As the year draws to a close, it is time to reflect on the major news stories in the world of freight transportation. These are the ones that struck me as being the most impactful.
1. The Economy – Two Steps Forward/One Step Back
US GDP grew by over 3 percent in 2014, its best showing in several years. A rise in employment levels, coupled with an increase in consumer spending, helped lift the American freight market. The long, slow post Great Recession recovery finally kicked into a higher gear, driving an upswing in freight activity.
However, November data highlighted a slowdown in the pace of recovery across the U.S. manufacturing sector. At 54.7, down from 55.9 in October, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest overall improvement in business conditions since the snow-related setback in January. Although the latest reading remained well above the neutral 50.0 threshold, the index has now dropped for three months in a row. Weaker rates of output and new business growth were the main negative influences on the headline PMI figure in November.
2. America – the Super Energy Power
At the time of writing of this blog, crude oil was priced at $76.51 US a barrel, about a twenty-five percent drop from the beginning of the year. While bad news for the energy producers, this is good news for truckers and shippers. Certainly the fracking movement in the United States is making America the leading energy producer in the world and reducing dependence on foreign oil. This lowers freight costs and consumer energy costs, putting more money in the hands of consumers to purchase other goods and services.
The trucking industry is also taking notice. Heavy-duty vehicles represent 4% of registered vehicles on the road in the U.S. but 20% of on-road energy use and greenhouse gas emissions. Lower energy prices coupled with greater use of technology (speed limiters, idle reduction technologies, aerodynamic trucks, trailer skirts, tire inflation systems), improved engine design, and driver training are improving miles per gallon. Of course, the movement of crude oil by train has become a major source of revenue for the rails. Taken as a whole, this is a good news story for the economy and freight transportation.
3. Truckers made Big Purchases of Class 8 Trucks
Preliminary Class 8 net orders for 2014 were up 70% year/year. The most recent preliminary monthly Class 8 order number was also the highest since January on an unadjusted basis, and was the best order month since April 2011. The Class 8 order strength has been driven by the replacement of aging equipment, upgrades to improve MPG and reduce maintenance costs, and the opportunity to use this newer equipment to attract/retain scarce drivers. A stronger economy and lower energy prices helped increase demand.
This increased demand was impeded by various challenges.
4. The Winter Storms of Quarter 1, 2014 – Climate Change comes to the Freight Industry
Parts of America experienced their worst winter in 30 years. The severe weather took its toll on the US’s economic recovery and on the transportation systems that move goods throughout the country. While cold weather and snow gripped much of the country in January and February, consumer spending was hit across the US. Manufacturing and construction were also adversely affected. Weather was also cited as a contributing factor to softer auto sales in many areas. While the unseasonable cold did the most damage in agriculture, California’s record drought also took its toll on the state’s economy.
The cold temperatures and winter storms affected almost all aspects of the freight business. Rail operators, intermodal drayage and trucking companies, airlines and marine operators all faced service failures and bottlenecks. These problems were exacerbated by chassis shortages (see below) and other problems. The year ends with western New York receiving a year’s worth of snow in one day. The rails are reporting that they will need until the end of the first quarter of 2015 to recover from the winter storms in the first quarter of 2014. That begs the questions of what did we learn from the nasty storms of 2014 and will the freight infrastructure be better prepared in 2015?
5. Tight Capacity Became the Norm in Many Parts of North America
Warnings of a tightening freight capacity have been heard for a number of years. In 2014, shippers across North America experienced what tightening freight capacity can mean to their supply chains. After the rocky, wintry start in quarter 1 and a second quarter freight surge to offset the freight backlog, coupled with the challenges faced by intermodal providers, this produced a noticeable tightening in freight capacity. The tight capacity was fuelled by several other factors. The leading check on capacity was driver shortages. This has been a familiar theme in previous years. This year it became more pronounced.
As an example, Swift, the largest US truckload carrier, experienced a 2 percent year/year drop in second quarter truckload revenue due to an inability to “seat” more trucks. Carriers are having trouble convincing young people to drive a truck and in convincing drivers to get behind the wheel. With turnover ratios still in the 90 percent rage, this suggests that trucking companies are more focused on “luring” drivers from one firm to another rather than hiring new recruits.
This left truckers with a dilemma. Do they “cherry pick” freight and only haul the best paying loads or do they take a more holistic strategy and try to raise driver wages to attract more drivers and deliver more capacity? Driver pay has actually decreased in recent years as a result of the HOS regulations. The corollary to this strategy is will shippers pay more for freight? The truckload driver shortage is as severe as ever. Finding drug free, CSA compliant drivers remains a challenge, despite commendable efforts on the part of many carriers.
