Trucking is confronting a new era of logistics uncertainty, according to an annual report being released today; one where e-commerce, new technologies and business tactics, plus more regional and last-mile freight demand could upend the industry’s economics for years to come.
The annual State of Logistics report, compiled by consulting firm A.T. Kearney with the help of the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics, analyzed multiple trends that are affecting every mode of freight transportation in the U.S.
This year’s report recorded the first decline in U.S. business logistics costs since 2009, even as a surging e-commerce sector propelled demand for parcel delivery services, with motor carriers in particular facing the “familiar challenges” of overcapacity, rate pressure, and sluggish freight demand as a result.
When coupled with nominal gross domestic product (GDP) growth of 2.93%, business logistics costs as a percentage of GDP declined 34 basis points to 7.5%.
“At the midpoint of 2017, we see a backdrop of economic and political uncertainty,” according to the report’s lead author, Sean Monahan, an A.T. Kearney partner. “An array of mixed signals vexes decision-makers, who see consumer confidence rise while GDP growth disappoints, and government officials struggle to take clear action related to stimulating growth, addressing infrastructure requirements, and trade policy.”
As a result, the U.S. logistics industry appears destined for a “prolonged bout of cognitive dissonance,” he wrote.
Yet such “uncertainty” isn’t slowing the pace of change; on the contrary, the logistics report noted that many industries are now “churning with disruption” as newcomers and incumbents vie for market share, and innovation undermines old business models.
“One thing is certain: ‘business as usual’ won’t return,” Monahan noted.
Where trucking is concerned, several conflicted trends are occurring.
On the one hand, an A.T. Kearney analysis of Truckstop.com data showed that spot rates for dry van shipments jumped 10% in 2016, with full truckload rates also overcoming early weakness to close 2016 above 2015 levels, according to Morgan Stanley’s Full Truckload Index.
Yet rates remained below $2 per mile, too low too low to relieve the financial woes for some motor carriers and leading to the removal of over 14,000 trucks from service last year, according to data tracked by Avondale Partners – triple the number idled in 2015.
Overall, truckload and intermodal segments finished 2016 weak, while the LTL segment managed to push through moderate rate increases even as volume declines depressed overall revenues. By contrast, dedicated contract carriage (DCC) and brokerage services were industry “bright spots” where new business models are taking shape.
Yet in a sign that many motor carriers believe the worst is over, orders for new tractors picked up in late 2016. Although net orders for Class 8 tractors declined 36% last year, they surged 106% between July and December 2016.
“Early results for 2017 appear to support carrier optimism. Rates have continued to rise, and publicly traded carriers generally met or exceeded Wall Street earnings expectations for the first quarter,” Monahan noted in the report, adding that motor carriers are hoping rates will firm up further as stronger economic growth and a looming electronic logging device [ELD] deadline reduce excess trucking capacity.
A few other trucking related trends A.T. Kearney noted in its annual report include:
- Initial predictions that ELDs would reduce available capacity by 3% to 10% appear to have overstated the amount of “cheating” going on under the old manual hours-of-service tracking regime. The capacity impact is probably in the 2% to 3% range.
- More shippers are embracing DCC arrangements that lock in capacity, rates, and service levels. Yet they are also tasking their trucking partners to find backhauls and share revenues in such arrangements now.
- E-commerce retailers are winning customers away from traditional brick-and-mortar stores by promising fast and free delivery to innumerable locations across the country. To fulfill this promise without crushing profit margins, they are looking to reduce shipping costs and reconfigure distribution networks.
- Regionally oriented distribution centers have emerged as linchpins of advanced networks as retailers offering same-day delivery move goods closer to densely populated areas.
- Those redesigned distribution networks require new trucking routes, with motor carriers shifting line-haul routes to transport merchandise from national distribution centers and rebalance volumes between local and regional centers.
- Last-mile capabilities are essential to same-day delivery and motor carriers will continue striving to build the local route densities necessary to provide last-mile services profitably.
- Connected vehicles and “Uberization” have the greatest near-term disruptive potential. Yet some shippers and motor carriers are reluctant to adapt Uber’s ride-sharing model for moving millions of dollars’ worth of freight as that requires higher levels of planning, qualification, and service than ferrying passengers across town.
- Electrified Class 8 trucks could spawn a new business model in trucking, allowing motor carriers to “rent” power through interchangeable batteries that are swapped out at stations along highways as they run out of juice. This approach, based on aviation industry practices under which airlines rent power from engine manufacturers, could drive down operating expenses and equipment costs for truckers.