Is This The New Normal?

Is This The New Normal? Seventeenth Annual Freight and Logistics Symposium Minneapolis, MN December 6, 2013 Rosalyn Wilson r.wilson@delcan.com 703-587-6213 8618 Westwood Center Drive, Tysons, VA 22182 www.delcan.com

U.S. Business Logistics Costs 0.95 1.03 1.17 1.31 1.39 1.34 1.10 1.20 1.29 1.33 $ Trillions 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CSCMP s 24 th Annual State of Logistics Report, Rosalyn Wilson 1

U.S. Business Logistics System CARRYING COSTS Interest Taxes, Obsolescence, Depreciation, Insurance Warehousing TRANSPORTATION COSTS Motor Carriers - Truck Intercity - Truck Local Other Carriers - Railroads - Water - Oil Pipelines - Air - Forwarders Transportation Costs Other Costs Carrying Costs OTHER COSTS Shipper Related Costs Logistics Administration 2013 Source: CSCMP s 24 th Annual State of Logistics Report, Rosalyn Wilson 2

The U.S. Business Logistics System Cost is the Equivalent of 8.5 Percent of Current GDP in 2012 Carrying Costs - $2.269 Trillion All Business Inventory Interest Taxes, Obsolescence, Depreciation, Insurance Warehousing Transportation Costs Motor Carriers Truck Intercity Truck Local Other Carriers Railroads Water (International 27, Domestic 7) Oil Pipelines Air (International 13, Domestic 20) Forwarders $ Billions 3 302 130 Subtotal 434 445 202 Subtotal 647 72 35 13 33 37 Subtotal 189 Shipper Related Costs 10 Logistics Administration 51 TOTAL LOGISTICS COST 1,331 May not sum to total due to rounding Up 4.0% Up 3.0% Up 3.4% 3

Logistics Costs As A Percent of GDP 8.5 8.7 9.3 9.8 9.9 9.4 7.9 8.3 8.5 8.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CSCMP s 24 th Annual State of Logistics Report, Rosalyn Wilson 4

Total U.S. Business Inventories 2,400 Billions of Dollars 2,200 2,000 1,800 1,600 1,400 Great Recession Dec 2007 June 2009 1,200 1,000 Source: U.S. Department of Commerce, Census Bureau 5

Inventories Remain High 750 700 650 Millions of Dollars 600 550 500 450 400 350 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 Retail trade Wholesale trade Manufacturing Source: U.S. Department of Commerce, Census Bureau 6

Interest Rate at Historic Low 6 5 4 Federal Reserve s Commercial Paper Rate Percent 3 2 1 0 Source: Board of Governors of the Federal Reserve System 7

Capacity, Capacity, Capacity Just Right Railroads Ocean & Air Too MUCH Too Little 8

Railroad Recap Freight revenue increased 4.3 percent Carloadings were down 3.1 percent Intermodal volume was the second highest on record Ton-miles decreased 1 percent $13 billion capital spending on road and equipment was16.1 percent higher than 2011 9

Maritime Recap Ocean carriers positions are slowly improving Barge traffic on the inland waterways has been hampered by water levels, especially in the summer emergency dredging was needed to deepen channels Volume down because of drop off in coal and agricultural products affected by drought in the Midwest Great Lakes shipping showed signs of recovery in 2012, after several slow years Jones Act in active debate again Maritime infrastructure, especially inland waterways, is in dire need of investment and Congress is formulating a comprehensive waterways package to address the issue 10

Ports Recap Port 2012 TEUs 2011 TEUs Percent Change Los Angeles 8,077,714 7,940,511 1.7% Long Beach 6,045,662 6,061,085-0.3% New York 5,529,908 5,503,485 0.5% Savannah 2,982,471 2,927,247 1.9% Oakland 2,344,424 2,342,504 0.1% Seattle 1,885,680 2,049,733-8.0% Norfolk 2,105,887 1,918,029 9.8% Houston 1,922,479 1,866,450 3.0% Tacoma 1,711,134 1,476,153 15.9% Charleston 1,424,673 1,377,513 3.4% Source: Individual port reports 11

Air Freight Recap Domestic air cargo ton-miles were up 2 percent and international were down 3.9 percent, for a total drop of 3.6 percent Total tonnage declined 2.2 percent 1.4 percent for international and 0.1 percent for domestic U.S. airlines moved more than 48,000 tons of cargo per day Jet fuel prices were up 2.9 percent The growth of cargo space in passenger jet bellies and their relative cost advantage is putting significant pressure on all cargo jets The cargo jet fleet was reduced by 30 aircraft, yet yield factors deteriorated again 2012 12

