Trucks at Work

How quickly the pendulum swings

So truck capacity is loosening up due a range of factors, including the strong U.S. dollar, still-weak consumer demand, and a cratering energy industry over low oil prices. Sure, fuel prices are down, but that’s not exactly helping trucking’s bottom line as it removes fuel surcharges from their revenue stream.

Obviously, all of this gives motor carriers the weaker hand in the freight world right now. So what are shippers doing as a result?

In the words of John Larkin: “Kick them when they are down.”

Larkin, managing director and head of transportation capital markets research at Stifel Financial Corp., made some fairly grim predictions for the freight world earlier this year – especially for truckers – and sad to say some of them are coming true

“Shippers, who 12 to 18 months ago when capacity was in short supply were visiting carriers to deepen strategic partnerships, have, in many cases, reverted back to their tried and proven Neanderthal practices,” he explained in a recent research brief, based on two weeks of visits with various privately-held trucking companies and third party logistics (3PL) firms.

“When supply and demand is loose [shippers] conduct an auction and capitalize on the surplus capacity presently available in the market: Kick them when they are down, so to speak,” Larkin (at right) said. “So if weak volumes, brought on by the strong dollar, weak energy prices, and a lethargic consumer aren’t enough, carriers are scrambling to respond to comprehensive bid processes, often administered by emotionless consultants.”

While “incumbent” carriers and brokers may retain a slight advantage in this re-bidding process, he stressed that – more often than not – the low bid wins.

Yet often the low bidder cannot meet the shipper’s service standards, so some of that “re-bid” freight eventually gravitates back to the shipper’s previous carriers.

But by then, the damaged is done, as the shipper’s network balance is thrown out of whack and, in turn, carriers “scramble” to rebalance their networks with additional business often secured at less than desired prices, he said.

All of this is proving something of a shock to Larkin and other analysts, simply because of the major capacity constraints everyone knows lurks just over the trucking horizon.

“We were surprised at the speed with which shippers reverted to the ‘low price wins’ strategy,” Larkin emphasized. “Certainly they know that the laundry list of federal safety regulations is coming down the regulatory pipeline at a relatively quick clip. Even with the weak demand conditions presently in place, it would not require a huge leap of faith to see supply and demand tighten significantly in 2017 as carriers comply with the federal electronic logging device (ELD) mandate.”

In addition, he’s heard that some shippers that had shifted to one-way truckload service are now shifting back to the spot market. On top of that, some TL lost some share to intermodal as rail service levels recovered, while several dedicated fleets are being unwound in favor of one-way truckload service.

“These opportunistic changes are all designed to squeeze down transportation and logistics costs that had spiked in recent years, thanks to tight supply and demand conditions which persisted across vast swaths of the [trucking] industry,” Larkin pointed out.

Yet he feels this “short-term” capacity glut situation may persist for a time, hampering the ability of trucking companies to win rate increases.

“Freight volumes remain weak across the board [and] only a few carriers suggest that freight is actually normal on a seasonally adjusted basis,” he said. “Certainly carriers can look forward to some seasonal strengthening in freight demand as the year 2016 progresses. However, they shouldn’t expect enough tightening in supply and demand to drive pricing much above flat to slightly up year-over-year.”

Not a happy view of trucking’s prospects, that’s for sure.

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