Shipments will rise and most rates will follow
By Staff -- Purchasing, 2/12/1998 2:00:00 AM EST
Shippers have been busy lately. Early returns show that exports and imports grew at the fastest rates of the decade in 1997, rising 12.5% and 14.2% respectively. While the pace of export and import growth will slow this year, shippers will still book plenty of freight. Here's what buyers can expect from the four major transportation modes in 1998:
Truck rates to climb as capacity tightens--again
A strong economy isn't all good. Just ask shippers that move the bulk of their freight by truck.
A 5.1% uptick in overall industrial production last year drove demand for trucking services through the roof. And, with slower but steady production growth predicted for 1998 (and with the nation's railroads struggling to improve service), even more freight will travel over the road this year.
That should cause capacity constraints among most motor carriers, who are having difficulty finding enough drivers and trucks to handle current traffic levels. Case in point: Driver shortages were so bad during last year's peak freight season that some truckload carriers had to turn away business.
And the problem could get worse as former drivers snatch up well-paying manufacturing jobs that don't require them to be away from home weeks at a time.
Meanwhile, expect trucking companies to be a bit more cautious about adding capacity. The industry got burned badly in 1995 when, after bulking up its trucking fleet, the bottom dropped out of the over-the-road freight market. Truckers vow not to make the same mistake this year.
Instead, both truckload and less-than-truckload carriers will attempt to wring more efficiencies (and profits) from existing assets. While that will work well for most of the year, it could cause some capacity crunches during heavy-freight-volume periods, which is what happened last fall.
Some carriers announced rate hikes early. The rest will most definitely follow. Overall, shippers can expect rate increases between 3.5% and 5% for trucking freight services this year.
Shippers will pay to repair rail delays
Everyone knows about the rail industry's problems. The Union Pacific's well publicized service woes have wreaked havoc on shipments moving through Southern California and the Southwest. These problems have had a ripple effect on rail service across the country, causing delays and capacity problems as far away as New York.
What transportation buyers might not realize is that they could wind up paying for service improvements.
The recent round of mergers prompted major railroads to cut back operations, lay off workers, and close miles of track. These changes were supposed to allow the railroads to operate more efficiently. However, recent surges in freight volumes, coupled with the UP's troubles, have led to the degradation of service in many lanes.
In an effort to appease angry shippers, many of which are threatening to reroute their freight onto trucks, railroads have been buying up new equipment and laying new track. One example: Burlington Northern Santa Fe Corp., the other major western railroad, recently doled out $125 million to reopen a line in Washington state.
But such moves may be a matter of too little, too late. "The railroads are adding capacity," says Chris Lange, associate partner for Andersen Consulting's logistics strategy practice. "But adding capacity, such as locomotives, takes years."
For quicker results, some railroads are trying to improve operations by getting more selective about who they do business with. That's bad news for smaller shippers and those in remote locations.
"The customer rationalization process includes increasing prices to customers that are not providing adequate returns for the railroad's investment," says Lange.
Upshot: Rail rates will increase for all but the very largest of shippers.
Air cargo rates, capacity hinge on future of Far East financial crisis
To get an idea of where the air cargo market is heading, just take a look at Asia. The region's recent economic woes, which came as a surprise to air carriers, have prompted many to downgrade predictions for air cargo growth there.
Once slated to climb at a 10% annual clip, air freight traffic within Asia and between the United States and Asia has taken a nose dive. According to some estimates, air cargo shipments from the U.S. to Asia are off by nearly 50%. And there is uncertainty over exactly when the region's economy will rebound.
What does this mean for buyers? On the one hand, expect lower prices on electronic components and equipment built in Far East, particularly Southeast Asia. However, stronger demand for such low-priced products could tighten air cargo capacity in some lanes, particularly between Asia and the U.S. and Asia and Europe.
"Even though unit prices will be lower on goods coming out of Asia, transportation demand will be increased, resulting in higher rates that will partially offset those lower unit costs," says Lee Hibbets, research director for the Seattle-based Air Cargo Management Group.
Indeed, to offset recent currency devaluations, major airlines and express carriers have boosted Asian cargo rates between 10% and 20%.
Conversely, Hibbets says higher per-unit costs in North America and Europe will be counterbalanced by lower air cargo rates from those regions to Asia.
The financial crisis in the Far East will have a ripple effect on air cargo traffic and rates in other parts of the world. "As spending dries up in Asia, it will dry up elsewhere," says Hibbets. "Overall, I think air cargo traffic will be down in 1998."
Upshot: With the exception of shipments from Asia to the U.S. and Asia to Europe, transportation buyers can expect air cargo rates to level out or inch up only slightly this year.
Get ocean cargo deals while they still last
An overabundance of capacity and increased competition from renegade steamship lines have been holding down ocean cargo rates in most lanes. But how long will it last?
Ocean carriers have been bringing a boatload of new capacity online for the past several years, including some massive 6,000-plus twenty-foot-equivalent unit (TEU) vessels in major trans-Pacific lanes. However, orders for new ships have been slowing recently. And a heavy uptick in freight traffic from Asia to the United States has even caused some capacity pinches in select lanes.
That could foreshadow some rate increases in the not-so-distant future, particularly for popular containership services. In the near term, however, persistent capacity problems and new competition should throttle any ocean-freight rate increases.
For example, shippers sending cargoes across the Atlantic have been able to dodge a proposed $120 per 40-ft container rate hike, thanks to pricing pressures from new, low-cost independent ocean carriers, such as Evergreen Marine Corp. and China Ocean Shipping Co.
However, transportation buyers would be wise to shore up business with a particular carrier or conference soon. That way they'll be prepared for the choppy waters looming over ocean-shipping's horizon.
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