As the year 2013 winds down, it is time to reflect on the major transportation trends of the past year. While I saw and read about a wide range of developments, these are the ones that resonated most with me.
1.Technology Comes to Freight Transportation
Last year I predicted that we would see a flurry of new technologies come to freight transportation. They did and I wrote about some of these new companies on several occasions during the year. Technology was successfully applied to the freight brokerage business, freight portals, LTL density calculations and to other segments of the industry. Buytruckload.com, PostBidShip, Freightopolis, QuoteMyTruckload, and Freightsnap were featured in various blogs during the year. They are changing the way business is done in freight transportation. Watch for more of these companies to surface in 2014.
2013 has been called the Year of the Network by numerous supply chain and transportation industry thought leaders. Companies that built a successful supply chain trading partner network focused on three elements:
Connectivity— unite disparate systems and trading partners
Visibility— access and understand the data in the network
Optimization— eliminate costs and increase efficiency
2. Energy Shipments by Rail Take Off
The transportation of crude oil via tanker car goes back to the days of John D. Rockefeller. The rail industry is now hauling more crude oil than it did in those days. Trains are transporting a record numbers of carloads of crude in 2013. This is a significant percent more than during 2012 and about 1000 percent more than the rails handled during all of 2008. Most of the American and Canadian railroads are recording major increases in volumes in this area.
While moving crude oil by pipeline still costs about half to one-third of what it costs to move it by rail, trains don’t require long term contracts or need to wait for pipelines to be built. While pipes stretch only from point A to point B, refiners can access nearly any market in the United States or Canada by rail. Flexibility and the ability to easily shift delivery markets to maximize revenue, has been encouraging oil companies to increase the leasing of rail cars.
Much of the increase has come from the Bakken shale formation in North Dakota, the origin of the oil that caught fire in Lac-Mégantic, Quebec that killed over 40 people and destroyed much of the downtown of the city. While concerns remain over the safety of transporting of oil by rail car, the surge in North American production and desirability of gaining energy independence makes this trend one to watch in the coming years.
3. FMCSA regulations and changing labor demographics tighten transportation industry supply and demand.
There is a disconnect developing within the labour force in the U.S. Some 3-3.5 million semi-skilled to highly-skilled blue collar jobs currently exist within America’s slowly growing economy. Yet, unemployment and under-employment remain at high levels, and labour force participation continues its slow steady decline.
Among the industries suffering from this disconnect the most is the trucking industry.
While one does not need a college degree to drive a truck, one must be able to pass a drug test, secure a commercial driver’s license, lack a criminal record, possess a blemish free driving record, and, perhaps most importantly, be willing to drive at all hours of the day with little promise of getting home on a regular basis (at least initially). As the Federal Motor Carrier Safety Administration (FMCSA) continues to push forth regulations aimed at improving the industry’s safety record, the current situation is likely to get worse.
New Hours-of-Service rules were implemented in mid-2013. The new 34 hour restart may reduce industry productivity by 1% to 3% or more. A survey was conducted by the American Transportation Research Institute (ATRI) and released a few days ago. The changes to the rules implemented by the Federal Motor Carrier Safety Administration (FMCSA) include provisions that limit use of the 34-hour restart and require a rest break before driving after eight hours on-duty.
ATRI’s analysis is based on a survey of more than 2,300 commercial drivers and 400 carriers as well as a detailed analysis of logbook data representing more than 40,000 drivers. Drivers are more tired. They’re making less money. The carriers they drive for are less productive and they need more drivers to haul the same amount of freight.
4. Dedicated Fleet and Private Fleet options gain Market Share as shippers look to lock in base load capacity.
With shippers worried that changing truck driver demographics, increasingly restrictive federal safety-oriented rules and regulations, and the rising cost of operating free-running irregular route truckload carriers will soon create a truckload capacity shortage, they are increasingly looking to lock in base load capacity though the implementation of dedicated or private fleets.
With base load volumes set up to be handled at predictable costs and service levels, weary traffic managers need only worry about sourcing capacity to carry end of period surges and/or volumes associated with promotions. These non-base load volumes can normally be handled by irregular route truckload carriers or truck brokers. Again, base load volumes can be handled via dedicated fleets operated by truckload operations experts. In the case a private fleet is selected, costs can often be minimized by securing the trucks and/or the supporting services (i.e., maintenance, insurance, fueling, etc.) from a low cost provider with large economics of scale,
5. Intermodal continues to gain share in the Eastern half of the U.S.
Historically, intermodal growth was centered on the long haul East-West traffic lanes originating and/or terminating in the far western U.S. Logic suggested that long rail hauls and the attendant line haul efficiencies embedded therein were needed to offset the cost of terminal operations, circuitous routing, and drayage operations. With the advent of double stack operations, highly automated yards, LTL freight consolidations and computer aided freight selection techniques, intermodal routes within the eastern U.S. have proven to be rather profitable for the eastern railroads (i.e., CSX and Norfolk Southern).
As density builds and terminal density, route density, and train length economies kick in, eastern intermodal market profitability should only improve. As CSX and Norfolk Southern collaborate with their respective truckload partners and intermodal marketing company partners, they should be able to continue to slowly but surely gain market share in a handful of dense eastern markets anchored by large cities and highly automated yards/ramps.