U.S. Third Party Logistics Market 160 $ Billions 140 120 100 80 60 76.9 89.4 103.7 113.6 119.0 127.0 107.1 127.3 133.8 141.8 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Armstrong and Associates 13

U.S. 3PL Market Segments 2012 Net Revenue Total $63.5 B 4.1% Domestic Transportation Management $6.3 B 5.4% International Transportation Management $17.9 B 1.0% Dedicated Contract Carriage (DCC) $11.4B 4.7% Value-Added Warehousing and Distribution (VAWD) $27.6 B 3.8% 14

Truck Industry Recap Rates were flat for much of 2012; tonnage up 2.3 percent Truck capacity is tight and utilization rates are at 95 to 97 percent; driver shortage persists with greater problems looming Costs continue to climb, but rates have only inched up Truck sales gained strength, but have not reached replacement levels; used truck prices soared and the supply has dwindled Fuel prices have moderated Driver turnover rate has topped 100 percent at times and remains high CSA enforces stricter qualifications, new health requirements, and hair follicle drug testing has reduced the pool of eligible drivers Prospect of EOBRs 15

Truck Tonnage Index 135 130 Index 2000 = 100 Average Index Value 125 120 115 110 105 100 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2011 2012 2013 Source: American Trucking Associations 16

New Hours of Service (HOS) Rule Went into effect July 1 st, 2013 - Immediate impact has been about a 2 to 3 percent decline in productivity; 7 to 8 percent for long haul - Has hurt individual drivers more than fleets reduction in the number of hours they can drive, not just statutorily, but also operationally - Congress is looking into FMCSA research methodology - Another pressure point making it difficult to retain and attract drivers - Violations of the new HOS 30-minute break requirement now adds points to CSA score - Wait time to load and unload now a real cost factor 17

Truck Driver Shortage 2009 2010 2011 2012 Drivers Trucks Sources: Bureau of Labor Statistics and FHWA Highway Statistics 18

Driver Shortage There are a number of factors affecting driver supply: - stricter qualifications and the high cost of training - expanded unemployment benefits, coupled with what some call the underground economy and abundance of part-time jobs - private fleet owners also have an aging population and they have been attracting some of the most desirable drivers with better pay and working conditions - more drayage work is available because of the growth of intermodal, pulling drivers out of mainstream driver jobs because of the better hours Solutions: - Lower the age to 18 for a CDL, apprentice program - Sponsored driver training - Change the way drivers are paid by the mile/by the hour/fixed wage 19

Freight Sector Employee Growth Slowing 3,800 Freight Sector Employment Thousands 3,700 3,600 3,500 3,400 Oct 2013 3,300 3,200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Labor Statistics 20

Truck Driver Employment Rising 1,500 Truck Employment 1,450 1,400 Oct 2013 Thousands 1,350 1,300 1,250 1,200 1,150 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Labor Statistics 21

Employment Situation in the U.S. 204,000 Jobs created in October Chicago New York Philadelphia San Francisco Los Angeles Phoenix Dallas Houston 22

Truck and Rail Volume in 2013 has Been Mixed 8% 6% Truck Tonnage Carloads Intermodal 4% Percent Change 2% 0% -2% -4% -6% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Sources: American Trucking Associations and Association of American Railroads 23

Cass Monthly Freight Index 2.6 Index of Dollars Spent for Freight 1.2 Index of Freight Shipments 2.5 2.4 2.3 1.2 1.2 2.2 1.1 2.1 2.0 1.9 1.1 1.0 1.8 1.0 2011 2012 2013 2011 2012 2013 Source: Cass Information Systems 24

Estimates of Annual Manufacturing Growth Percent Change Year Over Year 2012 Expected for 2013 World 2.9 3.0 Industrialized countries 0.4 1.4 North America 0.4 1.7 East Asia -1.6 4.1 Europe 1.8-1.7 Developing countries 5.4 4.5 China 10.6 9.0 Newly industrialized countries 5.7 4.4 Other developing countries 3.7 4.4 Source: United Nations Industrial Development Agency 25

Summing Up Freight Freight volumes have been increasing slowly and unevenly Trucking industry capacity problem is a serious issue and could hit the tipping point next year Economy Expect continued slow growth GDP around 3 percent Higher inventories could become a drag on the economy While hiring is growing and the unemployment rate is slowly dropping; jobs are not keeping up with population growth and the biggest growth sector is part-time jobs Consumer sentiment had been rebounding, but took a hit during the government shutdown Budget and debt ceiling resolutions put off again 26

