US Trucking Rates may Rise Faster than Many Expect, Industry Analyst Says

There certainly are a lot of opinions about how fast rates in the greatly depressed truckload and LTL sectors are likely to begin some sort of recovery along side a now growing economy.

Recently, transportation industry analyst John Larkin predicted that rates would stay low into 2012 even with economic recovery, for reasons ranging from increase use of technology by shippers in sourcing transportation to continued over capacity in both the TL and LTL markets.

Now, IHS Global Insights analyst Charles Clowdis comes in with a slightly different view, saying rates may in fact rise more rapidly and quickly than many current projections.

Clowdis believes that the number of carriers and owner-operators that have left the market has decreased total available US trucking capacity to the point where continued economic growth could lead to constrained capacity in the fairly near term, and therefore push rates sharply higher.

Clowdis adds that "Many carriers, both truck load and less-than truck load, have not replaced their fleets on a schedule that puts the most fuel-efficient equipment requiring less maintenance into service," meaning fewer trucks will be available on any given day.

All told, Clowdis predicts TL and LTL rate hikes in the 7-10% range, "as capacity decreases and becomes more valuable to serve the released consumer demand."

Of course, even rates hikes in those ranges would still leave shipping costs well below rates in 2007, but from a current year perspective, if Clowdis is accurate, it could lead to sharp year-over-year cost increases that could affect a shipper's bottom line and ability to meet transportation budgets.

Will Shipper Green Initiatives Cost them More?

In general, Green transportation initiatives often combine reducing miles driven and hence lowering shipping costs and greenhouse gas emissions at the same time.

However, Clowdis thinks those days of win-win may run into some challenges.

"Pressures to lower CO emissions will require investment in more fuel efficient engines to meet Green Initiatives that surely will be mandated by shippers," Clowdis says. "Decreased fuel efficiency likely to result from added emission control enhancements can decrease the miles-per-gallon trucks currently produce and add to carrier costs that can be passed along to shippers."

Clowdis also suggests that the cost structures of the carriers will simply force them into fairly aggressive rate hikes if they want to stay in business. He says, for example, that many carriers borrowed heavily to ride out the downturn, often at comparatively high interest rates - and that rate hikes will be needed to service the debt.

"Freight rates "will also be driven upward by the need to service debt incurred by many of the carriers that resorted to borrowing to sustain themselves during the downturn," he says.

He adds that required carrier infrastructure investment will also drive rates northward.

"Terminal and infrastructure facilities also will require investment to restore efficiencies in operational areas and handle increased tonnage," he says, adding that such investments must be financed in part by some increases in freight rates.

All this leads to the conclusion that sharp "rate increases are a certainty," according to Clowdis.

The supply-demand balance still strongly favors shippers at present, however, though there are signs this is starting to change.

The American Trucking Associations tonnage index for March, the most recent month reported, showed just a seasonally adjusted month over month increase of just .4% in March, but that was a 7.5% increase in volumes versus March of 2009. It was also the fourth straight month of year-over-year tonnage gains.

This latest rise in volumes put the ATA's freight index at 109.2 (2000=100), which means it is at its highest level since November 2008.

Given that almost no new capacity is being added to the market, any increase in freight volumes has to tighten capacity a bit.

Supporting Cowdis' perspective, ATA Chief Economist Bob Costello said last week that "For most fleets, freight volumes feel better than reported tonnage because the supply situation, particularly in the truckload sector, is turning quickly."

Source: http://www.scdigest.com/