexander Neuhaus Motor carriers have been successful because of their ability and willingness to take just about any traffic at any price. And in the United States in particular, when railroads have experienced capacity crunches or bottlenecks, shippers have been able to rely on trucking to handle the overload for products typically better suited to rail. This situation appears to be changing, however, with motor carriers entering a period of tight capacity, market rationalization, and rate increases. Truck transportation is undergoing changes not seen in previous economic cycles, with a number of industry dynamics coming together to make the current situation unique: Truckers responded quickly this time around to tightening capacity, with price being used to rationalize the economics of the truckload market. New hours of service rules are having a major impact on transportation costs, modal usage, and supply chain configurations. Multiple driver issues are coming to the fore, including increased costs for leased operators, high rates of turnover, likely increases in wages, and driver retention issues. The trucking capacity jam is unlikely to go away anytime soon. For both carriers and shippers, creative responses will be needed to ameliorate the potentially negative effects on their businesses. The Carrier Perspective Shipper-carrier dynamics have definitely shifted in favor of carriers for the first time in decades. Carriers are responding by favoring higher-margin, easier to serve customers and a traffic mix that effectively balances their fleet and driver utilization. Comments that carriers have made to us recently include: This is probably the best pricing environment we have seen in the past 10 years, we are taking this opportunity to cull out some less attractive freight, and we re being very tough on rates. If we can t get it, we ll walk away. Price in particular is being used to rationalize the economics of the truckload market; as a result, traditional shipper RFP s and shippers playing carriers against one another will be less effective in today s environment. After a relatively long period of flat or modest price increases, truckload carriers responded more quickly than rail to the current market economics, as shown by the jump in revenues per loaded mile in 2004 (Exhibit 1). Truckload carriage has always been the most opportunistic of transportation modes. These carriers have the agility to respond quickly to changing markets and have the flexibility to effectively utilize their assets. These same dynamics are allowing truckload carriers to reap the rewards possible in today s market. But part of the rapid rate increase as capacity has tightened also can be explained by the need for carriers to recoup rising costs for driver retention and training, fuel, and fleet changes mandated by new environmental regulations. 17 Mercer on Transport & Logistics

2 Exhibit 1 Trends in Truckload Rates 11% 7 9% 6 YOY% Change in TL Revenue per Loaded Mile* 7% 5% 3% Seasonally Adjusted Dry Van Only Truckload Freight Index 1% 2-1% 1-3% *Excludes fuel surcharges, proxy for rates, for a basket of TL carriers. Source: Industry analyst reports Increasing Fuel Costs Fuel costs for example, can account for up to 15 percent of truckload costs. After a dip in 2002, fuel prices have continued to rise in the past two years, reaching a new high of cents per gallon for diesel fuel in April Fuel prices have also become much more volatile. Over the short term, motor carriers have benefited by being able to quickly adjust their prices through the use of fuel surcharges pegged to various fuel cost indices. And they have the market agility to make relatively timely rate adjustments, as their contracts tend to be shorter than rail, for example. But over the long term, fuel price volatility will make it difficult for both the trucking industry and its customers to do business efficiently. The root of the problem is fuel price risk; tight capacity, by shifting market power to truckers, has increased their ability to pass along fuel price volatility to shippers. If shippers are too deeply impacted by fuel costs, however, leading to a loss of profitability and business slowdown, motor carriers may once again find themselves with capacity to spare. Hours of Service Changes Another significant new challenge are federally mandated changes in hours of service (HOS) rules, which are having a major impact on transportation costs, modal usage, and supply chain configurations. These rules, implemented in January 2004, increased driving time by an hour but generally reduced the time and flexibility of the over the road driver. The impact on multi-stop truckload shipments has been especially severe: Under the old rules, time spent on loading and unloading did not materially affect driving time; the new HOS rules count all time as duty time, meaning that a driver cannot make up compensation through miles operated for time spent unloading or loading. As result, drivers have required increased compensation, or in many cases, multi-stop truckload service simply has been dropped. Reduced available road hours and new rules have taken truck miles of capacity out of the system. Estimates of what the actual impact may be are hard to track, but some suggest they may be as high as 10 percent. 18 Mercer on Transport & Logistics

3 The new HOS rules were unexpectedly thrown out in a court decision last summer and will now remain in effect only until September 30, 2005, when revised rules are required to be issued. These revised rules are likely to further reduce the flexibility of drivers and increase carrier and shipper costs. Currently, the new hours of service regulations are estimated to have an average impact on annual productivity in the 3-4 percent range. Driver Issues The industry is suffering from a declining owner-operator base and high driver turnover, at the same time that driver pay is rising to persuade the best drivers to stay. From a high of 168,000 in 2000, the US owner-operator population declined to about 153,000 in 2003, and is forecast to decline to 110,000 in a few years. There has been a continued shift from independents who find their own freight to leased operators who operate under a carrier s authority and rely primarily on the carrier for loads. This reduces competitiveness for loads, particularly for backhauls, where there may be less downward rate pressure from independents willing to take any load for fuel money home. Turnover continues to be a major industry concern. The quarterly annualized rate for turnover in Q was 110 percent for large truckload carriers and 94 percent for small ones. Management and traffic characteristics can impact driver retention rates. Generally, dedicated and private carriers have higher retention than for-hire carriers, as the work is less random. The costs of turnover are high and reducing the turnover rate is critical to a carrier s success. Some industry analysts believe that it costs on average $6,000 each time a new driver is brought on board. Instability in the driver workforce at a time of tight capacity not only increases costs but takes capacity out of the system. Additionally, driver wages have lagged other sectors in both absolute terms and year to year growth, but now appear to be making up for lost time. Several truckload executives from the largest carriers believe that annual wages will likely rise to $70,000-$75,000 by 2006 (Exhibit 2). The overall pay package is increasing due to pay for detainment, delays, and extra stops, as well as to alleviate concerns over lower pay resulting from the revised hours of service rules. Exhibit 2 Truckload Wage Index vs. Prices and Other Sector Wages (1997 = 100) Consumer Price Index Wages & Salaries: Private Industry Dry Van Truckload Wages Source: Industry analyst reports. 19 Mercer on Transport & Logistics