Why Should You Care About Current Trends? Private sector plans do not have the same time horizons at traditional planners they make decisions based on past, current and forecasted trends that amount to no more than 10 years Look what has occurred in the supply chain industry in the last thirty years - a typical planning horizon We got the hang of a deregulated freight environment Globalization with a strong shift to offshore manufacturing Containerization and huge containerships new infrastructure Intermodal new equipment, new transfer facilities, cooperation among traditionally competitive modes Wal-Mart transparent supply chains with more cooperation all the way down the supply chain; shippers dictate logistics Amazon instant gratification supply chain 3PLs and 4PLs Shippers become mode agnostic 27 27

World of Freight Data Most carriers and shippers know: What is being moved Where it is now Where it is going How it is being moved When it needs to be delivered How Much it costs and How Well they are doing Speeds, fuel use, routes Safety records carrier, vehicle and driver What if public agencies had access to these data? Most public freight data are out of date and miss current trends; have limited data for sub-state regions; and have little to say about prices Problem: information is proprietary to individual firms 28 28

Is This Information Available to Me? RTFI = Real-Time Freight Intelligence Combines exclusive and publicly available datasets with expert transportation consultant skills Draws upon detailed freight waybill data from approx. 25 million shipments annually Utilizes more than 45 data sources to identify and track trends in freight movement Is tailored specifically to examine impacts of changes in prices (new tolls, for example) and service (greater reliability) on freight industry, including relative attractiveness of specific locations Check out www.freightmatters.us 29

RTFI Is a Comprehensive Source It draws from more than 45 separate data sources including the key freight datasets Domestic Volume and Speed Data FAF3 International Flow Data CFS Current Detailed Cost Data Waybill Data PIERS Historical Volume and Value Data Others Tolling Data B/C Data Local Freight Data It will complement data already collected for the MRTPO for its regional freight analysis work 30

What We Can Do with RTFI We can identify, isolate and compare cost factors at a detailed level NAICS 327 333 441 424 339 336 NAICS Description Median cost per ton-mile From Port of Virginia Median cost per ton Rank by number of shipments Median cost per ton-mile From Port of Savannah Median cost per ton Rank by number of shipments Nonmetallic Mineral Product Manufacturing $0.18 $32.69 1 $0.28 $40.92 16 Machinery Manufacturing $5.53 $248.68 2 $2.98 $207.26 5 Motor Vehicle and Parts Dealers $2.10 $367.32 3 $1.41 $299.76 12 Merchant Wholesalers, Nondurable Goods $0.15 $90.23 4 $0.68 $245.54 7 Miscellaneous Manufacturing $0.26 $84.32 5 $0.67 $397.66 1 Transportation Equipment Manufacturing $0.50 $372.45 6 $1.40 $1,123.37 14 31

What We Can Do with RTFI We can provide graphic depictions of comparative statistics These charts compare average cost per ton-mile for truck trips originating at Hampton Roads and Savannah 32

What RTFI Offers We can provide detailed analysis of comparative statistics Mileage band Median cost per tonmile From Port of Virginia Median cost per ton # of shipments via LTL in % From Port of Savannah Median cost per tonmile Median cost per ton # of shipments via LTL in % <50 $13.74 $248.64 18.2% $10.68 $238.23 3.2% 50-100 $3.60 $227.47 99.4% $4.63 $248.62 10.3% 100-200 $1.96 $296.23 53.4% $2.86 $408.15 67.0% 200-300 $1.04 $232.20 50.1% $0.29 $71.61 24.2% 300-400 $0.70 $237.91 84.2% $0.90 $325.93 55.3% 400-500 $1.16 $540.60 100.0% $1.08 $486.84 76.9% >500 $0.35 $258.95 71.9% $0.85 $649.43 76.3% This illustrates a direct comparison of cost per ton-mile for truck trips of machinery manufacturing commodities originating at Hampton Roads and Savannah 33

An Example of What RTFI Offers for Minnesota River transportation delivers Minnesota's bounty and helps link this landlocked state to the world Minnesota s water highway, like the concrete highway, is important Both Minnesota senators are cosponsors of The River Act which updates Water Resources Development Act, which authorizes waterway projects of many kinds administered by U.S. Army Corps of Engineers. RTFI data can be used to demonstrate the importance of Minnesota s waterways to the entire economy positioning it better for funding. 34

Contact Me Questions? Contact me at r.wilson@delcan.com 703-587-6213 35