There’s an awful lot facing trucking these days on many different fronts.
Take the recent efforts on Capitol Hill to make changes to current hours of service (HOS) rules – those got tangled up in fiery public debate following a highway crash that involved a Wal Mart tractor-trailer that ended up killing comedian James McNair and severely injuring fellow actor Tracy Morgan.
Indeed, regulations governing trucking operations alone are becoming a top driver of carrier costs, and that’s before factoring in the sticker price increases for new trucks due to emission control mandates, or the impending cost hikes due to soon-to-be-imposed greenhouse gas (GHG) rules.
This is all before we get to other big issues such as the ongoing driver shortage, cargo theft, the Compliance Safety Accountability (CSA) program, a growing lack of trucking capacity, even a growing feeling that today’s supply chain structures may be inadequate.
That’s quite a laundry list, if I say so myself.
Trying to put all of this in perspective against a backdrop of still-sluggish U.S. economic growth and other “macro” trends that could affect freight volumes for the rest of 2014 is a tall order, but David Ross, a managing director for Wall Street investment firm Stifel, Nicolaus & Co. recently took a crack at it and I think you’ll find his analysis insightful.
The recent unveiling of the 24th annual State of Logistics report compiled by Rosalyn Wilson helped crystalize some of Ross’ thinking in terms of the “macro” trends that may be forming near-term for trucking, so keep that in mind as you review his outlook points below:
The economy has been and still is struggling, resulting in a depression of freight volumes: Real GDP [gross domestic product] grew at a meager 1.9% in 2013. In some areas of the economy there were rays of light, but few of them managed to illuminate the world of freight logistics. Some factors contributing to positive GDP growth included increased inventory investment, a deceleration in imports, and strengthened state and local spending; the first two of those factors do not directly relate to improved freight logistics. New housing starts continue to lag, which some experts speculate is due to excessive student debt, slow job growth, and delayed family formation, among other demographic factors. Moreover, a congressional budget standoff and subsequent shutdown forced many into temporary unemployment, pushing contracts into 2014 or delaying them indefinitely. On the plus side, household net worth strengthened, consumer credit has leveled to pre-recession totals, domestic energy is making local production more affordable, and de-globalization looks to onshore some manufacturing jobs.
Consumer habits are evolving and fulfillment logistics will need to change to meet their needs: In 2013, online sales reached record highs, contributing to the inability of some parcel carriers to meet delivery deadlines. Amazon even limited signups for its Prime service to try and make sure orders got fulfilled within guaranteed timeframes. The shortened but intensified peak we witnessed in December 2013 is representative of shifts in American consumer behavior, and will necessitate flexibility and concurrent, real-time adaptations of supply-chain practices to better manage cost, service and competitiveness, in Stifel's view.
Truckload capacity is likely to further decline: Contrary to carrier counterparts in alternate modes (rail, air, and ocean) trucking companies are more likely to fail or reduce capacity in an economic downturn than they are to invest heavily in growth. Although the industry remains near record utilization levels, shippers perceive that they have enough options to stave off rate increases, and in many cases, for-hire trucking companies have capitulated and those shippers have been proven right. As costs continue to rise, the industry continues to see elevated failure rates. By the end of 2013, trucking bankruptcies had increased for seven consecutive quarters, reaching a three-year high.
There are a number of regulatory and demographic drags to trucking capacity, with very little in the way of capacity increasing offsets: Among those potential offsets, Mexican drivers/trucks are unlikely to produce much incremental relief due to political and regulatory hurdles. Plus, currently, Mexican drivers are only allowed to traverse Mexican origin/destination routes and prohibited from making intra-U.S. pickups. Longer Combination Vehicles (LCVs) and increased weight limits are also mired in legislative and regulatory gridlock (with the LTL carriers pushing for twin 33-ft. trailer combinations). These capacity-increasing measures are most needed at the tails of transportation routes—often in urban or semi-urban regions, the regions where such capacity expanding measures are least likely to be approved, in our view. With regard to higher weight limits, the majority of trucking shipments cube-out, as opposed to weigh-out, meaning that volume is often the limiting factor, not weight. Finally, while greater length and weight limits may increase capacity and efficiency, they often produce greater strain on highway infrastructure, which might create a further regulatory impediment due to the dire state of much of our nation's road infrastructure, in Stifel's view.
The “regionalization” of supply chains seems to be a uniform trend across multiple shipper network strategies: Those shippers opting for such strategies cited better flexibility in terms of sourcing, replenishment, and fulfilment of inventory, as well as faster time-to-store. More intermediate DCs [distribution centers] were also credited with absorbing some of the unpredictability of intercontinental moves, whether inherent (natural disaster, political instability, etc.) or market-based (slow steaming, skipped sailings, etc.). As an aside, some feel that shorter-haul moves are beneficial for driver recruitment as far as improving quality of life and reducing time away from home.
One of the more significant byproducts of unhealthy intercontinental carrier markets, particularly in ocean freight, is the effect on supply chain reliability: The influx of 18,000 TEU (twenty-foot equivalent unit) mega-vessels, the pervasive and persistent unprofitability of the container lines, and significant bunker fuel costs, have driven most ocean carriers to a cost-based internal focus, as opposed to a service-, share-, or growth-oriented focus in our view. As such, tactics like slow-steaming and skipped sailings have become commonplace. While overcapacity means that shippers have favorable bargaining power, all else equal, it also means that service reliability suffers. For those shippers with complex, high-value, or fast-moving supply chains, these tactics incur a big cost as far as speed and predictability are concerned, and may actually drive high-service shippers up the service cost/value ladder in search of greater reliability, leading to more potential airfreight or higher inventory levels.
It’s not all bad for trucking, though, as a persistent shortage of capacity could finally help carriers win must-needed rate increases – an issue that’s been long on the minds of truckers. Let’s just hope the positives outweigh the negatives as we enter the second half of 2014.