By Gary Girotti, Vice President, Transportation Practice, Chainalytics LLC
Wednesday, June 24, 2009
2008 was the worst year on record for carriers, and 2009 could be even worse. ATA’s truckload load index dropped 23% — its largest drop since it started collecting data. More than 3,000 trucking companies went out of business, eliminating 6.5% of freight capacity. Only one other time comes close to this free-fall – the LTL trucking strike in 1994. Companies that have managed to hang on are surviving on little profit — nearly all major trucking companies reported lower first-quarter revenues and profits as demand remained weak.
Transportation is the red litmus paper that brightly shows the souring of the down economy. When the economy recedes, transportation capacity quickly follows suit. So far, 2009 is mirroring 2008. According to Avondale Partners, 480 trucking companies went under in the first quarter of 2009, but even more are expected.
The last time this much capacity exited the market was during the recession of 2000-2001 – when 1,100 carriers a quarter went out of business. After the last recession, truckload rates continued to rise through 2006. A flashback to Fall 2005 brings an ominous remembrance. Driver turnover was at 136% compared to the current 65%.
Since the peak, rates have dropped 15-25% for most shippers. The transportation market is extremely efficient. Pricing moves rather seamlessly to balance supply and demand. As demand falls, downward prices quickly eliminate capacity. This capacity can be added or subtracted in very small increments. After all, capital investment is a small percent of the overall cost structure and there is a low barrier to entry for companies entering the market. Reliability, safety, and technology are now standard and expected. A broker can make it easy for an owner operator to compete with the large carriers on any given lane.
But what happens when the economy rebounds? Unfortunately, transportation capacity doesn’t come back as quickly as the demand for it. When demand turns around, rates will climb, and the magnitude of this turnaround could be severe. Could a transportation capacity crunch be looming? The answer is a resounding yes. The only question is when.
In 2005, transportation managers reacted. Few anticipated the capacity shortfall and were dealt higher rates and service failures. Companies must anticipate a demand recovery – followed by a supply shortfall and subsequently higher rates. So what should you do? You need to have a process in place to sense this recovery and respond to the implications:
- Leverage the current market now. Leveraging the market doesn’t mean hammering carriers and churning your carrier base for low-ball offers. It’s quite the opposite. The current market condition presents a unique opportunity for shippers to consolidate their carrier base, enhance carrier relations and reduce cost. If you have not taken your truckload and LTL freight to market in the past 12-18 months, you should do so immediately. Be clear with incumbent carriers that you are measuring market dynamics and not looking to change off lanes. Offer incumbents first rights if they are within a few points of the market. Chainalytics recently conducted several bids with clients where they could achieve theoretical rate reductions of more than 10% by consolidating carriers. These shippers did not change their carrier partners to chase unachievable savings and put service at risk.
- Maintain expertise in dedicated operations. Given today’s low one-way rates, it is hard to justify dedicated assets. But you shouldn’t rush to eliminate all fleet management competencies. While it is true that most fleet operations should be reduced in light of today’s market, shippers must also thoroughly assess the viability of dedicated assets as common carrier rates rise. Management and deployment of dedicated assets can be flexed up or down in the relative short-term, but internal management competencies are difficult to get back once they’ve been eliminated.
- Consider moving to Intermodal. Long-haul capacity has been the hardest hit – reducing by more than 35% in the last year. Short-haul has been significantly less impacted. As demand comes back, carriers will focus on the higher revenue, regional trucking, leaving a significant long-haul gap that will drive prices up quickly. To mitigate the impact, shippers can use Intermodal and benefit from the fuel efficiency as well.
- Start collaborative programs with supply chain partners. Collaboration may seem counter intuitive when common carrier rates are low. But when operations have some slack, it’s the perfect time to invest in carrier initiatives and remind them of your loyalty and dedication through action. And quite frankly, carriers are also more willing to consider creative programs in bad times. While these programs won’t deliver huge returns, they can be the key to easing future capacity problems and limiting the effects of rate increases.
Many failed to anticipate capacity shortfalls in the last recovery. In the next boom, it will pay to be prepared.