The year ahead for trucking looks good - even great. Freight is growing at a record-breaking pace. Tight capacity appears to be driving up rates. Capital is available for expansion. But, once again, the industry finds itself hemmed in by a familiar problem: finding and keeping good drivers.
Economic growth may have slowed some during the summer but economists like Jim Haughey are confident that the trend is still upward. "When things started picking up last year, the economy was growing at a 5%-6% pace. That couldn't continue," he says. Growth for this year will probably come out to about 4% which, he points out, is still very good.
As of August, the manufacturing sector had logged its 15th consecutive month of growth, according to the Institute of Supply Management. The growth rate decelerated slightly but new orders and production remained high.
The Federal Reserve Board reported in early September that household spending had softened in parts of the nation, but the manufacturing sector continued to show improvement nationwide, especially among capital equipment and other durable goods makers.
New and existing home sales showed some signs of cooling and upward-trending interest rates will likely slow residential construction, but economists point out that the market is still strong. Most also expect 2005 to see upswings in commercial building and public works projects.
Freight demand may have slowed slightly, but summer data still put it at very high levels as the transportation industry began to gear up for the busy fall season. The U.S. Department of Transportation's Transportation Services Index for freight hit an all-time high in April, and in June was 6.2% ahead of June 2003. The American Trucking Assns. Truck Tonnage report for June showed an 11.1% increase from a year earlier. ATA said it was the second largest year-over-year increase in 18 months. The largest was 13% in March 2004.
Haughey says a slowdown in freight growth wouldn't be surprising. "I think we've gone through a phase of the economic recovery where spending tilted heavily towards goods versus services," he explains. "In the first part of recovery you have to rebuild the inventory and move it around. That will keep growing, but not as much. The growth forces in the economy now will be finance, insurance and other services. In many markets we may have passed the period of peak freight growth but it will keep rising at an above average rate for a number of months."
Tight Capacity, Higher Rates
"I've always thought that the freight industry is one of the best precursors of change in the economy," says Phil Polakoff, managing director, TBB Global Logistics. "I'm here to tell you that the economy is not in recession and it's not in recovery, it's expanding and the amount of freight chasing fewer trucks has definitely put pressure on capacity."
Not only motor carriers, but railroads have been hard pressed to provide manpower and equipment to meet growing freight needs which, in some markets, means higher rates to move freight. "Right now, it's a carrier driven market and they can pretty much pick and choose the freight they want to haul," says Polakoff. "If you're [a shipper] in a bad location or have undesirable freight, you're going to end up paying a premium in order to get trucks."
Most of the big carriers say rates have definitely improved but price increases seem to be coming slowly for smaller carriers. "Our customers aren't showing us the door when we ask for more money," reported one small fleet owner. "But they're telling us they have to raise their own prices before they can give us more, and that takes a while."
The story is much the same regarding accessorial fees. It didn't hurt to have the demand/supply pendulum swing in trucking's favor when new hours of service rules put a premium on non-driving time. Most of the large carriers report shipper cooperation - they either made changes to minimize driver delays or they're now paying extra. Even if a recent court decision forces still more changes, at least the efficiency measures should stick. Smaller carriers and owner-operators still report problems getting paid for shipper abuses.
Peter Nesvold, an analyst with Bear, Stearns & Co., credits the big carriers with setting the bar for the rest of the trucking industry, but he's not optimistic that the price hikes will stick. "I think rates will continue to be very strong through the end of this year," he says.
But higher rates mean more competition - more owner-operators coming into the business, more expansion by existing fleets.
And that, he notes, is what undercuts rates.
An Uncertain World
Industry analysts seem to agree that, until very recently, most of the new trucks sold were replacements not additions. One reason for the slow expansion is that many fleet executives are optimistic, but cautious.
Dick Carson, senior vice president of Ryder System's Fleet Management Solutions business, says demand for rental trucks - especially highway tractors - has been brisk for the last 12 months, but Ryder is being very conservative about expanding its rental fleet.
"This is an uncertain world," he explains. "We don't know for sure what the next year will bring." Moreover, the patterns aren't the same. The downside of the business cycle in the past has been deep but quick. This one was shallower but longer, and recovery has come in fits and starts.
"It's hard to decide what to do," Carson says. "Do you build a new building? Hire more people? Buy new trucks? This is a very dynamic business. There is nobody sitting around with the solutions they had a few years ago thinking 'this will still work.'"
Volatile Fuel Prices
Despite some post-Labor Day downward movement, there is little optimism that fuel prices will drop significantly any time soon. According to the U.S. Dept. of Energy, OPEC is producing oil at its highest level in more than 20 years and world surplus capacity is at its lowest point in the past three decades. Petroleum inventories in the U.S. and the rest of the industrialized world are below normal, especially considering rapidly increasing global oil demand. Thus any disruption in the world oil market is likely to cause prices to jump.
