Transportation Update: 1st Quarter Review, 2010

The consensus concerning the trucking industry for the year of 2009 is that it was a dismal year. As manufacturers and the economy struggled, carriers fought to maintain profitability while providing service to their customers.

The less-than-truckload (LTL) sector ended the year at a collective 107 operating ratio, losing $.07 per dollar. This was a direct result of declining tonnage and diminished revenue yield driven by excess capacity and pricing pressures. There was speculation throughout the entire year that a major player in the LTL market would exit the industry, effectively balancing capacity and demand. That event never took place, and LTL carriers were forced to absorb losses that were historic in some cases. Across the board, we saw carriers reduce employee pay and benefits, initiate layoffs and downsizing, dramatically change their line haul networks, and shrink the size of their turn terminals from fully staffed operations with managers and clerical staff into ‘dark’ or unmanned operations.

Despite these cost-cutting measures, most companies still ended the year in the red. The competition that ensued was both a positive and a negative for shippers. Through bid processes and negotiations, companies were able to enjoy discounts at historic levels. As a direct result of such discounting, we saw deterioration in levels of service and the number of quality choices available in several lanes. LTL companies require a certain amount of volume to meet high operating costs. Discounting at the levels seen in 2009 caused many of these carriers to handle unprofitable business simply to keep freight volumes at an acceptable level.

An industry that operates at a loss for a full calendar year cannot sustain itself indefinitely and will correct itself in one of two ways; either freight volumes will rise to meet capacity or capacity will continue to shrink to meet the diminished demand. We expect pricing pressures in the LTL sector to linger throughout the first quarter. However, we see evidence of sporadic increases in demand from a variety of sources, and we know that companies are readjusting their capacity daily to ‘right-size’ their operations. By mid-year of 2010, we expect to see the supply/demand scale tip toward the carrier’s favor, which will lead to incremental pricing increases. Such price increases will likely be widespread across the industry. The speed at which this occurs, and the level of increases requested, will obviously be affected by the economy as a whole and each individual situation. But it would not be surprising to see an overall 5-6% effective increase in LTL pricing for the industry as a whole.

Truckload (TL) carriers have faced many of the same challenges in 2009. Despite 4000+ trucking company closures in the last seven quarters, we still see over-capacity. As with LTL, reports indicate some growth in demand at the end of last year and early this year, but experts still believe the industry is well over capacity. Large fleets are downsizing to accommodate business levels and smaller companies are feeling the pressure of reduced rates. We expect TL capacity to tighten significantly in some markets as early as this spring, with wider scale rate upticks beginning in the summer months.

We anticipate that the TL sector in particular will be heavily impacted as new safety requirements come into play. Comprehensive Safety Analysis 2010 rolls out later this year and will replace the current Safe Stat Scores, which indicate what a carrier’s safety performance has been. Although the impacts of this are still being explored, the Federal Motor Carrier Safety Administration believes there is a focused and determined initiative to raise the bar for companies entering the industry and to enforce safety compliance on a consistent basis for existing firms. The end result of this will hopefully be safer highways for all of us and our families. But it is important to realize that with strict enforcement of these new guidelines, companies will have to purchase new technology and adopt new standards. These new expenses may force some companies out business altogether. The impact of these failures and/or the inability for some companies to enter into the market is not easily measured, but verifiable statistics will probably begin to emerge later this year.

In summary, we expect pricing to rebound this year across both the LTL and TL sectors. Companies that take a proactive approach to this dynamic market will best mitigate the pricing impacts on their supply chain. Our commitment is to work with our partners in this period of market uncertainty to determine the best solution based on service, price and overall value.

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Jeff Thomas is the Director of Market Economics for M33 Integrated Solutions, a global logistics solutions provider. Jeff is responsible for the successful integration of new customers into the M33 Client Network, overseeing data analysis, procurement of carrier resources through the RFQ process, and carrier contract management. He can be contacted at (877) 369-0343 or via e-mail.

The commentary above is based solely on the professional opinion of M33 representatives, and is meant to provide M33 clients with the knowledge they need to make more educated decisions.