ORLANDO, Florida — U.S. shippers and trucking companies ride a pricing 'roller coaster' with more stomach-punishing ups and downs than the Coney Island Cyclone. Derek Leathers, president and COO of Werner Enterprises, would like to shut the ride down.
“I’m not casting blame, I’m questioning why we do it,” Leathers told the 2016 NASSTRAC Shippers Conference here Monday. He referred to what he called “aggressive procurement behavior” on the part of shippers looking to drive truckload rates lower in a soft market.
“We knowingly and willingly go into these cycle shifts with aggressive behavior and there’s a better way,” he told NASSTRAC shippers, carriers and logistics providers. That better way involves collaboration to keep long-term shipping costs low and still provide remunerative rates.
There is still more capacity in the truckload market than available freight, thanks to overly optimistic forecasts more than a year ago and a record-breaking round of new truck orders and sales in 2015. Pricing power has swung back to shippers and they’re not afraid to use it.
Some would ask, why should they be? In an economy that expanded only 1.4 percent in the fourth quarter of 2015 and may barely have grown in the first quarter this year, companies of all stripes are under increasing pressure to reduce costs, and transport costs are a target.
Logistics managers have told JOC.com they are being told by CEOs and CFOs to pursue double-digit savings from transport operators, the kind of savings which can gut partnerships and imperil value-added services carefully developed through collaboration in recent years.
“All it takes is one executive to question why rates have not dropped as fast as fuel prices,” one shipper told JOC.com. “You have to explain there’s more to truck pricing than fuel costs.” But that push for savings is harder to stave off when transportation is considered a “cost center.”
The pressure on surface transport rates is evident in the Cass Freight Index, the Cass Truckload Linehaul Index and Intermodal Price Index, all measures of freight volume, shipper spending and pricing drawn from data from more than $25 billion in annual freight bills.
The Cass Truckload Linehaul Index dropped 0.6 percent year-over-year in March, the pricing index’s first negative reading since May 2010. The Cass Intermodal Price Index dropped 3 percent last month, following declines of 2.2 percent and 3.8 percent in January and February.
The Truckload Linehaul Index peaked in January 2015, rising 7.9 percent year-over-year, before beginning its long slide into 2016. The 0.6 percent drop in the index indicates not a slower growth rate, but an actual decline in truck rates that is pushing intermodal rates lower.
Several truckload carriers, including Werner, are blaming soft pricing for a year-over-year drop in first-quarter revenue. “Some customers are aggressively working to take advantage of the favorable shorter-term trends to the detriment of carriers,” Werner said in a statement.
Trucking companies that enjoyed considerable pricing power in 2014 and 2015 were able to thicken historically thin margins and build more sustainable profits. Now they feel more like their ocean carrier counterparts, who complain they are being pounded in rate negotiations.
The bidding season for transportation contracts in 2016 is proving to be “a constant battle with our shippers,” Richard Stocking, president and COO of Swift Transportation, said in March. Swift’s revenue dropped 4.7 percent in the first quarter, and profits were down 15.7 percent.
“Our truckload services experienced pricing pressure throughout the 2016 first quarter, as industry-wide truck capacity was more readily available as compared to the 2015 first quarter,” Jim Gattoni, president and CEO ofLandstar System, said in a statement last week.
The trucking companies are sending a not-too-subtle warning that customers seeking “aggressive” price cuts when capacity is plentiful may be punished when supply tightens again. Additionally, they see the pricing pendulum swinging back toward them in the not-too-distant future.
“We’re seeing massive truck order cancellations,” Leathers said at the NASSTRAC conference. Data from freight analyst FTR shows March 2016 North American Class 8 truck net orders declined for the third straight month to 15,800 units, the lowest net order level since September 2012.
Net orders for Class 8s dropped 37 percent year-over-year last month, according to FTR. That’s a real sign of capacity contraction the market is ignoring, Leathers said. “We've dropped truck orders by 40 percent and everybody's acting like it's not happening,” he told NASSTRAC.
Knight Transportation President David Jackson expects truck capacity to contract even before the electronic logging device mandate takes effect December 2017. “We’re just looking at new orders, used equipment pricing and non-contract rates,” Jackson said April 20.
“We think we’ve hit the bottom, in terms of supply being added to the market,” Jackson said. “We think supply is coming out of the market. We think we’ll see a little bit of progress each month as time goes on. By the time we get to the fall things are going to feel a little bit different.”
Werner cut 85 trucks from its fleet from the fourth quarter to the first quarter, though its truck count did rise by 220 tractors year-over-year, a 3.1 percent increase, to 7,330 trucks. Despite the soft rate environment and excess capacity, Werner plans to buy more trucks.
“At a time when everybody else is cutting orders, we’re going to have a record capex” of $425 million in 2016, Leathers said. “We’re going to buy more trucks than we’ve ever bought in our 60-year history.” The goal isn’t greater market share, but replacement of older vehicles.
By last month, new truck purchases had lowered the average age of Werner’s Class 8 fleet to 1.8 years compared with an average age of 2.1 years in March 2015. The goal is to drive that average tractor age down to 1.5 years by the end of 2016, the company said last week.
Trucking capacity is going to contract sooner or later, Leathers said. “We want to be ready with the best trucks, the best technology and best drivers to catch freight when that happens.”
The question is, will Werner and other carriers take freight from their “best shippers” first?
The NASSTRAC conference opened this year with a panel featuring a discussion between a Class I railroad and trucking company executive titled “Why can’t we all just get along?” Perhaps next year the same panel should feature a trucking executive and a major shipper.
In the meantime, the rate roller coaster rolls on propelled by market forces that are hard for carriers and shippers to deny or temper, and no one wants to exit a roller coaster in mid-air.