FTR Associates Outlook Predicts 5-6% Freight Rate Increase: What Shippers and Carriers Can Expect Within Upcoming Months

Although the number of positions in the trucking industry surged last month, carriers and shippers are still facing struggles with driver shortage and will continue to do so for years.  In return, members of the supply chain can expect to see rate increases.  On a positive note, oil prices are predicted to return to equilibrium within the upcoming months.

Last week, FTR Associates announced their trucking outlook for the current year, stating an average truckload growth throughout 2012 of at least 4 percent. 1

As Manitoba Trucking Association president Tom Payne Jr. explained this week, “The trucking industry that will emerge from the recession will likely be quite different from the trucking industry that existed pre-2008,” since instead of the overcapacity and low rates experienced prior, capacity shortage will now lead to higher rates. 2

And if shippers weren’t already concerned about current carrier price increases, they are about to get worse.  FTR anticipates “freight rates increasing 5 percent to 6 percent annually through 2013.” 1

One of the reasons for capacity issues is not the lack of equipment (although equipment costs have gone up, making it more expensive to expand or replace older equipment) but rather the shortage of drivers to deliver the freight.

According to the Bureau of Labor Statistics, trucking companies created an additional 10,200 jobs in February, the largest monthly gain since last February and accounting for an increase of 97,300 jobs since March 2010, a 7.9% raise. 3

But despite this, the industry is still currently facing a shortage of nearly 200,000 drivers which is expected to increase four times by 2014 to 800,000.

As Noel Perry, FTR Senior Consultant explains, “We go from very small hiring requirements to very large hiring requirements. It is unlikely that anybody’s hiring capacity can expand fast enough to keep up, partly because fleets lowered hiring due to the recession.” 4 And as he explained, there are currently 13 agendas for stricter regulations that would affect an already slim driver pool.

Just last week, the Federal Motor Carrier Safety Administration decided to go back on a proposal that would assess who was at fault in crashes in conjunction with the carrier’s CSA rating, due to concerns with “using just the Police Accident Report and a carrier’s statement to determine crash accountability,” instead of taking into account other input such as witnesses. 5

And with other mandates such as environmental regulations and technology requirement costs, smaller companies will have a harder time keeping up with larger carriers. 2 MTA executive Bob Dolyniuk explains, “I know of situations where smaller companies are approaching bigger ones asking to be bought out.” 2

Take for example Fil-Mor Express Inc., who advised employees that they would be closing their doors just days before Christmas.  Their rival, Dart Transit Company, quickly began attempting to recruit their drivers.

Drivers, shippers, and carriers are aware of this shortage and are taking measures to cope.  Drivers are becoming choosier over which company they decide to work for.  Carriers realize the competition and need for drivers and are offering higher wages in order to recruit them.  And shippers are working with multiple carriers to move their freight instead of relying on a single trucking company in order to increase coverage (many carriers operate only under certain territories, some don’t have the availability in the areas they do service, etc.).  How many carriers do you utilize?

Capacity is not the only reason for increasing rates, however.  Rising costs in conducting business are a great factor as well.  For instance, the national average price of diesel continues to rise, currently at $4.12.  But Perry offers some hope believing that “The situation with Iran will simmer down in three to four months and prices will return to equilibrium.” 4 Do you agree?

Below is what Road Scholar considers to be eight main factors building up to a Perfect Storm for Capacity Shortage.  These include the following:

1.  The Cost of Healthcare which the journal HealthAffairs stated is expected to grow 5.8% each year for the next decade.  The increased cost will deter new employers in the trucking industry.  Not only this, but those already purchasing health care for their employees are expected to make changes.  1/5th of business owners expect to significantly alter their benefits packages upon renewal while 12% plan to cut their health plans completely.

2. Credit Markets are tightening, causing trucking companies to keep fleets small due to the difficulty they are having qualifying for a loan, while others are forced to close their doors for good and sell their assets.

3. Gen-X Drivers are Retiring. With 1/6th of drivers being at least 55-years-old (and with the average age being 51 years), those retiring pose a risk of further capacity shortages…fewer drivers = fewer trucks transporting freight.

4. CSA 2010.  New safety restrictions set to remove unsafe drivers from the road in order to reduce the number of accidents and fatalities is argued to come at a price…capacity.

Instead of carriers being rated under the SafeStat system, which rates trucking companies based on four categories (driver, vehicle, safety management, and accident), both carriers AND drivers are now evaluated under seven Behavior Analysis and Safety Improvement Categories (BASICS).  These include: unsafe driving, fatigued driving, driver fitness, controlled substance/alcohol, vehicle maintenance, cargo-related, and crash indicator.

Many believe that those drivers who are looking for work fear that they will have a hard time obtaining employment due to past occurrences and carriers are complaining about high CSA crash scores reflecting accidents in which their trucks were not at fault.

5. Hours of Service Restrictions. Lawsuits arguing over a reduction of a driver’s hours of service from 11 to 10 hours would, if passed, lead to less productivity, for drivers will be restrained to how far they can travel/how many loads they can deliver without breaking their hours of service.

6. Fuel Cost. With the price of diesel surging, owner operators cannot afford for their fuel costs to exceed that of which they are being paid to haul the load in the first place, placing many out of service.

7. Cost of Equipment is up 20% and with greater capacity demands and the need to replace older equipment, carriers are purchasing new trucks for their fleet.  Four years ago, the cost of a power unit was roughly $108,000.  Now, purchasing one of these will cost you around $133,000.  Don’t forget to buy a trailer on top of that!

8.  2008 and Lingering Recession: In 2009 we witnessed 800 trucking companies go out of business, leaving many of these workers to find jobs in a different industry…adding to the driver shortage.

Road Scholar Transport recommends that the following diagram exhibiting each of the above points be presented to a shipper’s management in order to help better prepare for and understand increasing costs and capacity restraints.

perfect storm

What measures have you, as a shipper, been taking to avoid capacity shortage?  List your comments below.

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