Trucking update: Buyers see light at the end of the tunnel
Shippers finally get relief as carriers report lower demand and expanded capacity for LTL and truckload.
By David Hannon -- Purchasing, 4/5/2007 6:00:00 AM
After seeing unprecedented demand and pricing for their services in the recent past, trucking firms are reporting a decrease in demand in early 2007, which is good news for shippers and freight buyers looking for more capacity and an end to high rates.
According to a recent Bear Stearns survey, 80% of shippers polled reported overcapacity in truckload in the fourth quarter, up dramatically from 54% in the third quarter. In the same poll, 71% of shippers reported overcapacity in the LTL market in the fourth quarter. And 51% of shippers polled expect more truckload capacity to come online in the next 12 months.
Finally, some light at the end of the tunnel.
Big shift
But what accounts for such a dramatic flip-flop of market dynamics and more importantly, how long will it continue? Trucking firms did a lot of equipment "pre-buying" in the second half of 2006 to beat the EPA regulations that went into effect in 2007 governing truck engines and fuel. The result has been a rapid increase in trucking capacity that met with an unexpected decline in demand for trucking late 2006 (see "Truckload capacity expands, shippers reap benefits," Purchasing, March 1, 2007, p. 25).
Wayne E. Johnson, director of logistics at American Gypsum Co. and chair of NITL's Highway Committee explains that, "These advanced purchases provide more capacity and, combined with the reduced volume from shippers, carriers are experiencing downward pressure on rates."
Diesel engine maker Cummins expects North American heavy-duty truck engine sales could fall as much as 50% in 2007, thanks to the pre-buying ahead of new emissions standards.
"We are expecting sales to be down 30%–40%," Cummins CEO Tim Solso told Reuters recently. But if truckers have stockpiled more engines than expected, the sales drop "could be as much as 50%."
From the carrier perspective, "When [trucking firms] do that pre-buying and have those trucks sitting up against the fence, it's difficult to not think about putting drivers in those trucks," says Mark Rourke, president of the truckload division at Schneider National in Green Bay, Wis. "The second half of 2006 there was a run-up in capacity on the road which was exacerbated by a tonnage drop off. That's why capacity is much more plentiful now than we've experienced in the past few years."
Rourke says Schneider is one of those firms—in 2007, it plans to buy only about one-third the equipment it would normally buy in a year because of its increased buying the year before.
Less-than-truckload carrier Con-way Freight in Ann Arbor, Mich. made sure the trucks it bought in 2006 didn't hit the roads—they may have been against the fence, but the keys weren't in them. "In 2006, we bought a little heavy and bought some additional equipment that will have the 2006 technology but most of those tractors didn't get delivered until January," says David McClimon, president of Con-way Freight. "Where possible, we had the equipment held by the manufacturer. And if it was delivered to the service centers, it did not have a license plate or the keys with it."
Rick O'Dell, CEO of Atlanta-based LTL carrier Saia, says engine specification changes are becoming the norm for trucking and the 2007 engine requirements didn't really impact Saia's equipment-buying strategy.
"We've had a number of engine spec changes over the years, so we don't expect this one to be a huge issue," O'Dell tells Purchasing. "We don't have as much pre-buying in LTL [as there tends to be in truckload]. We've taken the approach of just averaging the spec changes in each year as opposed to doing a lot of pre-buying and guessing what the capacity for the next year will be."
O'Dell points out that Saia's vice president of purchasing has an engineering background and is the main point of contact with the engine suppliers on the specification changes. "He knows what changes need to be made and what supplier relationships we can leverage to get them made," O'Dell comments. "We're hearing good news from the engine makers that they're having good luck with the new engines."
Douglas Duncan, CEO of FedEx Freight in Memphis, Tenn., says the industry has learned that fighting these updates is fruitless. "When the industry got word of the 2002 engine change, it spent all its energy trying to fight it," Duncan says. "But in the end we learned we're going to have to do it. The environment is a critical issue and if we're going to operate in big cities we have to do this."
FedEx Freight did not pre-buy engines in late 2006, opting instead to maintain its regularly scheduled replacement cycle. "I am sure we will have to tweak the new engines, just as we did the 2002 engines," Duncan says.
