Higher costs aren't dampening shipper confidence

Despite the ravaging effects of Hurricanes Katrina and Rita, shippers overall are confident in the U.S. economy, according to the latest Freight Pulse survey conducted by equity research firm Morgan Stanley with Logistics Today and the National Industrial Transportation League (NITL). On a scale from 1-10, where 10 is a strong economy and 1 is a recession, shippers weighed in with a score of 7.0. This is slightly higher than the 6.9 from the previous Freight Pulse survey in the spring of 2005.

The recently concluded survey of nearly 300 shippers indicates just over half (53%) have seen no material impact on freight shipments or their transportation spending as a result of Hurricane Katrina. Just over onequarter of shippers saw more than 5% of their shipments disrupted, and 29% said their non-fuel freight spend increased by more than 5% as a result of Hurricane Katrina.

The survey includes responses from U.S. and Canadian shippers who use rail, intermodal and motor carrier transportation.

The majority of shippers (73%) indicate that inventory levels are at or below the levels planned at the beginning of the year (59% say inventories are in line, while 14% say they are below planned levels).

On the rate front, motor carriers are still able to get increases from shippers, but as volume growth slows, so does the momentum on rate increases. Rail is a different story. Rates continue to rise by unprecedented percentages on the rail side, and those shippers who have not seen significant rate increases yet may be in for a shock. Many contracts have not come up for renewal, so some shippers are still paying below-market rail rates on contracts that were negotiated prior 2004. One third of respondents say their rail contracts have not rolled over yet.

In written testimony submitted last month to the Surface Transportation Board (STB), NITL stated that shippers are finding railroads more reluctant to enter into contracts or are shortening the duration of rail freight contracts. The railroads, said NITL, are moving towards more public pricing. The market and tight capacity are, no doubt, driving much of the move to market rates to allow railroads to adjust prices more often.

Cost factors such as fuel prices are coming into play on all modes, and for those railroads that have not been able to hedge fuel, costs have been moving up faster than for the railroads with a good hedge position.

In the period to April 2006, shippers expect rail rates (excluding fuel surcharges) to rise 5.6% (see box below). For the four largest Class 1 railroads, shippers expect to pay more than 6% increases, while the two Canadian railroads and Kansas City Southern are expected to see rate hikes of 5% or less.

Along with rates, shippers appear to be paying substantially more to railroads in the form of accessorial charges and fuel surcharges. NITL suggests that shippers are questioning whether the railroads are using accessorials and surcharges as revenue generators rather than simply a means to cover rising costs.

According to the Freight Pulse survey, many shippers indicate they are shifting freight to other modes in response to rate increases. (In the previous survey, shippers said they were simply paying the rates.) Some shippers say they have shifted freight to another railroad, and a few are changing sourcing locations to increase competitive options.

One company says it's buying vehicles for a private fleet to allow it to reach further than the current 150 miles that differentiates the economic range for truck vs. rail. With the fleet additions, the expectation is truck freight will be economical out to 250 miles, reducing dependence on rail.

Railroads with the best service levels tend to get the largest volume increases and have more leverage to command higher rates. On average, the railroads have improved service quality. Shippers indicate "delivery when expected" has improved slightly overall. Measured on a 10-point scale, the rail industry has improved slightly from 5.6 in the spring to a current 5.8. Leading the Class 1's is the Norfolk Southern (NS) at 6.8.

Motor carrier capacity continues to be a problem in truckload, though shippers perceive capacity is plentiful in the less-than-truckload (LTL) segment. Carriers with solid pay packages have less problem attracting drivers, and if service is top notch, shippers are more willing to pay higher rates for capacity guarantees and the better service levels. Carriers with less efficient operations aren't attracting the rates and, as a consequence, are less able to improve driver pay. C.H. Robinson, a non-asset-based third-party logistics provider (3PL), has taken an approach of faster pay for drivers its brokerage hires, which has helped it attract capacity in a tight market.

Fully two-thirds (67%) of respondents to the Freight Pulse survey say truckload capacity is tight. Just over half (52%) say intermodal capacity is also tight. The tables are turned in LTL, with 42% of shippers reporting national LTL capacity is abundant and another 44% saying it is balanced. Regional LTL doesn't look much different despite a number of carrier closings in the Northeast and Southeast. Nearly half of shippers (49%) say regional LTL capacity is balanced, and 38% say it is abundant.

With a perception that capacity is readily available for national and regional LTL, shippers' expectations for price increases dropped from the last two Freight Pulse surveys. A year ago, shippers said they expected to pay 3.9% more for regional LTL service and 3.8% more for national LTL. By March 2005, volumes (and volume growth expectations) were dropping and carriers were increasing capacity, leading shippers to say they only expected a 3.1% increase for regional rates and 3.4% for national LTL rates. That trend continues with the current survey, and shippers now expect to see only a 2.6% increase on regional rates and 2.9% on national LTL rates (all figures exclude fuel surcharges).

Actual rate increases for truckload have exceeded shipper expectations in each of the last six surveys (from May 2002 through March 2005). In September 2004, shippers expected truckload rates over the next six months to be 6% higher than the same period a year earlier. In fact, rates rose 9.9% in that period. In March 2005, shippers predicted a 4.7% increase and actually experienced a 6.8% rise. Given that shippers have underestimated truckload rate increases by 40% to 60% over the last six surveys, it's reasonable to expect truckload rates to rise by as much as 6% year-on-year between October 2005 and April 2006.

Intermodal has become increasingly important, driven by increased imports from Asia and fuel and other cost factors that make intermodal more competitive with truckload. In the last three surveys, covering 18 months of fact and forecast, shippers have predicted an average 4% increase in intermodal volumes. Tighter capacity has struck intermodal as well, and shippers predict they will see a 4.3% jump in rates in the next six months. This compares with a 2.9% increase forecast in March 2005 and a 2.2% increase in the year-ago survey.

Going by rail will cost more
It's no secret that spiraling out of control fuel costs are driving more shippers to consider rail and intermodal options, and the railroads right now are capitalizing on the situation. Shippers expect the cost of using rail to be 1.2% higher than they were in the spring. The good news is that rate increases for the motor carriers are continuing to slow, a good indication that capacity is loosening.