As shippers begin preparing for the fall peak season, they may be mildly surprised to find that trucking prices are slowing — not by much, but at least a little. That's the good news, such as it is, as revealed in the latest Freight Pulse study, conducted by equity research firm Morgan Stanley (www.morganstanley.com) with Logistics Today and the National Industrial Transportation League.
According to Morgan Stanley's analysis, the less-than-truckload (LTL) carriers have excess capacity, despite an impression (fostered largely on Wall Street) that capacity is tight. On a scale from 1-10, with 10 being "very tight" and 1 being "abundant," shippers rank regional LTL capacity at 3.9 and national LTL at 4.3.
It's a different story for truckload and, to a somewhat lesser extent, intermodal.
Shippers surveyed in the Freight Pulse study rank truckload capacity at 6.5 (down significantly from the 7.7 rank in the previous study, conducted last fall). Intermodal came in at 6.0 (also down from 6.7 last fall). A score of 5 is considered "balanced."
Coincident with the mixed reports suggesting an overall slowing of the U.S. economy this spring, freight volumes picked up a little later than usual from their usual post-Christmas patterns, says Morgan Stanley analyst Chad Bruso. The seasonal rise in freight demand that typically occurs around early April was delayed in 2005, but truckload demand was increasing as of the beginning of May. But Bruso was quick to point out that capacity in the truck-load sector was also increasing.
In the LTL segment, carriers announced general rate increases early this year and they had moderated their published increase somewhat from the high levels announced in 2004. The general rate increases averaged 5.6%, compared with 6.0% in 2004. While the truckload sector struggles with capacity, "The LTL industry has excess capacity and industry-wide price increases will decelerate for the remainder of 2005 and into 2006," says Bruso.
In the Freight Pulse survey, truckload shippers say they expect to see volume increases of 4.3% in 2005. Looking forward, LTL shippers also expect to increase regional shipments by 4.1% and national LTL shipments by 2.7%. While each of these categories demonstrated slight drops in anticipated volumes, intermodal is expected to rise 2.9% in the six months from March 2005, picking up its pace from the 2.2% reported in the previous survey.
General rate increases, which apply to non-contract LTL freight, account for 40% to 50% of the carriers' business, according to Morgan Stanley (see accompanying charts ). Published rate increases typically fluctuate between 5% in weak pricing environments and 6% in stronger pricing environments. With the LTL carrier segment divided roughly equally between publicly and privately held companies (based on total industry revenues), Morgan Stanley examined capacity-trends and found the privately held LTL companies were increasing capacity faster than the publicly traded companies.
Publicly traded carriers increased headcount 4.1% vs. 6.1% for privately held companies, according to Morgan Stanley. And while publicly traded companies increased their tractor fleets by a modest 1.6%, private firms added 8.3% to their fleets.
Privately held carriers, which equate to regional carriers, have had lower general rate increases than the publicly traded carriers. Estes Express Lines, which Morgan Stanley indicates is the largest privately held LTL carrier, announced a 4.6% rate increase, its lowest publicly available rate increase in five years and well below its 2004 increase of 5.9%.
With truckload capacity tight, many shippers have responded by shifting to other modes where they could. Morgan Stanley reports 53% of truckload shippers responded to capacity constraints by shifting modes. Of that group, 46% moved freight to LTL and 36% shifted to intermodal. The overwhelming majority intend to move those volumes back to truckload as capacity becomes more readily available. Only 33% say they will not return the shifted freight to truckload. Morgan Stanley also documented the truckload shift by measuring growth in shipment size. Since the third quarter of 2002, shipments weighing more than 10,000 pounds have increased faster than will land. Despite the strength of the carriers' positions, LTL companies aren't expected to see the full amount of their announced rate increases.
The overall strength of the U.S. economy and any shifts between consumer and commercial buying will all come into play through the remainder of the year.
Rail volumes have also been increasing, led by growth in intermodal traffic. Morgan Stanley analyst James Valentine reports shippers are maintaining their expectations of historically high rail rate increases. The Freight Pulse survey indicates shippers expect no change from the 4.4% increase they projected in September 2004. Prior highs were 2.7% in May 2001 and 2.6% in March 2004.
By carrier, it should not be a surprise that the railroads with the best performance were able to command rate increases higher than the average. Union Pacific led shipper expectations with an anticipated 5.5% increase in the March survey, down from 5.7% last fall.
Unlike the mode shift from truckload, rail shippers feel they have fewer options when facing higher rates. Asked which statements they most strongly agreed with, shippers say they have not made a mode change and were paying the higher rail rates.
The rise in intermodal was attributed to strong import growth of lower valued goods from Asia and the fact that truckload base rates had reached a level where intermodal was competitive. Nearly as strong in shippers' opinion were the forces of fuel surcharges and tight truckload capacity. Far fewer shippers report that they shifted to intermodal because service had improved.
The better performing railroads have generally been rewarded with larger volume increases. Norfolk Southern, which stood to see a 3.6% increase in volumes, according to the Freight Pulse survey, led the Class 1 railroads, but was far below the 8.5% increase reported last fall. It was followed by Canadian Pacific with a 2.3% increase. CSX turned its 0.3% decrease-in volume reported last fall into a 1.8% volume increase this spring. Union Pacific, on which shippers said they would reduce volumes by 3.4% in September, expected to see a 0.5% increase in the six months from March 2005. Union Pacific still lags in shippers' rankings of deliveries when expected (3.7, compared to an industry average of 5.6), but this was an improvement from last fall, when the railroad was given a 3.2 on a 10-point scale. Leading the pack on performance is Kansas City Southern at 6.8, followed by Burlington Northern Santa Fe, Canadian National and Norfolk Southern, all at 6.2.
Carriers appear to be moderating their view of what is a realistic request for rate increases in 2005. Volumes remain high relative to capacity, but shippers have become more comfortable with some additional inventory buffers and alternate transportation strategies.
The windfall year of 2004 that produced record profits for most carriers is over, but motor carriers should still be in a strong position for 2006. With capacity building in the LTL sector and concerns over chronic driver shortages in truckload, there are still questions where rates will land. Despite the strength of the carriers’ positions, LTL companies aren’t expected to see the full amount of their announced rate increases.
The overall strength of the U.S. economy and any shifts between consumer and commercial buying will all come into play through the remainder of the year. LT
A decade of general rate increases: 1997-2005
(based on available data from LTL carriers)
1997 ............................................5.8%
1998 ............................................5.4%
1999 (Jan.) ..................................5.6%
1999 (Oct.) ..................................5.1%
2000 ............................................5.6%
2001 ............................................5.8%
2002 ............................................5.9%
2003 ............................................5.9%
2004 ............................................6.0%
2005 ............................................5.6%
Source: Morgan Stanley/company reports
