We have a pulse

A stronger economy, balanced inventory and increased volumes are three positive developments shippers are reporting in a new study conducted by Morgan Stanley in cooperation with Logistics Today.

Shippers give the U.S. domestic economy the highest grade in the three years Morgan Stanley has conducted its Freight Pulse survey. Logistics Today's readers give the economy a 6.9 on a 10-point scale (10 being strongest). This is well ahead of the 5.0 score respondents registered on the prior study a year ago (see accompanying chart at right).

More good news: Most shippers (65%) say inventories are in balance with plans made at the beginning of the year. Only 15% say inventories are above planned levels.

Supporting the view that the economy is beginning to accelerate is the projection that shippers will be increasing volumes shipped via all modes.

The good news doesn't come without a price. Rates are going up across the board. Some charges are going up dramatically. And capacity is getting tighter.

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Shipper confidence — widespread among 13 industry sectors — is translating into higher freight volumes on each mode: rail, intermodal, truckload and less-than-truckload (LTL). The goods aren't just moving to storage — the majority of shippers (65%) report inventories are in balance with planned levels. Only 15% report inventories are at planned levels.

Economic confidence
(ranked on a scale of 1-10, with 10 being highest):

May-01 4.8
January-02 5.2
May-02 5.8
June-03 5
March-04 6.9

source: Morgan Stanley/Logistics Today

Survey respondents are reporting some of the largest increases in freight volumes on every mode in the history of the Freight Pulse report. This is translating into some tightening capacity in the truckload sector, leading shippers to switch more freight to intermodal and regional LTL.

There are a few other bumps in the road to recovery. Rail shippers continue to report service has seen little improvement relative to truckload. The average response to the measure of rail service “delivered when expected” declined from June 2003 to March 2004, the interval between surveys.

Some railroads clearly have more significant issues than others when it comes to service. Canadian National, which has ranked highest on service measures in recent surveys, suffered in this year's survey, due in part to a severe winter which caused service delays and a recent work stoppage.

Slower network speeds and longer terminal dwell times continue to plague CSX and Union Pacific, translating into lower overall service ratings. Burlington Northern Santa Fe and Norfolk Southern ranked highest in shippers' perceptions of service.

The challenge for railroads — and, therefore, for shippers — is the continuing rise in shipment volumes. Through Q1 '04, rail volumes had increased 13.5% year to date. Overwhelmingly, shippers say they expect to continue shipping at present volumes or increase use of rail in the next six to 12 months. Only 10% say they will decrease rail use (49% will increase, 41% will stay the same).

Service has its price and shippers expect to pay. Expected rate increases on rail are the highest since May 2001 when the survey began. Current expectations are for an average 2.6% increase. (Shippers reported an expected 2.7% increase in 2001.) The last two surveys indicated rate increases of 1.9% (June 2003) and 2.2% (January 2003).

Carriers with the best service reputations appear better able to command higher prices. Canadian National shippers expect to pay 3.5% more in the coming year. Canadian Pacific shippers say they expect a 2.9% increase. And Burlington Northern Santa Fe shippers are preparing for a 2.7% rise.

Quality service or not, the railroads need to hold onto any increase. Labor and fuel inflation are driving up their costs even as demand offers an opportunity to increase rates. The railroads may realize very little margin gain on the rate increases as a result.

Another question raised by Morgan Stanley analysts is whether the shift to intermodal is temporary, driven by tightening capacity in the truckload segment.

Shippers say they expect their truckload volumes to increase 5.4% in coming months. This is well ahead of the pace during the last two surveys. In June 2003, truckload volumes were expected to rise 3.3%. Before that, in the January 2003 survey, shippers said they would be increasing truckload volumes by only 2.6%. This makes truckload the fastest growing mode for respondents to the survey.

While all trucking modes are exhibiting tightening capacity, truckload is perceived as tight while other modes are approaching the centerline “balanced” measure. On a 10-point scale, with 10 being very tight and 5 being balanced, truckload is at 6.1, national LTL is at 4.0, and regional LTL is at 3.9.

Rates for truckload are increasing faster than other modes, and double the pace of intermodal. Large shippers (freight bills over $5 million per year) are seeing the highest increases for truckload — 4.1% vs. 3.4% for small shippers. This position is reversed with national LTL — large shippers will pay 2.8% more where small shippers expect a 3.4% increase. Regional LTL increases are nearly balanced between large and small shippers at 2.8% and 2.6%, respectively.

Shippers expect to increase regional LTL volumes by 4.8%, nearly three times the rate of increase reported last June. National LTL will see a more modest 2.3% increase.

Excluding fuel surcharges, shippers expect to see national LTL rates increase 3.1% and regional rates to rise 2.7%.

Hours of service and accessorials are affecting costs for 43% of truckload shippers. The fact that larger shippers, who tend to use larger carriers, are seeing more of the increase suggests these larger truckload carriers are more aggressive in recovering costs. Some shippers report they have avoided higher charges by modifying loading and unloading procedures to improve efficiency.

Most of those shippers entirely avoiding costs from hours of service rules say they are able to do so because they have contracts that don't allow increases. As those contracts come up for renegotiation, expectations are for those shippers to start seeing increases.

Hours of service costs average $50 per load, but that covers a range from $10 to $200. Earlier reports in Logistics Today indicated shippers were seeing the greatest increase in drop off fees for multi-stop shipments. Fees for successive stops were increasing by larger increments.

Nearly one third of truckload shippers say they are shifting some traditional truckload freight to intermodal. Overall, shippers say 14% of their truckload traffic is subject to mode shift. This works out to 4.5% of all truckload freight.

The greatest beneficiary of the modal shift is intermodal (40% of truckload shippers), followed by regional LTL (28% of shippers) and national LTL (17%).

With more pricing power shifting to carriers as a result of higher demand and tighter capacity, shippers appear to be using mode selection as a means of balancing rate increases. Cost factors for carriers could continue to build during the year as the search for drivers pushes wage and benefit packages in the truckload sector. Many of the carriers have already made adjustments to balance the impact of hours of service on drivers' earning potential.

While most will welcome the news that the economy has shown signs of reviving, transportation managers will have their hands full keeping service levels and costs in line. LT

How does the current economy look?

Based on responses to the Morgan Stanley/ Logistics Today Freight Pulse survey, economic confidence among shippers is at its highest point in three years, indicating the worst may be over.

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May, 2004

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