The Brutal Reality…Logistics, Capacity and where we are headed

I am a pessimist by nature. When I am in a big pot in Poker I am convinced the river will make my opponents hand. I am also not very bullish on the economy. Over the last 2 years members of both parties have thrown trillions of public dollars at the economy and it appears to have only stopped the bleeding. That doesn’t portend too well now that most people agree we are out of money to throw around. So how does this apply to our industry? The last 6 months we have all heard about capacity issues in Truckload and LTL. Freight is piling up on docks and loads are going unfilled. Rates are going up as trucking companies struggle to meet demand. But what is missing in this picture?

Well as I remember from high school when demand goes up two things are supposed to happen. First, prices go up as the Laws of Scarcity go into effect. We have all seen the prices of LTL freight going up this year. Secondly, supply is supposed to increase to meet the demand. I have not seen this happen, have you? But why is this not happening and what does it tell us about the near future?

I think there are a few basic reasons supply is pretty static.  Barriers to entry are huge. New companies cannot be formed to handle excess LTL freight. Terminals are needed; trucks, trailers and people are very expensive. The timeline to form, open and staff a new trucking company is years. It is just not going to happen. And let’s not forget about government regulations. Jay Thompson of the Gerson Lehrman Group covers that in great detail here. “When it comes to regulation, it’s like a confluence of issues that results in carriers being hesitant to invest in much of anything – smartly so.”   The base of suppliers of LTL freight is not going to change any time in the near future. It might even contract with companies going out of business.

Cash is tight. LTL carriers have just suffered through a couple years of losses and are only now coming out of the doldrums. Even titans like FedEx are posting losses. YRC has seen it’s stock price fall to 15 cents. Other companies are also coming off bad years. They have retired older equipment without replacing. Drivers are let go or allowed to retire with no replacements hired. No one is buying new equipment. We have seen the unemployment numbers; no one is hiring new drivers.  No new companies plus no new equipment is not a recipe for increased supply. For these reasons, Moody’s is predicting that rail will outpace trucking in the near future. “We expect railroad sales growth to outpace growth for truckers into the second half of 2010,” the report said. “U.S. truckers were devastated by the recession, which constrained their ability to invest in new fleet and infrastructure. Consequently, their fleets may be less able to accommodate spikes in demand,” the report said. Railroads, meanwhile, maintained capital spending during the downturn and will be able to handle increased demand without the bottlenecks that accompanied previous recoveries, Moody’s said.

Lastly, (and this is where my pessimism comes in) I just do not think that LTL companies believe the hype. There are a lot of very smart people making buying decisions for LTL companies. Like me, they just do not think the economy has really turned. They are pretty sure that when the spending stops that demand is going to fall and no one wants to be left with a bloated supply chain.

Those of us in the 3PL and logistics world need to recognize how this affects us. In the short term, we will be dealing with higher prices but SO ARE OUR CUSTOMERS. Carriers are not raising rates on our segment because of any change in philosophy. Rates are going up for simple economic reasons; there is no supply. If the economy continues to grow, then trucking companies will start to expand their fleets. New companies will take a shot at the multiyear horizon and start to open. Increased supply plus new competition will of course bring the prices down again. It is simple Economics 101. But what if the economy double dips or just stays stagnant? Well all of a sudden, carriers will be cutting back again and looking for help to fill their trucks. Of course, we will be poised and ready to assist. If these times seem hectic and confusing to those of us who are considered professionals in our industry, imagine what it’s like for the customer. This is our time to shine. Anyone can keep a customer happy when saving him or her 20% on their freight needs. But the true professional can keep the customer happy when his costs are going up by 20%. We need to be explaining what is happening in the industry and why. They need to understand why a load that cost $500 in March now costs $750. They need us now more than ever.

– Randy Collack, VP of Administration
Follow me @schmengieBG

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