The situation is already painfully familiar to shippers who've been out scouting for truckers to deliver their Shrek 2 DVDs and Grinch-themed underwear to store shelves for the holiday season. Not only is a good truck hard to find, but if you are lucky enough to locate one, it's going to cost you more to hire that truck than it has in a long time. That's generally the case whether you're talking truckload, less-than-truckload or intermodal providers.
And transportation executives are warning shippers to expect more of the same next year. In a recent teleconference on the state of the freight industry sponsored by Tranzact Technologies, four carrier executives agreed that rates would likely rise and that capacity would remain tight in 2005. "Capacity will be king in 2005," Dan Hartman, executive vice president of operations for Hub Group, told listeners.
However unwelcome this news may be, at least shippers are being forewarned. That apparently was not the case in 2004. Mike Regan, chief executive officer of Tranzact, which makes transportation management software, told the audience that by early November, shippers were complaining that they had already blown their transportation budgets for the year. "Company after company has told me they thought their transportation expenses would rise 2, 3, 4 percent [in 2004]," he said, "but it looks like the increase was actually closer to 6 or 8 percent."
Ed Wolfe, a securities analyst who specializes in transportation for investment bank Bear, Stearns and Co., predicted that 2005 "is going to be a really bizarre year." The capacity crunch has forced many shippers to rethink their transportation purchasing plans, he explained—in some cases, prompting a complete reversal of their strategies. For years, conventional wisdom has held that shippers get the best deals by concentrating their business with a few "core" carriers. But Wolfe reports that his quarterly shipper surveys indicate that large numbers of shippers are doing the exact opposite: They're expanding their carrier rolls as they desperately search for space.
Feeling the pain
What's to blame? It appears that a number of unrelated factors have conspired to brew a perfect storm. A resurgence in manufacturing has driven up demand for freight services; fuel and insurance costs have soared; the pool of available drivers has all but dried up—particularly in the truckload sector; and truckers and railroads alike have been slow to add equipment.
Shippers may get some relief when the peak shipping season ends. Truck orders are up sharply, an indication that more over-the-road capacity may become available. The major railroads are likewise spending money to improve capacity, installing double tracks in lanes where single tracks had limited train movements to one direction at a time, for example. And the executives taking part in the teleconference predicted that fuel prices would ease somewhat.
But the pressure on capacity and rates won't disappear any time soon.Matt Rose, CEO of BNSF Railroad, reported that the railroad had seen significant growth in volume—11 percent in the third quarter alone. He expects BNSF's intermodal volume will grow substantially in 2005, largely because truckload and LTL rates have shot up faster than rail rates. "We're seeing an almost insatiable desire to change modes," he said.
Duane Acklie, chairman of truckload company Crete Carrier, acknowledged that a great deal of truckload capacity vanished between 1998 and 2003 as carriers fled the business, but warned that simply adding back equipment wouldn't make much of a dent in the problem. The real problem is the driver shortage, he reminded his audience. And no one's optimistic that will be solved any time soon. The driver workforce is aging, and truckers are finding it harder to recruit young people, particularly at current industry pay scales. And just as some drivers quit the business when new hours-of-service regulations prohibited them from splitting hours, Acklie expects that other drivers will walk out if the federal government mandates that their employers install "black boxes" that monitor truck movements in their cabs.
"Right now [capacity] is probably as tight as it can get, and I think 2005 will probably stay that way," Acklie said. However, he was willing to offer shippers some hope: "In 2006," he says, "I expect that will ease."
Editor's note: For more on market conditions in the motor carrier industry, watch for DC VELOCITY's January issue.
Gartner, Inc.