Cost savings to shippers average around 15% prior to the consideration of fuel surcharges. With intermodal fuel surcharges typically running at about one half of over-the-road truckload fuel surcharges, on a per mile basis, overall savings can often approach 25% to 30%. Plus intermodal service quality has improved tremendously over the past decade when measured in terms of transit time and transit time variability. Shippers will likely continue to switch freight from truckload to intermodal in the East in those cases where sufficient capacity exists and where length of haul, route circuity, or length of overall dray do not destroy the cost savings generally available with intermodal.
6. Major Brick and Mortar and E Commerce Retailers Test Same Day Delivery
Amazon, Wal-Mart, Google, Target, FedEx, Walgreen, eBay and Best Buy are in the process of testing same-day delivery services in the United States. In Canada, four major retail brands and Canada Post are launching a same-day delivery service for online orders in the Toronto area. The Delivered Tonight e-commerce service is a pilot project with Best Buy, Future Shop, Indigo and Wal-Mart.
For now, the strategy seems to be more about creating a customer expectation of same-day service than answering consumer demand. As Amazon has done before, it is working to create that demand with same-day shipping in 10 cities, while it also builds warehouses near major metro areas, paving the way for same-day delivery service on a much broader scale. Currently, Amazon is able to reach 15% of the market in America’s top 20 metropolitan areas. It is making a major to push to add warehouses close to these markets that would allow it to reach 50 percent of Americans.
Another feature of same-day delivery is convenience. The major retailers are testing various same-day delivery models. Wal-Mart is offering in-store, same-day pickup for online orders. Amazon is exploring the “pick-up” model as well with its new Amazon Lockers in convenience stores, grocery stores and drug stores in selected cities. EBay is testing an “eBay now” mobile app, available in San Francisco and New York City, that relies on couriers for same-day delivery of products ordered online from existing partner stores. Same day delivery is currently morphing into the so-called omni-channel marketing strategy that will be discussed in detail in my next blog.
7. Fuel for trucking begins shift from diesel to natural gas.
As natural gas becomes more abundant and as natural gas prices decline relative to other forms of fossil fuels, the trucking industry seems poised to be relatively early adopters of natural gas powered vehicles. As engine manufacturers develop and market higher horsepower natural gas engines and truck stop chains and natural gas companies team up to develop nationwide distribution capabilities for liquefied natural gas and/or compressed natural gas, the larger, more sophisticated, well capitalized trucking companies will be the first to replace some of their diesel powered vehicles with natural gas powered vehicles. Given the cost advantages associated with natural gas consumption, carriers adopting natural gas powered trucks early will gain a cost advantage vis-à-vis other carriers, particularly the smaller carriers that struggle with financing, driver recruiting and retention, maintenance costs, lack of purchasing economies, and reliance on brokers for some/all loads.
8. Small Freight Brokers are coming out of the Market
The brokerable portion of the truckload market is nearing saturation as multiple, rapidly growing brokers continue adding capacity (i.e., growing headcount) faster than shippers are outsourcing traffic management functions. Effectively, brokers are calling all the same accounts. Smaller freight brokers are less able to acquire TMS systems and pay the setup fee. They have less leverage in negotiating agreements with carriers, they are less able to establish contractual relationships with shippers and, as a result, are required to compete in the transactional spot market. As the segment matures, margins are contracting. Winners will now be separated from losers on the basis of cost per transaction, availability of capacity, technology and consistency of service.
9. Asset Light Carriers and Networks are on the Rise
Some asset light carriers have been assembling networks of regional carriers and consolidation centers with some or no base of assets. These carriers are opening/closing new markets in months versus. years without large capital outlays. They are making heavy IT investment, creating an experience like traditional carriers, reducing costs of switching for shippers. Roadrunner Transport Systems is the poster child in the LTL sector. Daylight Transport, Towne Air and NOTS are other carriers that come to mind in this space.
10. Big Carriers doing better than Small Carriers
In a recent report from Transport Capital Partners, it highlights the variance in performance between carriers with less than $25 million in revenue as compared to larger carriers. Carriers with sales in excess of $25 million are achieving higher rate increases, are planning to add more capacity, derive less of their revenue from freight brokers, achieve superior miles per gallon on their fleets and are less likely to leave the industry that their smaller competitors. This suggests that another round of industry consolidation may be imminent.
One of the ironic by-products of the onslaught of federal and state regulations (designed to protect the “little guy”) is that the “little guy” is in fact hurt. It is the large, sophisticated carrier that can access low cost financing, leverage purchasing economies, optimize his network, and deal scientifically/methodically with usually complex/tough to interpret/challenging to implement government regulations governing engine emissions, driver health and safety, equipment safety, as well as treatment of and benefits for employees. In a somewhat unplanned way, big government begets big business. Large carriers will have more competitive cost structures, the ability to more consistently deliver sufficient capacity, the ability to provide higher-levels of service, have better access to the capital markets, and stronger, more comprehensive systems to optimize operations and enhance customer service and satisfaction.
What trends did I miss? Please let me know. In the next blog, I will look at the major forces shaping the Year in Transportation in 2014.
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