This year has been less stressful for shippers compared to the strong customer demand and tight capacity of 2014. But, the situation is about to change. A recent market overview by the Journal of Commerce shows that both contract and spot market truck rates will increase.
The current recess of rate growth will end due to the expanding economy and shrinking capacity. Economic forecasts for 2015-2016 predict that development will accelerate from about 2.4% to 3%. David G. Ross, a managing director at Stifel, expects that truckload rates will rise 3-5% and LTL rates will rise 2-4% percent this year.
A new report by the ATA projects freight volume to rise 29% over the next 11 years, due to a boost in population, foreign trade and added development from the energy sector.
The truckload capacity crunch has been stimulated by new US regulatory requirements that worsen the continuing driver shortage. The truck driver shortage is estimated at 48,000. This trend will only get worse as the industry grows and more drivers retire; the driver shortage could reach 175,000 by 2024.
There are additional factors that impact truckload capacity including demand, weather, industry trends, fuel prices, and federal regulations.
Demand. US consumers have gained confidence; employment rates are up, debt is falling and Americans are spending. As customer demands increase, shippers require more capacity, which drives up transportation costs. When demand is too great, it results in inadequate capacity, which leads to poor delivery performance, expedited carrier labor and higher costs.
Weather. Weather impacts prices and capacity; for example, the 2013-2014 “Polar Vortex” led to tension on truckload markets in one of the biggest parts of the country. Even states like California and Texas experienced instability in capacity, though they weren’t impacted by snowy weather. Bad weather increases shipping costs because extra effort is required by the carrier, and weather strains capacity because trucks are on the road much longer.
Industry Trends. Mounting demand in a specific vertical can eat up available truckload capacity. Shippers must be aware of geographical, market and opponent demand in order to find capacity ahead of time to move products.
Fuel prices. For now, shippers are profiting from relatively low fuel rates. Sometimes, fuel prices lead to lower transportation costs, but higher fuel prices mean greater pressure for a transportation budget.
Federal Regulations. Rules and regulations placed by the government reshape how carriers operate and serve shippers. With HOS Rules, a driver loses productivity. The ELD Mandate hurts a carrier’s profitability in the short-term and can put them out of business. For some shippers, this means limited capacity and an inflexible timeline.
What should shippers do?
When capacity is strained, rates react by going up. Carriers realize they are able to charge more, both on the spot market and for a long-term deal. In order to avoid the inescapable capacity crunch, shippers should plan a pricing strategy.
- Short-term: shippers need to respond quickly to bids and adjust rates.
- Long-term: shippers should define key carriers and lock in fixed rates.
- The best time for a shipper to set up long-term contract rates is during January and February, when carriers tend to offer lower rates after peak season.
As the holiday season approaches, shippers have to think about securing capacity for freight by finding a reliable partner. PLS Logistics provides value for shippers by instantly finding the best option to move shipments (rates, lanes, carriers).