Carriers Now Have Upper Hand

February 4, 2005
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GRAND RAPIDS — For the first time in decades, trucking carriers are in a position of strength.

"Virtual self-destruction" of the trucking industry finally reached equilibrium last year. Carriers large and small have shuttered their doors — including last May's folding of USF Red Star in response to a threatened Teamster strike — while the industry slowed the creation of equipment and drivers.

The result was a sudden shortage of shipping capacity that, despite relentless fuel surcharges, has put trucking on the sunny side of the supply/demand curve for the first time since deregulation.

"We've been with the company for over 20 years and we've never seen it like this," said Pam Hassevoort, CEO of Foreway Transportation Inc. "This has always been a difficult business to make a profit in — you'd have good years and bad. Last year was a very good year."

"We've never seen it in this severity," said Rick Ensing, president of Foreway. "This was the perfect storm."

Donn Herreman, executive vice-president of non-asset based logistics firm Cargo-Master Inc. said 2004 was a banner year, and he expects the same for 2005.

"As a broker we gained on the field," he said. "Capacity has been an issue for all of our customers, but we benefited by aggressively marketing to smaller carriers and growing our dedicated fleet."

Cargo-Master has 30,000 carriers under contract. Through cooperation with branch offices across the nation, it has taken advantage of business that other carriers can't — namely little or no lead-time freight that other providers turned away.

"We've been able to take the capacity issue and use it as an advantage," Herreman said.

Other brokers aren't as cheerful.

"Business is good," said Nationwide Transportation President William Meyers. "But we had some difficulties last year because of a shortage of carrying capacity."

Historically, West Michigan has always produced more than it has received, and that natural imbalance is still there. But many carriers diverted attention elsewhere in the state, including over 100 tractors to a single expanded factory in northern Michigan.

"Instead of excess capacity, we now don't have nearly enough," Meyers said. "In the second half of the year, carriers started to realize that they were in demand for the first time in a century."

Foreway Transportation has struggled to meet the demands of walk-in business. "We've turned away a lot of shippers," Hassevoort said. "We don't have the capacity. We need to take care of the accounts we have under contract."

As such, Foreway has seen higher revenue per mile but has not been able to expand on that.

Not like it isn't trying.

Foreway has boasted an average fill-ratio of 97 percent as the driver shortage kept up to a third of some carriers' fleets off the road. Ensing attributed this to a substantial increase in Foreway's pay last year to attract new drivers.

Herreman mentioned that the driver shortage could be a boon for the economy, as displaced factory workers may find employment in transportation.

Ensing disagrees.

"If Joe Blow loses his factory job and wants to drive trucks, we can't hire them," he said. "We only hire drivers with a couple of years' experience. They'll have to pay their dues somewhere. They want to be home with their family at night, but they'll be gone sometimes for months. There is a huge price at the entry level."

While deregulation eliminated most barriers to enter the market, new barriers aggravate the capacity problem. Besides a lack of drivers, insurance costs skyrocketed and manufacturers slashed equipment output in recent years.

Ensing said there is a three-month lead-time on new equipment. New entries are in line with fleets that waited through the recession to replace aging equipment.

"Time heals everything," Ensing said. "Independents are going to come back. It's still an easy business to access and the carriers will increase their fleets. More people will start schooling drivers.

"The holdback is insurance and drivers. It will take longer to heal because of driver pay."  

Meyers believes that 2005 will be one of the best years transportation has ever seen. But it won't be the cheapest.

"It took 23 years for the industry to virtually self-destruct and bring the price of product down to virtually nothing," he said. "It's not going to take 23 months to build a reasonable compensation for the services performed in the industry."

He reported a major price increase in the last quarter of 2004, which he will be forced to pass along to his customers in 2005.

Using USF Red Star as an example was Bruce Ferrin, Western Michigan University associate professor of marketing and integrated supply.

"When USF shut them down, that completely changed the economics of competition in that region," Ferrin said.

Ferrin explained that Red Star was a marginally performing carrier that stayed afloat through aggressive price-cutting. With it gone, so went the region's price competition.

"That's a microcosm of what's happening across the nation."

Customers should expect to bear the brunt of higher fuel costs, driver pay and insurance prices.

A logistics management survey co-sponsored by DHL and Reed Research Group last month predicted rate hikes of 4.5 percent across all modes of transportation in 2005 and 4.6 percent increase in trucking rates. Of respondents, 82 percent saw prices rise in the fourth quarter of 2004.

The majority blamed higher fuel costs (52 percent), followed by insufficient carrier capacity (32 percent).

Less than a third predicted shipping capacity to improve in the first quarter of 2005. Only 14 percent saw improved availability in the fourth quarter of 2004.

According to another Logistics Managementreport, express shippers UPS, FedEx and DHL each announced domestic average increases of a uniform 2.9 percent, with varying rates by delivery type — the highest being UPS Hundredweight Service, an LTL carrier, at 5.9 percent.

The Masters of Logistics survey last fall reported similar findings. Over the past two years, respondents had indicated that cost cutting was their primary strategy. With freight rates rising, though, shippers may have resigned themselves to higher costs, as only 16 percent named cost leadership as a driver. Instead, customer service was the leading strategy (36 percent).

While confirming drops in carrier capacity (3.5 percent for truckload) and noting declining delivery times, the report also showed shippers keeping a tight lid on inventory. Managers on average reported only 12,997 stock-keeping units in warehouses, a sharp reduction from 16,175 the previous year.

Ferrin believes that such a continued focus on lean or just-in-time manufacturing may set the stage for catastrophe.

"We may be on the verge of a major paradigm shift away from lean," Ferrin said. "Just like we saw a shift toward it 20-some years ago."

Ferrin explained that lean concepts were developed for a different economic climate. Twenty-five years ago, money was expensive, interest rates were high, and the just-deregulated transportation industries had excess capacity and were all competing on price (often with discounts of up to 60 percent off published tariff rates).

"Money was expensive so inventory was expensive, transportation was cheap," Ferrin said. "It made sense to strip away your inventory."

Today, the opposite factors exist: Money is inexpensive, interest rates are low, the shipping industry has shed its excess capacity and prices are steadily rising.

"There aren't carriers left that will haul unprofitable traffic," he said. "Then with the crunch of the booming import volumes from China and Asia, carriers are in a position where they can start to charge compensatory rates for the services they provide."

Besides pricing, there are performance issues.

Ferrin cites Ford Motor Co.'s logistics nightmare that caused it to close its Hapeville, Ga., plant for two days in August due to a lack of parts.

"Some people are saying this is the shape of the world for the foreseeable future. Rates are going to increase, and people are going to take a hard look at how lean lean should be."    

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