The American Petroleum Institute also attributes high oil prices to the tight balance between supply and demand. The world's spare capacity to pump additional petroleum is limited to an estimated 1% of total demand, API says. Uncertainties involving geopolitical developments in the Middle East, Russia and other major oil-producing regions add to the volatility of oil prices. Rapid global economic expansion fueled a surge in demand and buyers bid prices upward to ensure their customers have supply.
Haughey blames a good share of today's high prices on speculators. "I think the amount of oil being used would suggest prices in the high $20s (versus more than $43 a barrel in late August)," he says. "Anything over that is due to people stocking up because they're nervous about supply." While he expects high prices to be with us for a while, speculators can't hold on forever. "If I ran across a good price for today, I'd buy a couple of weeks' worth, but not a year's worth," he adds.
Good and Bad News for Insurance
Liability rates are definitely easing and premiums for umbrella coverage are starting to come down, says Christopher Patrick, senior vice president, Cottingham & Butler. "You won't see any dramatic price reductions, but increased competition and insurers coming back into the market will likely bring some reductions."
Cargo insurance premiums are also starting to level off and even coming down. "I think that goes back to the safety of the trucking companies, he says, "especially in the areas of theft, where trucking companies are taking a much more proactive approach. Overall, they're managing their exposure much better today than several years ago."
Unfortunately, the news isn't so good for workers' compensation and health insurance. Patrick says workers' comp problems are tied to a couple of things: Medical inflation continues to run about 15% annually and some jurisdictions, even those that have initiated reforms, still don't have the kind of control and savings that workers' comp really needs.
His advice for carriers: Focus on the hiring process. "If you hire better drivers and do a good job on the background checks, you're likely to avoid some of the potential bad hires and workers' comp problems that you might have ended up with because you didn't look at them." He also recommends functional job testing which measures an applicant's physical ability to perform required tasks. "It helps avoid hiring someone who is not physically up to the demand," Patrick explains, "and the cost of testing is far outweighed by the claim."
Prevention seems to be the rule of the day. Warrenville, Ill.-based WorkWell Systems designs functional job tests for a variety of industries, including trucking, and recently added a questionnaire-based tool to assess a person's risk of incurring a musculoskeletal disorder. MSDs account for about half of workers' comp costs, including treatment and time away from work. WorkWell's goal isn't necessarily to screen out MSD-prone applicants, but to offer focused prevention.
"As the workforce ages and employees become more susceptible to MSD injuries, employers will need to adopt a disease management approach," says Kevin Schmidt, vice president and general manager. "They will need to identify high-risk individuals before they are injured and proactively work to reduce their risk of MSD injury through training and education rather than only reacting to injuries once they occur."
Medical insurance may pose even greater problems for companies trying to attract drivers. To beat higher premiums many companies are shifting more of the costs to employees through higher deductibles or co-pays, which is unpopular among workers. Patrick doesn't discount those strategies but also advocates programs to help make those employees better, healthier consumers.
"Trucking is a very difficult occupation from a health standpoint," says Patrick. "Diet and exercise typically are insignificant issues with guys on the road." His company has developed disease management programs for asthma, hypertension, diabetes, and many other diseases that can escalate into high medical claims if not properly controlled. Unfortunately, getting companies and their workers to take advantage of the programs is an uphill battle.
For one thing, says Patrick, "it's hard to get people to change their behavior, even if it's in their best interest to do so." Moreover, it's difficult to measure the cost benefits of such programs since nobody can accurately say what might have happened if the behavior hadn't changed. "You just have to have faith that it's having a positive impact," he says.
The Persistent Driver Shortage
Still, the major reasons fleets aren't adding capacity at a faster clip is that they can't find enough drivers to operate the additional trucks. A Bear Stearns study released early this year indicated that small fleets (less than $25 million revenue) planned to add trucks in 2004 while mid-sized ($25 million to $500 million) and larger carriers planned to concentrate their capital investments on replacing older trucks.
"It comes down to drivers," says Nesvold. The small carriers are now making money, which enables them to add benefits and raise driver pay. And most are regional or local operations that get drivers home regularly. "The national truckload non-union carriers aren't planning to add capacity because they can't add drivers fast enough," he adds. "We're just not seeing drivers coming back into long-haul trucking."
Higher pay is the logical first step in attracting more drivers. The Bear Stearns study put average pay at about 39.5 cents a mile at the end of last year. Two thirds of all fleets surveyed said they were planning to implement pay increases late in 2003 or sometime in 2004. The per-mile amount averaged 2.2 cents. Approximately 56% said they would raise accessorial pay. Among truckload carriers, 79% planned pay increases and 57% said they would raise accessorial pay.
Judging from recruiting ads, most carriers did implant pay increases. No doubt we'll see more in 2005. As one fleet executive recently told investment analysts, "Driver pay has to go up and it has to go up substantially to fix this situation." The question, however, is if and how quickly those additional costs can be passed on to shippers.
More money will help, but experts say trucking companies also have to address driver "lifestyle" complaints, especially in long-haul operations.
Fleet management consultant Kris Kohls of CFOex, says clearly defined markets can improve driver retention. "A lot of companies are hiring drivers where they can find them, they're not hiring drivers where they can run them," he explains. "The best run companies are those that hire drivers who live where the freight goes, which means they can get them home on a consistent basis."
