Shippers – Our Capacity Expectations for 2016

So far, 2016 has been a year of relative economic uncertainty. Although business levels & earnings have remained relatively flat as a result. The transportation (and trucking) industry are no exception. While a majority of publicly-traded transportation stocks made a profit during the 1st quarter of 2016, results and expectations were lackluster. Demand for trucking has modestly increased so far in 2016 from 4th-quarter 2015 lows, but demand and prices are still at recent year-over-year low points with short-term challenges that carriers are currently facing such as driver shortages, reduced revenues, and declining volume. Shipping lanes are experiencing different results as the market conditions vary throughout regions of the United States. American economic projections are still uncertain for the remainder of the year and this has also affected the trucking industry, which hauls 69% of all domestic freight tonnage, also remain relatively flat. Because of this:

2016 Capacity (So Far)

Trucking capacity began 2016 with an excess as 2nd-half 2015 shipping volumes fell short of initial projections. According to trends information provided by DAT Solutions, trucking capacity for spot (non-contract) shipments has increased 11% from May 2015 to May 2016 (the most recent data as of this publication). In general, capacity has looser but carriers have been trying to contain costs as much as possible by consolidating shipments & routes, to offset reduced revenues, but are not making any drastic cuts just yet. Demand has increased in certain trucking sectors like refrigerated freight but has reduced in other sectors such as energy commodities. Carriers are also delivering with LTL shipments (less-than-truckload shipments) instead of waiting to run a full truckload. As a result, trucks are running with lower tonnage volumes and more drivers are required to keep the fleet moving.

Another reason not to reduce capacity is that recent law changes related to a driver’s hours of service limit & compensation for overtime might require companies to retain or hire more drivers. With a projected long-term shortage of drivers over the next 5 years due to turnover & retirement of existing drivers and projected freight demands, carriers are not in a position to trim their fleet size as low as they would have during the economic downturn of 2008-2009.

Carriers are also containing capacity by not ordering as many new Class 8 tractors as they did in 2014, which was the highest purchase of new tractors in recent years. The new fleet additions turned into a “supply glut” in the second half of 2015 when demand dropped rather quickly and volumes dropped. Fleet reductions have been made in certain sectors like energy due to low commodity prices & consumer merchandise as warehouses currently have excess inventory because of weak consumer demand.

Instead, most carriers are placing more emphasis on contract freight with more secure pricing, volumes, and shipping windows than non-contract (spot) shipments and by raising rates in sectors where they are operating at capacity. Shippers without contracts can expect to pay higher prices for their loads & possibly have a diminished quality of service depending on the carrier’s capacity for the type of load and the desired shipping lane.

What Shippers Can Expect For The 2nd half of 2016?

Overall, shippers can expect rates to rise slightly for the remainder of the year but will stay fairly consistent. Below is a graph from DAT Solutions that shows how spot prices have been trending since 2012.

DAT Solutions freight_index_final_May-2016 Infographic

Figure 1: Rolling Spot Price on DAT Load Board Source: DAT Solutions
Spot prices are at the lowest amounts for the 2nd quarter in past four years. Despite a decline from September 2015 through the 1st quarter of 2016, prices have consistently risen.

Reasons Why Rates Will Stay Low

There are several reasons why prices will remain low for the remainder of the year. Listed below are several factors:

Low Diesel Fuel Prices

One reason spot prices & carrier operating revenues were higher in previous years was because of diesel fuel cost more. Carriers collect a “fuel surcharge” from shippers to offset the cost of diesel fuel. The higher the price per gallon, the higher the surcharge that the shipper needs to pay if they went their load hauled to a receiver. As the cost of diesel continues to rise, shipping rates increase. Diesel has increased in price the last month or two and is a contributing factor to rising rates.

Less Overall Tonnage

Many companies have too much inventory so demand for shipping services is lower than it could be. This is one reason capacity has increased since the first half of 2015. According to the American Trucking Association, shipping volumes have increased 1.8% when comparing 1st quarter 2015 shipping volumes to 1st quarter 2016 shipping volumes. Carrier capacity has risen at a faster rate, so there is currently more supply than demand. The ATA projects shipping rates to remain nearly flat until capacity is reduced or tonnage volume increases.

Increased Capacity

This has been covered before in the previous section, but it is important to consider. Carriers, in general, cannot charge as much if they have a fleet that is underutilized. Shippers can have more leverage in negotiating rates as carriers might compete for non-contracted business. Although shipping rates have increased recently, they are still the lowest rates in recent years.

Reasons Why Shippers Could Pay Higher Rates

Just because rates are the lowest they have been in recent memory, it doesn’t mean they will not go back up soon. As long as the price of diesel fuel remains low, carriers cannot charge a fuel surcharge to offset expenses. As a result, they have to raise shipping rate using other methods to cover operating expenses. Here are some reasons shippers will pay higher in 2016:

Carriers Prefer Contract Shippers

With weak demand & low tonnage volumes, most carriers are increasingly trying to secure long-term contracts with certain business partners. In an era of a relatively sluggish economy, contracts give carriers a better idea of how to “right size” their fleet and reduce excess capacity. Contracts & secured rates can be mutually beneficial for both parties as costs and revenues are more consistent. A shipper has a more solid idea how much they will pay per load & they might have a dedicated fleet to haul their loads that wouldn’t be available during busier times when carriers have less capacity and service shippers as business levels allow. Carriers benefit from shipping contracts as they have more secure sources of revenue that can offset the costs of increased LTL (less than truckload) shipments & excess capacity that they do not want to reduce.

If a carrier puts more emphasis in servicing “preferred” customers, shippers needing to pay a spot price will expect to pay more. Especially for expedited service.

Consolidation of Shipping Lanes

Like any business, carriers need to make a profit to remain in business. One way of increasing profit margins is to consolidate shipping routes and charging a slightly higher rate per mile. This method reduces excess capacity but still allows goods to be delivered to a final destination. According to the most recent data from DAT’s load board, shipping lanes in the Sun Belt & in particular the southeastern portion of the U.S. (i.e. Georgia, Alabama, Carolinas) are seeing the highest increase in shipping rates. Some of the rate increase is also due to an increase in shipping demand too.

Smaller Loads

Just because a carrier’s driver is hauling less tonnage doesn’t mean they get paid less money. As most drivers are usually paid by the mile, they essentially are paid the same amount to haul a full load or an empty trailer. As carriers are turning more towards LTL shipping and only hauling partial loads, they theoretically have to maintain a larger fleet size than if they only hauled full loads to keep the supply chain network running smoothly. Similar to consolidating lanes, carriers can also increase rates to help offset the operating expenses required to maintain a larger-than-necessary fleet to handle the partial loads.

Summary

It is hard to estimate how much rates will rise or fall in the coming months. The carrier capacity situation has been different in 2014, 2015, and 2016. Not many people expected fuel prices to drop to recent historic lows several years ago. As America currently seems to be approaching the end of a bull market, it is unclear whether it will turn into a recession or if the economy will continue to grow, albeit sluggishly. Until there is more clarity, shippers can expect to pay slightly higher rates than they have been paying for the last nine months, but should remain relatively stable with minimal surprises.

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