4 Fleet Issues Motor carriers will be required to meet new EPA emission standards starting in The response thus far has led to carriers focusing on lowering fleet age, with new units coming online for the most part compensating for the low acquisition rates of the last 36+ months; little or no new net capacity has been added. To add capacity as well, we anticipate an acceleration in buying up to 2007, with the additional costs of the new standards becoming a direct passthrough to customers. The Shipper Perspective Trucking overall is an industry that feels it has been kicked around by shippers for many years; the recent rate increases are one way of saying enough is enough. Shippers now increasingly appear to be seeking ways to meet motor carriers halfway, such as by asking for long-term contracts to manage increases and partnering with truckers deeper into their operations. Such direct and integrated relationships can be an important way to manage and reduce total costs for both. Continuing tight capacity will likely accelerate such trends. By working with motor carriers as long-term partners, shippers will be better able to ensure that the capacity they need is available when they need it, and will lower the risk of having to fight for truck space on the basis of price alone. According to motor carrier executives with whom we ve spoken recently, many shippers are now asking how can I help lower my costs? Shippers that focus on efficiency and total cost, rather than just the transportation rate, will be most successful in meeting their customers needs and minimizing long run total costs. Easing the Jam If the current traffic boom ends up being just a blip in the business cycle, carriers will find it important to retain good traffic while not alienating customers. This can include helping shippers over the short-term find the capacity they need. Longer-term, if the capacity crunch continues, the situation in Europe may be instructive: Despite the fact that trucking accounts for a much larger share of the freight market in Europe (44 percent), the region still has excess trucking capacity and trucking capacity continues to grow faster than demand. One source of capacity over the past 10 years has been the increasing use of cheaper Eastern European trucking transport, due to the enlargement of the European Union (see sidebar). Europe also makes significant use of river/short sea transport as an alternative to trucking. Alternatives to the European model in the search for capacity might include greater cooperation across transport modes to grow intermodal service, i.e., rail, water, and trucking working together seamlessly to alleviate capacity bottlenecks while keeping speed up and prices down. By increasing intermodal options, not only trucking companies but other transportation operators could increase the flexibility and thus the value of their business designs, while avoiding the need for excessive capital costs. 20 Mercer on Transport & Logistics

5 Conclusion The relationship between motor carriers and shippers has changed perhaps permanently. Whether it has also changed for the better is unclear. Shippers need to be cognizant of the drivers of trucking price increases and capacity rationalization, while carriers will need to find ways to be better managers of their relationships with shippers, even if it means putting their traffic on other modes. In the meantime, rate increases are not all bad: higher earnings by truckload carriers may yield a more sustainable model for reinvestment, enabling motor carriers to meet customer demands for continuing service improvement. A Bigger EU, A Bigger Trucking Sector As could be expected, the enlargement of the European Union in May 2004 has led to increasing trade between old and new member states. Most of this trade is moving by truck, with cross-border road traffic in the first months after EU expansion showing impressive growth (Exhibit 3). Exhibit 3 Impact of EU Expansion on East-West Trucking Flows (number of border crossing per truck, per month) 400, , % +30% 200, ,000 0 Before May 2004 After May 2004 (e) Before May 2004 After May 2004 (e) German-Czech Border German-Polish Border Cross-border transport prices, however, have fallen by about 20 percent, according to a market survey by the German office for goods transport. A major reason for this is the cost differences between transport companies in the old and new EU states, especially in terms of labor costs. Additionally, East European motor carriers operate some trucks with two drivers, so that their assets can be used nearly around the clock to earn money. The resulting total cost advantage can be up to percent. The impact on prices is expected to be felt throughout the EU, as East European truckers penetrate western EU markets at prices which would not allow West European companies to cover their costs. The abolishment of borders has also increased the competitiveness of trucking, since wait times at crossings have dropped precipitously. As a result, some traffic that moved crossborder on other modes has shifted to road. For example, the rolling motorway service (intermodal transport) between Dresden and Prague, which once reached utilization of percent at peak times, was abolished two months after enlargement, when utilization dropped to 10 percent. Likewise, ferry operators have reported a drop in the usage of cargo services between North Germany and the Baltic States. But while available on-truck capacity in the EU appears nearly inexhaustible, infrastructure capacity is not. Western Europe has a very dense network of motorways, but one tenth of the trans-european network is congested. Increasing congestion and environmental pollution, together with some very serious accidents involving trucks, have led the EU to set up initiatives to move traffic off the roads. To push these incentives forward, the EU is seeking to increase the costs of trucking (e.g., by introducing road tolls for trucks) and is giving preferential treatment to other modes, such as rail and short sea shipping, through larger subsidies, reduced regulation, and the encouragement of private sector participation and investment. 21 Mercer on Transport & Logistics