Shippers may gain from slowing demand
By Staff -- Purchasing, 1/25/2001 2:00:00 AM
Transportation needs will see a slowing this year, analysts, shippers and carriers all predict. With that will come increased leverage for shippers and possibly a dip in transportation freight rates.
"We will see a lessening of the peak [in demand] and we are in a softer economy," says John Ficker, logistics development manager for Weyerhaeuser and a member of the National Industrial Transportation League. "There has been some lessening, just enough to ease the pressure." The economy "is slowing down," Ficker agrees. "[Fed Chairman] Alan Greenspan wanted to slow the economy down and he's done it; I hope it will be a soft landing."
Not all modes were experiencing a decline by the fall. Air cargo carriers reported near the end of 2000 that they were well placed to announce earnings in line with or better than expectations, according to the most recent industry update from BB & T Capital Markets. The Boeing World Air Cargo Forecast 2000/2001, issued at the Air Cargo Forum 2000 in Washington, forecasts that the world air freighter fleet will double in 20 years. The forecast predicts that world airborne cargo will grow at 6.4% annually during the next 20 years.
But by late 2000, most other modes had experienced ups and downs when it came to demand, but the common denominator was a slowing of growth. Consider these facts:
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The Truck Trailer Manufacturers Association reports that sagging shipments of van trailers during the first half of 2000 threw a bucket of cold water on hopes for an increase in truck trailer shipments. These caused the total shipment figure to lag 3.3% behind the midyear figure in 1999. Total shipments for trailers of all types were 135,645 for the first six months of 2000, compared with 140,239 in 1999. This downward trend was expected to roll into 2001.
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In its 2000 Truck Industry Demand Outlook, analysts at A.G. Edwards state that 1999 represented a peak in both U.S. class 8 and class 5-7 truck production. The 2001 production estimate showed a decline of 10%. One of the reasons for this prediction: The continued rise in interest rates and diesel fuel prices pose a threat to truckers' ability to purchase trucks.
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Freight traffic on U.S. railroads was off during the week ending Nov. 11, 2000, in comparison with the same 1999 week, the Association of American Railroads reports. Total volume was estimated at 29.0 billion ton-miles, down 2.7% from the corresponding week in 1999. Intermodal traffic was off 0.2%, totaling 187,229 trailers and containers. Carload freight, which does not include the intermodal data, totaled 334,144 cars, down 3.9% from 1999. Carload volume was up 0.7% in the East, but down 7.6% in the West. Fourteen out of 19 commodity groups were down for the week, with loadings of metallic ores off 14.2%, grain traffic dropping 12.4% and chemical traffic declining 8.9%.
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The major U.S. ports, key barometers for ocean cargo trade, say in late fall 2000 that there was a slight drop off in shipping activity. The news was not all bad. Paced by equally strong export and import gains, shipping terminals at the Port of Long Beach, for example, had a record 4,564,429 20-foot-long container units in the fiscal year from October 1999 through September 2000, an increase of 6.1% over the 1998-99 fiscal year's record-setting total. From month to month, however, cargo volumes varied greatly during the last 12 months. After a record-breaking month in August 2000, the container cargo total fell in September to 387,593 20-foot equivalent units (TEUs). The total was a 3.8% decline from the September 1999 total-the top month for all of that year. And September marked the first full month in which the Port of Long Beach lost market share to the Port of Los Angeles. In September, the two ports combined saw import volumes increase 7.4% from 1999. But they still were down 9.1% from August levels.
Uncertain new year
But, does a slowing in demand last fall mean a slowing in demand in 2001? Some carrier representatives are not convinced. They say early predictions that the demand for transportation is going to slow are coming too quickly in the game, and that no one can accurately predict what will happen as 2001 progresses.
"Our problem is that until that phone call is made for us to come and pick [the shipment] up, we just can't predict," says David Stubblefield, president of ABF Freight System Inc. "In the manufacturing business, you've got orders. And we have no way of knowing what will happen until we talk to the customers."
But analysts say the signs cannot be ignored. "Most of these companies, but not every single one, made some references that they see things slowing down from a red-hot level over last couple years," says Bob Shulz, director of Standard & Poor's Debt Ratings. "I don't think everyone is predicting a recession, but most are saying that some parts of their business seem to be slowing."
Perhaps the proof can be found in the timing of the slowdown in 2000. The fall represents the busiest shipping season of the year. And any slowdown in this season is keenly observed by industry watchers. "The feedback here is that we haven't seen the peak use that we usually see in the fourth quarter," says Greg Fox, president of FreightWise.
That a slowdown came at all is in some ways no surprise. Industry representatives say that after about three years of a booming economy, a slowdown was to be expected, and they hope the fall won't be hard.
"The question is, how is the landing going to be?" says Richard Rogan, executive vice president of sales and marketing for The Hub Group. "Is it going to be soft or hard?"
The 'early warning' sector
Many analysts describe the transportation industry as a kind of "early warning" sector for changes in the economy. But even in a strong economy, problems in the industry were many by late 2000. Some believe those problems are finally taking their toll.