Moreover, he adds, carriers who keep close tabs on productivity and profit margins know quickly when a driver's time is being abused. "That information in the hands of sales is invaluable in helping the customer understand what they're doing to the carrier."
Back on the Tracks
Another possible solution to the driver dilemma is to change the way freight is moved. Ryder's Carson says some of their lease customers, mainly private fleets, have switched to smaller more frequent shipments so they can use trucks that come in under the 26,001 GVW threshold for stricter CDL requirements.
Once rail capacity problems are resolved, carriers might take another look at intermodal. Brian Bowers, vice president and general manager of intermodal services for Schneider National says rail intermodal is the fastest growing operation in the company's business portfolio, now accounting for some 20-25% of Schneider's revenues.
"We look at intermodal as more of an integrated part of our service solutions versus backup capacity to trucking operations," he states. "When a customer presents an opportunity and we're exploring potential solutions, we look across all of our different capacity types, including intermodal, brokers and the different trucking options to create the best value solutions to meet customer service requirements. Sometimes the solution may be pure truck, or may be pure intermodal, but it's typically a combination of different capacities."
Schneider's 48,000 trailers are equipped with lift pads that allow them to be loaded on and off trains. Customers can switch from mode to mode without having to change equipment pool or loading patterns. Empty trailers can be moved by rail.
The company has some 3,500 53-foot domestic containers and plans to aggressively grow that business. "It's a very good solution for railroads that are capacity constrained," he says. "By double stacking containers you can virtually double the number of loads handled by a single train crew."
"I think the trucking industry has come to realize they can use rail to satisfy their customers and dramatically reduce costs," says Phil Yeager, chairman of The Hub Group and an intermodal marketer for some 45 years.
Intermodal growth has been running over 8% since late last year, so that industry has also suffered growing pains. One big intermodal customer, Yellow Freight, recently described rail service as "consistently lousy" for most of this year and says it has shifted freight back to the highways.
But Yeager says the problems will be solved. It's generally acknowledged that trucks can't compete with the cost structure of railroads on hauls over 700 miles, but he also argues that service is competitive. In a test done for one client, they put 10 loads from Chicago to Los Angeles on trucks and another 10 loads - with the same origination and designation - on intermodal rail. The rail beat the trucks door to door, he claims. "A lot of people don't realize how good our railroads are."
Bowers also acknowledges temporary service problems but says they won't stop Schneider from growing their intermodal business an estimated 20% this year. Finding truck drivers to support that growth shouldn't be a problem, he says, because drayage operations are typically local or regional so drivers are home every night. "It's a very dynamic part of our portfolio and I think a wonderful opportunity for drivers and owner-operators."
Planning Goes Hi-Tech
Apparently, customers don't care if their shipment moves on truck or rail - as long as it gets there as promised. "Perhaps one of the most durable and meaningful trends of the last 20 years has been the shift away from mode-specific to time-based shipping," says Theodore Scherck, president of The Colography Group, an Atlanta-based research and consulting firm that specializes in the expedited cargo market.
In Colography surveys, when shippers are asked to list the most important factor in choosing a carrier, 95% put "on-time delivery" at the top of the list, says Scherck. "Cost-conscious consignees are willing to trade down the speed of transit times as long as the freight will arrive at pre-determined intervals."
"Cost is important, but in the world where I'm operating, a lot depends on service," says David Bouchard, senior vice president in charge of high-tech and consumer industries for Ryder System's Supply Chain Solutions. "What really matters is that the product is where it needs to be, when it needs to be."
In today's global economy, that can be a complicated task. With more manufacturing shifting overseas, many of his customers are now asking about direct shipping from those offshore plants. And often the goods go directly to giant retailers with very strict rules as to when and where merchandise can be delivered.
The improving economy, coupled with productivity issues created by the new hours of service rules, have caused carriers to be more selective about the lanes and customers they serve, notes Bouchard. Any big changes will likely be put on hold until the hours of service rules are sorted out, but he says some shippers are looking at dedicated carriage and even private fleets to get the service they need.
Technology also plays an increasing role in modern distribution. Using sophisticated computer and communications systems, Ryder can pull information directly from clients' systems to look at production flow, determine when finished goods will be available and how loads can be consolidated to maximize efficiency.
Many shippers who outsource logistics planning and coordination do it because of the technology. "It's very expensive," Bouchard says. "It's not just procurement of the technology but what you're willing to invest in manpower and training to be really proficient at using it. It's not easy stuff."
Shippers may also be turning to logistics specialists as a way of pooling their freight to get more buying clout. TBB Logistics' Polakoff insists it's not necessarily volume that earns the best service at the most reasonable price; it's having freight that fits a carrier's operational efficiencies.
"Let's say we have a carrier that badly wants freight out of Philadelphia because they've got a customer who delivers there," he explains. "We may be able to fill those trucks in Philadelphia if they're willing to free up some trucks in Baltimore for us. We'll do some horse trading. We'll help them if they help us."