6. The Incredible Choking Sound
In 2014, gridlock, delays and labour problems disrupted the flow of freight at Port Metro Vancouver, the Port of New York and New Jersey, the Port of Virginia on the east coast and the ports of Los Angeles and Long Beach on the west coast. In addition mid-western terminals, most notably Chicago, contributed to the congestion and delays. In addition to the weather, these terminals faced chassis shortages and dislocations, yard congestion, turn time problems, appointment scheduling problems, limited driver availability to perform drayage work and driver wage issues. The combined costs of these infrastructure problems are in the hundreds of millions of dollars.
Of course, in addition to the port congestion challenges, there is congestion at many highway and rail interchanges that also slowed the movement of freight. Taken as a whole, this set of factors played a large part in the host of service problems across all modes in 2014.
7. Intermodal conversions slow down
Conversion of over the road truckload shipments to intermodal service has been a consistent part of the Top 20 story in previous years. Many current truckloads should be moving via intermodal service, provided there is sufficient capacity available. Because of the capacity constraints noted above and the resulting deterioration in services levels, the rate at which intermodal is taking market share from the highway slowed down in 2014.
8. HOS have significant impact on trucking company productivity
The Hours-of-Service (i.e., HOS) rule change implemented by the Federal Motor Carrier Safety Administration on July 1 of 2013 is costly to carriers and drivers alike. It does not appears to accomplish the objectives of creating a safer, healthier, and more enjoyable environment for the industry or for the scarce driver resources that enable the transaction of commerce in the U.S. The 34-hour restart provision alone conservatively costs the industry hundreds of millions of dollars per year and drivers well over $1 billion in lost compensation.
9. Driver Wages – “Show me the Money”
This was the year many trucking companies threw money at the driver shortage problem. In the battle to retain existing drivers and recruit new ones, carriers increased driver pay by the highest amount in decades. These increases took several forms such as improvements in base pay, signing bonuses, retention bonuses, pay for performance bonuses (e.g. productivity/miles per gallon metric achievement) and other tactics.
While many people thought that increasing driver pay would solve the driver shortage problem, it didn’t. The issues are far more complex than just lifestyle but include HOS, congestion and many of the other productivity-reducing activities that are mentioned in this blog. Increasing driver pay is helpful since many people in this profession have been underpaid and undervalued for a very long time. Solving the driver shortage problem is a work in progress.
10. Higher driver wages and tight capacity – a Recipe for Higher Freight Rates
This was one year in a series of years when freight rates are on the rise. Many carriers are focused on allocating their capacity to the best paying customers. With the challenges facing the intermodal industry, this reduced the leverage available to shippers in playing the modal switching game. For shippers needing good service, they had to “pay the piper.” The LTL industry had a significant comeback year as more freight meant more density, better rates and higher yields.
Looking at the truckload sector of the US freight industry in October, rates increased 0.59% over September, 0.52% since July, 2.75% since April and 4.33% since October 2013. Rates increased by larger percentages in other sectors.
11. The US Currency Strengthened as the Canadian Dollar Sank in Value
As the year unfolded, the US dollar rose against other currencies. The drop of the Canadian dollar to $0.88 US sparked a 70 percent year/year growth in export truckloads. It quickly and profoundly changed the north/south flow of goods across the Canada/US border.
In addition to the dual themes of economic growth and capacity constraints, a number of other important developments took place in the North American freight market.
12. The M & A movement continued in the US and Canada
Industry consolidation continued on both sides of the border. In Canada, the largest truckload conglomerate, TransForce made an offer to purchase another large trucking conglomerate, Contrans. If approved this would place many of Canada’s major truckload properties in Ontario and Quebec in the hands of one company.
In the US, two 3PL moves caught my eye in 2014. Coyote Logistics and Access America Transport (“AAT”), two of the fastest-growing third-party logistics (“3PL”) service providers in North America, merged. Founded in 2002, Chattanooga, Tennessee-based AAT handles multi-modal transportation including truckload, less-than-truckload, intermodal, flatbed, and specialized freight for shippers and carriers across the country. The combined company became one of the largest 3PL service providers in North America with run rate revenues of over $2 billion, 17 North American locations, approximately 40,000 contracted carriers and approximately 1,750 employees.
XPO Logistics, Inc. acquired Pacer International, Inc. in a cash and stock transaction valued at approximately $335 million. Bradley Jacobs, chairman and chief executive officer of XPO Logistics, said, “Our acquisition of Pacer makes us a major player in the fast-growing intermodal sector, and the largest intermodal provider in cross-border Mexico. We now have a strong platform that fits our customer-centric culture and can support considerably more scale as we continue to grow our multi-modal services to shippers.