The most glaring and obvious of these was the soaring price of fuel, which reached over $35/bbl at some points. Every sector of the transportation industry was impacted by this, and virtually all modes increased the pressure on shippers by enacting fuel surcharges.
The truckload and less-than-truckload industry was hit hard by what it considers unfair legislation and troubling internal problems. Many fear a possible hours-of-service ruling this year will dilute the number of hours that truckers can spend on the roads. Meanwhile, the industry suffers from a dramatic lack of drivers. The industry should be hiring 80,000 drivers per year, but is only able to hire 50,000, according to the American Trucking Association.
Ficker says as demand softens, players in the LTL field will feel more pressure to consolidate. Such consolidation was dramatically seen in November 2000 when FedEx Corp. acquired American Freightways Corp. More dramatic mergers and acquisitions will almost assuredly be on tap for this year, Ficker says. "You will see some movement."
In the midst of all this, representatives from the trucking industry say they are getting a clear message from manufacturers. And it is not the message they want to hear.
"The number of manufacturers and equipment say the orders are slowing down," says Mark Yeager, president of field operations at The Hub Group. If there is a softening of demand, it's mainly in North America. Yeager says domestic business is slowing, while international orders, goaded by the global economic push, continue to boom. This is particularly true for shipments coming out of Asia.
Asia is a wild card
Industry analysts say Asia will almost certainly play a wild card for transportation. This is especially true for the ocean cargo industry. With Asian economies on the mend, exports climbed 7.4 %-the biggest gain in five years-by November 2000. Exports increased with nearly all countries of the Far East, led by Japan, South Korea, China and Taiwan. Imports increased 7.5 %, and the number of empty containers, nearly all headed back to be refilled with cargo in Asia, increased 2.1%.
But in the Untied States, carriers in the trucking industry say there is an unmistakable slowing, one that they sense will gather steam this year. Yeager says transportation demands for the past few years have had carrier companies and logistics management firms scurrying to stay ahead of orders. Now, he describes the atmosphere as "too orderly."
"The interest we experienced in the past three years isn't there," says Rogan. A slowing of demand could naturally have ramifications in other areas. Rogan says there will almost assuredly be an impact on rates as the need for transportation subsides a little.
Bureau of Labor Statistics data backs this up. According to quarterly producer price indexes from the bureau, rates for the rail freight, air cargo and trucking industries all showed increases between 1999 and 2000. But WEFA and DRI predictions for rates in these industries all show a decrease for 2001. "As the shippers feel the need to tighten their belts, we're going to need some more money in the transportation arena," Rogan says. "There will be some trade off in case there is a service downturn"
Ben Gordon, CEO of 3PLex.com, agrees: When demand falls, rates are soon to follow. "Transportation rates will come under the same pressure as carriers face a cyclical downturn like the first two quarters of the year," says Gordon.
Rate pressure will probably be felt most keenly in the LTL sector. Carriers in this sector, which experienced price gouging until the era of deregulation, got into the habit of raising rates roughly 5% each fall for the past two years. Carriers say these increases were long in coming and desperately needed as LTL carrier companies strove to rebound from what they viewed as cheap service and low profits.
The impact on 3PL
Third-party logistics is another area that will undoubtedly be impacted by the slowing of demand. The third-party logistics market is a $50-million market today. It's a market that has seen growth of up to 20% per year for the past several years. The rate may not reach that high in 2001.
Armstrong believes the 3PL industry will see "constrained" growth this year. And he says the economy isn't the only factor influencing this growth pattern. Part of the reason is the lack of 3PL providers out there. It is a problem, he says, that was making itself clear in 2000. "Even if they are creating greater outsourcing demand, the guys can only satisfy so much of that demand at a time," says Armstrong.
A slow in demand will of course spill over into the many Internet-based online exchanges that have taken root in the transportation industry, hoping to grow in the new millennium. Representatives from the Massachusetts-based 3PLex.com, for example, say they still hope third-party-logistics players will turn to their service as demand tightens in 2001. And that means they are banking on manufacturers who want to outsource to specialists who can manage their freight.
3PLex.com helps 3PLs improve their productivity and efficiency by automating their operations and providing increased access to high-quality carriers. It uses the Internet to provide 3PLs with the applications they need to compete. And despite all they are hearing, representatives from 3PLex.com are still banking on core growth
"It continues to grow," says Gordon. "The rate may be slacking but the core growth continues." Gordon says his company saw a growth in demand of 4% in 2000. He predicts that may sink down to 2% growth in demand in 2001. "But 2% growth is still growth," he says. While the 3PL industry may be optimistic, not everyone is sharing the same feeling. "From the carriers' perspective, the situation is not welcome," says Armstrong.
Carrier companies predict much the same sort of growth this year. James Welch, president and chief operating officer for Yellow Freight System, says the company saw an annual growth in shipping demand of about 2.5% to 3.5% up until December 2000. Now, estimates for 2001 are much more conservative. "We estimate moderate growth," says Welch.
