Will Sept. 11 spoil the peak season party in late 2002? (Web Extended Version)
David Hannon, News and Transportation Editor -- Purchasing, 8/15/2002 2:00:00 AM
It has been almost a year since the terrorist attacks on Sept. 11 and shippers and carriers alike are anxiously waiting to see if this fall’s shipping season provides the jump they want. While last year’s peak season was less than peak, most experts say the combination of events in late 2001 created the perfect storm to drown the shipping season last year. However, the long-term effects of Sept. 11 may not have been as drastic as originally expected.
A recent Purchasing Magazine survey found the events of Sept. 11 played only a small part of the 2001/2002 shipping slump. Overall business trends have affected volumes more than the terrorist attacks. How much those economic trends were related to Sept. 11 is difficult to say. According to the survey, 77% of respondents say their logistics operations have not been directly affected by the events of Sept. 11 and 81% say their average shipping times did not slow after Sept. 11, even with increased security measures across the country.
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The most dramatic effect came directly following the attacks with airports closed and shipments moved to the ground. A year later, most volumes are back to where they were prior to Sept. 11. Rick O’Dell, president and CEO at Duluth, Ga.-based LTL carrier Saia, says there was an immediate and drastic drop in freight following Sept. 11. “The amount of freight we handled after Sept. 11 followed the trend of many other LTL carriers in the industry. We saw a 2-3% immediate decline in volumes right after Sept. 11. But now as we enter our traditional peak season, we expect volumes to increase during the fall. We are seeing signs of volume improvements with favorable tonnage and bill comparisons over last year.”
Home improvement giant Lowe’s of Wilkesboro, N.C., has its biggest shipping seasons in the early spring and late fall when homeowners are gearing up for summer and winter respectively. The lack of vacation travel after Sept. 11 actually translated into increased home improvement sales and shipping for Lowe’s, while most other industries saw declines.
“We use a combination of truckload, LTL and small package shipping and we have our own distribution network with distribution centers,” says Rob Long, LTL services manager with Lowe’s. “We try to leverage those distribution centers as much as possible even through the peak seasons and where we can do truckload direct, we do. We have seen modest growth in all modes since Sept. 11, but more in the truckload side than LTL or small package, as we used our distribution centers to deliver product.”
Insurance costs
Perhaps the industry most affected by the events of Sept. 11 was the insurance industry, which in turn affects a host of other industries including transportation. Insurance costs have been spiraling out of control for many carriers in 2002, and some of those cost increases are being passed on to shippers, most often in the form of higher rate increases.
“Insurance rates have risen to a crisis level throughout our industry,” says O'Dell, adding that Saia’s bodily injury and property damage (BIPD) rates have increased in a range of 50-80% and health insurance costs have risen an estimated 17%.
Dennie Carey, senior vice president of marketing at FedEx Freight 
(Memphis, Tenn.) says even FedEx, with its massive buying power, has seen double-digit increases in insurance rates in the past year and sees no end to the increases in sight.
“We work hard to improve our efficiencies and lessen the impact of these increases on customers,” Carey says. But the impact became clear when FedEx Freight recently implemented a 5.9% general rate increase citing substantial increases in healthcare costs and insurance premiums as one of the major factors for the increase. Virginia-based Overnite Transportation Co. also raised rates 5.9% on July 1 for all non-contractual U.S. and Canadian business, citing “skyrocketing costs for healthcare, pension and insurance liability.”
“Virtually every carrier we know of has been affected by the insurance issue this year,” says Long. “The luckier ones renegotiated their rates 
prior to Sept. 11, but those that didn’t have been feeling the effects.”
One survey respondent cited a war risk surcharge as an unforeseen cost following Sept. 11 but despite that type of risk today, only 7% of the survey respondents said they are practicing risk management or considering more what if scenarios than in the past.
Transportation industry analyst Richard Hallal of Cleveland-based Logistics Development Corp. says one byproduct of Sept. 11 is that shippers are now more tolerant of cross-border and port delays. Hallal also says shippers and carriers are working more closely to track shipments as shippers look for more “command and control” of their shipments in light of increased security concerns.
But according to Purchasing’s survey, security changes were not a big 
priority, with 87% of respondents saying they have not increased security in their logistics operations substantially in the months following the terrorist attacks.
Long says Lowe’s has had a seal program in place for more than 10 years, but it put a special emphasis on this program in late 2001 and all of 2002. Lowe’s also stopped shipping hazardous materials through its distribution centers, for safety and insurance reasons, and sees more of its carriers securing its yards with electric fencing and gates. O’Dell says Saia has given its employees some additional security-related training and implemented a stricter ID badge policy this year. The biggest change at FedEx was its no longer doing business with unknown shippers and not allowing dock drops.
Lower peaks, higher valleys
Carey says the current inventory and distribution models have lessened the seasonal peaks in the freight business. “Just-in-time inventory control means shippers send things more on an as-needed basis now, which is more steady,” he says. “They have moved away from long-haul replenishments.”
Some survey respondents say their companies are carrying more emergency stock inventory in light of Sept. 11, but in general, more shippers are continuing to move in the other direction, to low-stock just-in-time inventory models. Only one in 10 survey respondents say they moved inventory as a result of a change made by their logistics provider.
Carole Wallace, purchasing manager for Luminent, a Chatsworth, Calif.-based communications firm, says her company plans to manufacture more of its product domestically to avoid the cost and risk of having inventory overseas.
The diversity of the customer base at large carriers like FedEx means less reliance on individual, peak-heavy industries like retail. FedEx Freight now tends to see heavier activity at quarter ends and the end of the months, rather than seasonal highs and lows. Business levels at FedEx Freight are back above pre-Sept. 11 levels and continuing to rise with normal peak seasons expected this year.
Peeking at the peak
The outlook for the fall peak season is mixed but no one is predicting a huge rally. Hallal expects replenishment shipments via truckload and intermodal to increase in August while parcel and LTL will see more holiday-related peaks in October through December. He says despite the slow, scandal-rocked economy, shipping volumes are expected to grow the usual 3-4% for most modes throughout the rest of 2002, while rates will continue to increase in the 4-5% range with air and international running higher. However, those volumes may be distributed differently, with more freight going via ground where possible to cut costs of express shipping.
O’Dell says the truckload market usually peaks ahead of LTL in the fall and the truckload market was getting tight in mid-July, particularly in the Midwest.
“We’re looking for economic improvements in the third and fourth quarters and believe there are signs that the economy is improving, with increases in manufacturing and some textiles.” The majority of buyers surveyed (51%) in June felt transportation prices will remain stable in the next quarter while 42% expect prices to increase in the next three months.
The unknown factor in the equation is what effect the threatening labor 
strikes will have on shipping in the fall. At press time, contract negotiations between UPS and the International Brotherhood of Teamsters were progressing before a July 31 contract expiration, but UPS’ financial results showed customers already shifting business to other carriers. Contract negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association are progressing on a day-to-day basis.
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