Finally, another deal caught my attention, not so much for its size but for its structure and strategy. Mullen Group Ltd. and Kriska Holdings Limited signed a letter of intent (“LOI”) in which Mullen Group and Kriska Holdings have agreed to create Kriska Transportation Group Limited (“Kriska Transportation”) which will be a new growth orientated transportation and logistics company based in Prescott, Ontario.
Mullen Group will be contributing its interest in Mill Creek Motor Freight L.P. (“Mill Creek”) in exchange for a 30 percent equity interest in Kriska Transportation. Mark Seymour, the owner of Kriska will be contributing his interest in Kriska Holdings to Kriska Transportation in exchange for a 70 percent equity interest in Kriska Transportation. This is quite different from the usual M & A deals and will be interesting to see how it unfolds.
13. Let’s Work Together
More and more carriers and shippers are embracing this last frontier of efficiency, collaboration. Shippers are increasingly collaborating with each other to combine volumes, increase leverage and drive efficiencies. Carriers are collaborating among themselves more frequently to balance lanes and improve profits. Shippers and carriers are collaborating to share information, improve planning, and ensure adequate supplies of equipment.
14. Dedicated Transportation continued to make sense for Shippers Seeking Capacity
Rather than rely on the capacity available in the for hire transportation industry, dedicated transportation continued to be an attractive option for companies that do not have a core competence in managing freight transportation and that wish to ensure consistent capacity. What many shippers realize as well is that by going the outsourced route, they can achieve economies that they were not capable obtain on their own.
15. Freight Brokers – being in the Right Place at the Right Time
Freight brokers, whether tied to an asset-based transportation company or purely non-asset based, were able to benefit in 2014. By not being married to the assets of one trucking company, they were able to search the market for capacity. This wasn’t always easy. Some carriers became very selective as to the brokers they would work with. On the other hand, freight brokers are a very valuable tool for small fleets that have limited sales resources. For shippers, freight brokers represent a mechanism to find capacity and pricing options that they cannot find themselves. This was a year when freight brokers expanded their service footprints (e.g. LTL service) so they could deliver more value.
16. 3PLs – We can do it better than you can
The 3PL movement continues to maintain its momentum as companies of varying sizes and industries better understand the 3PL value proposition. The opportunity to utilize a company whose core competence is logistics, that has a broad network of carriers and warehouses, and can remove costs from many operations is compelling. It is not uncommon for shippers to use several 3PLs in their operation. Large multi-national companies can employ 40 to 50 3PLs. This was a very positive year for this industry.
17. Some Manufacturing is returning to the United States
Cheaper energy costs (fracking) have made manufacturing in the US more competitive by reducing logistics costs. Automation/robotics has led to increased productivity and offset the advantage of cheap labour. Supply chain risk such as natural disasters, security, delays, quality control etc. are now being more effectively costed into off-shoring equation. For high value goods that match the profile above, the US is the place to manufacture.
18. Near-shoring comes to Mexico
The stars have aligned for Mexico. Increasing costs in China, long cycle times, port congestion, its proximity to the US and improvements in transportation between Mexico and the United States (and Canada) have served to expedite the near-shoring movement in Mexico. At the same time, Mexico has gained expertise in the manufacturing of autos, consumer electronics, high tech products and appliances. For light manufacturing, it makes sense to locate manufacturing in Mexico. A number of major transportation companies have bolstered their teams in Mexico to serve this growth opportunity.
19. E-Commerce spurs new Distribution Channels and New Transportation Services
E Commerce continues to grow each year as consumers purchase an increasing percentage of their goods and services over the internet. As part of these changes, new business models are evolving. Omni-channel distribution (the use of multiple service mechanisms such as stores, warehouses, home delivery) has been one of the hottest topics in freight transportation in 2014. A by-product of omni-channel distribution has been the emergence of various last mile delivery strategies such as same day delivery (or “same day insanity as described by one industry expert) to meet the changing needs to consumers. A number of major retailers such as Amazon, Best Buy and Indigo are exploring their options. Stay tuned for more in 2015.
20. Big Data and Control Towers – Technology comes to Transportation
Of course, managing freight transportation requires data, good data and “big data.” It also requires KPIs and the technology to manage the big data. Control towers become one of the tools that some advanced shippers used to oversee their freight operations. This will be another story to watch in the years ahead.
This was a remarkable year in freight transportation with a range of positive and challenging events. Please let me know what items I missed. Thank you for following this blog in 2014. To follow me on Twitter click on @DanGoodwill. I wish you a very Happy Holiday Season.