"We are seeing a moderate slowdown, but still are going above last year's levels," agrees Keith Lovetro, vice president of marketing for California-based Viking Freight.
New strategies ahead
Faced with this, carriers say they will adopt new strategies that put the customer up on a pedestal. Lovetro says Viking Freight now will focus on manufacturer requirements and search for new business. It's this sort of thinking that has Armstrong believing that 2001 could indeed become the year shippers gain a stronger sense of power when it comes to transportation.
Armstrong says shippers will probably find that as the year progresses, they will find themselves with more power. "I think if there is more capacity available, it will help shippers get more leverage," says Armstrong. "If [the economy] slows down a little, it could be to the buyers' advantage.
Mexico victory bodes well for shippers
Some manufacturers are hoping that a recent victory by Mexico in the ongoing trade dispute with the United States could smooth out their efforts to get supplies moved across the border.
"From the standpoint of reduced material handling and subsequent potential damage, lost time and cost, it would be a good thing," says Kevin Miner, materials manager for the Connecticut-based Pratt and Whitney Power Systems.
In December 2000, a Washington-based panel issued a preliminary decision in Mexico's favor, allowing Mexico's commercial trucks to operate on U.S. highways. This decision was a long time coming.
Under the 1993 North American Free Trade Agreement, trucking companies from the U.S., Canada and Mexico were given access to each other's territories. The access would come in two stages, with a partial opening of highways along the U.S.-Mexico border states and Canadian provinces in 1995. The trucking part of NAFTA would permit trucks from Mexico to travel anywhere in the four border states of Arizona, California, New Mexico and Texas, and eventually anywhere in the U.S. and Canada.
Under NAFTA, U.S. trucking companies quickly formed joint ventures with Mexican partners. But the Department of Transportation did not process license applications from Mexican trucking companies, citing lower safety standards of that country's trucking industry.
Some still remain skeptical that the panel's decision will make much of a difference. Fred Beasley, president of Hub City Texas, an operating company for the Hub Group, says the United States must try to change the way business is done at the border of Mexico before it can implement the new through service. Beasley expects a lot of resistance from the customs house brokers that collect fees during a border transaction.
"These guys have traditionally earned these fees by handling the freight, so they are not letting go easily," Beasley says. "They will fight it at every opportunity. And they still have a lot of control on the way freight is routed."
Adding efficiency
But if the decision becomes permanent, John Fontanella, senior analyst for the Boston-based AMR Research, says it will almost certainly add some efficiency into the supply chain. Fontanella notes that until now, Mexican trucks transporting supplies into the United States have been forced to drop their shipment at the border of Laredo, Texas, transferring trailers over to trucks from U.S. trucking companies. If this transfer is no longer necessary, time-and costs-will be cut out of the system.
"On the positive side, this is a much more efficient way," says Fontanella. "With the trade barriers down, they won't have to drop their loads at the border and have them picked up.
"A lot of the expense in the transportation and manufacturing process is in rehandling," Fontanella continues. "And if it's a shorter cycle time and the trailers don't have to be transferred to a U.S. carrier, the expense can be decreased by eliminating that handoff."
Miner has seen this expense firsthand. Pratt and Whitney Power Systems makes gas turbine engines and depends on some suppliers who have factories in Mexico. Miner says those suppliers have frequently run into supply chain snags when truckloads of supplies were delayed during border transfers.
"When it comes to transportation, getting it across the border is where there are a number of issues and problems," says Miner. "[Supplies] have to be unloaded onto different trucks because the trucks can't cross the border, so there's additional handling involvement.
"There's wear and tear and delay in shipments," Miner says.
Miner believes the NAFTA agreement would be a key step in ironing out this troubled aspect of the supply chain. And he's not the only one who believes this. Many carrier companies would like to see the border process smoothed out.
Keith Lovetro, vice president of marketing for the California-based Viking Freight Inc., says the border changes have long been a stake in the heart of the supply chain as far as Mexico is concerned.
"When we have to change at the border, that hurts efficient service for customers," says Lovetro.
But efficiencies aside, most agree that the safety issue still needs to be resolved, or closely monitored. Fontanella says the safety concern is a legitimate one. This was an issue that was played up heavily by The International Brotherhood of Teamsters, which opposes the decision. The Teamsters argue that Mexican trucks are very unsafe.
"The trucking provisions of NAFTA threaten highway safety and environmental quality," states an online position paper by the Teamsters.
Driver concerns
Lovetro says the safety issue is a legitimate point. And the concerns don't end with the equipment alone.
"This is not just about equipment, but the guys operating the equipment, the drivers," says Lovetro. "Do we require them to go through the same certification? Do they work under the same hours of operation? There's a lot of areas where we want to make sure that the Mexican drivers are well trained."
Still, Lovetro says it's quite possible that the decision could be an answer to the troubling driver shortage plaguing the U.S. industry. The industry should be hiring 80,000 drivers per year. But as of 2000, it was only hiring 50,000 per year.
Lovetro says the decision could help reverse this problem-a little.
"Having a new source of drivers will be good, if those drivers are of the same skill level of those we have today," he says.
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