Off-peak peak
But concerns in the trucking industry go beyond the engine technology. The traditional peak shipping season in 2006 was nearly non-existent, according to most carriers and market watchers. The question on both shippers' carriers' minds is: "Was that a one-time dip or is that the new model?"
O'Dell also says he has researched some theories on why the peak season did not materialize in 2006, including one that says retailers are changing their inventory strategies to emphasize post-holiday sales, which spreads the peak season out more. And that's not a bad thing, because less dramatic spikes make it easier for carriers to plan capacity.
| The trucking market was very different a year ago. Read Purchasing’s 2006 trucking report, “LTL buyers face an uphill battle.” |
"But that's a lot of theory," he says. "The real issue is how do we plan capacity for next year's peak season if we're not sure if this was a one-time slow down or a change in the way things are shipped?"
Rourke says there were certain areas—around the ports as you might expect—that were still robust during the peak season of 2006, but "there were also many areas where there was unprecedented softness. It was the softest surge period I've seen in 19 years in the business in some of those areas. It wasn't universal—it was regional—but when you look at it in aggregate, I would say it was a surge that never really materialized."
Rourke says there has been some speculation that increased consumer buying via the Internet has limited retail's need for holiday shipping. "We've studied this quite a bit and I don't think [the lack of peak season] will be the norm, but at the same time, I don't think we're going back to the traditional peak spikes we saw in 2004 and 2005. It will be much firmer than we saw in 2006."
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The lower peak demand may have been the result of better planning and advanced supply chain technology. "And there have been some changes in distribution patterns, which when added to the increase in capacity may account for that lack of peak season," McClimon says. "But right now, I think everyone's interested in finding out if this was a one-time thing or a new trend in the shipping season."
Shippers dive deeper
Johnson says since pricing in both the LTL and truckload segments has slipped, shippers today are reviewing the competitiveness of their carrier base more so than in the recent past.
"Annual bid packages can contain provisions which do not allow rate adjustments until the term of the contract has expired but many shippers have forecasted correctly and have chosen not to annualize their bids to take advantage of this weaker market," he says. "Shippers also understand better that carriers must reinvest in their equipment in order to provide proper service levels and maintain fleet costs."
And every carrier contacted by Purchasing reported that shippers and freight buyers today are increasing the amount of information they request from their current and potential carriers.
Saia now shares more of its costing data with customers. If delivery to certain locations takes significantly longer than others, shippers and carriers can now work more collaboratively to reduce time and costs which benefits both parties. "Shippers are less likely to have to put the business back out to bid and we're less likely to have to institute a rate increase," O'Dell says. "We're educating our salespeople to not necessarily go for a rate increase if there's a chance to reduce costs collaboratively."
| Want to get more information on truckers' buying plans for 2007? Click here to read a Reuters story on the subject. |
Rourke says Schneider's customers ask more about the carrier's green initiatives and fuel-savings programs in light of high fuel prices. "We're investing in in-cab heaters that don't require a truck to be idling for the heat to be on," he says. "And we're trying to be as diligent as possible about not running empty miles, given the high fuel prices."
McClimon reports that the information freight buyers are requesting in bids is changing. "Our customers want more financial information and clarity on how we're operating," he says. "We also get more questions about our certifications and third-party validations such as our ISO processes and Six Sigma initiatives, especially from shippers with similar goals and processes."
For more information check:
Environmental Protection Agency’s SmartWay Partnership:
Buying Green: Engine, fuel costs are top concerns
Truckload capacity expands, shippers reap benefits
Why the new engines?
The new regulations from the Environmental Protection Agency require all trucks on the road use new engines that use cleaner technology and ultra-low sulfur diesel fuel. And clearly the data behind the regulation explains why the new regulations were needed.
According to statistics from the EPA, combined truck and rail transport consume more than 35 billion gallons of diesel fuel each year, which produces more than 350 million metric tons of carbon dioxide each year as well as a vast amount of nitrogen oxides (NOx), a contributor to ozone smog. Ground freight contributes 40% of transportation related emissions of NOx and 30% of particulate matter emissions.
The SmartWay partnership created by the EPA focuses on helping trucking and rail carriers reduce their emissions.
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