The Seven Factors Behind Rising Truck Freight Rates

January 25, 2011

One session at the SMC3 conference in January 2011 featured three trucking industry CEOs. Schneider National's Chris Lofgrin, CH Robinson's John Wiehoff, and UPS freight's Jack Holmes gave a spirited panel discussion. Not surprisingly, each of these CEOs is very bright and very aware of his macro market and of the marketplace. And not surprisingly, each gave copious reasons to expect that trucking freight rates will climb in the future.

While some people could claim that these business leaders are doing nothing more than crying wolf in front of a group of shippers, their reasoning makes sense. These three companies are not laggards in the profit-creation part of the trucking industry, they are the leaders.

Lofgrin ran under the flag that regulatory changes will impact productivity in the trucking industry, thereby impacting costs. He stated emphatically that Schneider National will be adding no new trucks in 2011, and that he doubted that they would add any tractor units in 2012. Lofgrin also said that, given a highly fragmented marketplace filled with micro-carriers and micro-shippers—and a churning stew of changing regulations—the wisest path for his company would be not to grow capacity.

When you stop and think about the regulatory changes and the other market conditions, you have to wonder why business people even want to go into the trucking business. There are seven key drivers that are going to shape the economic conditions of surface transportation in the next five years. They are, in no particular order:

CSA: This is a comprehensive safety initiative that the Federal Motor Carrier Safety Administration and the DOT have ramped up. Some members of our organization compare CSA to a trip to the proctologist. Many people in the trucking industry feel that while this is the right thing to do, the implementation is not perfect. CSA is designed to get the bad actors off the road, and a key part of it is designed to identify unsafe commercial drivers through a variety of inspection and enforcement methods. The general impression is that CSA will trim the driver population, possibly by as much as 10 percent. A much bigger concern among carriers is the litigation issue that CSA could open for shippers.

Hours of Service: If you are involved in the logistics industry in the United States and don't know anything about the HOS rule-making issues of the past decade, then you have been asleep under a rock. New rules came into effect in 2001 that addressed driver fatigue and changed the mandatory rest periods, as well as on-duty time and driving-time rules. Each time the rules were finalized, various safety advocacy groups and the Teamsters would file suit in federal court to overturn them. These groups were victorious every time, and so the rules went back for modification and reissue. We in this industry need to realize that the safety advocates are not going to give up until they have found a way to legally mandate that a driver may spend no more than eight hours behind the wheel of his truck. At some point, wisdom must prevail in the courts and shut down the safety advocates. Many trucking executives say this pressure—which is not based on data—will drive wages up, add more trucks to the road, and drive freight costs through the roof.

Tractor Costs: Over the past five years there has been a 40% increase in the costs of operating a class A tractor. That 40% includes not just the increasing cost of the unit itself, but also the maintenance, lost fuel efficiency, and the additional costs for diesel emission fluid required by the 2010-mandated engines. As former American Trucking Association president Tommy Hodges said at the conference, “Trucks are now very expensive air cleaners.” By this he meant that the air that comes out of the exhaust is cleaner than the air that went in.

Infrastructure: The highway and bridge infrastructure in the United States is currently insufficient for the volume of traffic it must support. The legislation needed to address infrastructure issues will not pass this year because in order to pull it off, federal highway fuel taxes would have to increase—a poison that no politician, including the President, will touch. So, our underfunded highways and bridges will continue to be congested, creating even more capacity issues.

More focus on Return on Capital: As trucking companies emerge from the backside of the credit crisis still solvent, they are desperately seeking ways to increase their return on capital. Not only are these companies focusing on cost reductions, they are looking for ways to improve fleet utilization and lane profitability. Shippers should expect to see some carriers either increase rates in unbalanced lanes or watch carriers pull out of unbalanced and unprofitable lanes.

Responsible Spend: Shippers are taking responsibility for the cost of their inbound freight. The days of the seller being responsible for the outbound delivery of consumer products may be coming to an end. More companies are focusing on ways to create a continuous move in order to keep the carrier’s trucks rolling. This concept works well for shippers whose distribution points are balanced with motive and method. But many shippers cannot leverage conversion terms to create savings. Those shippers will be under rate-increase pressure.

Managing Safety Risk: A frightening idea developed by the plaintiff's bar is the theory of the deep pocket. With increasing frequency, lawsuits involving truck accidents that result in injury or death are reaching beyond the insurance of the trucking company. An unintended consequence of CSA is that a shipper now has access to more detailed data about the safety records of trucking companies and their individual drivers. A concern among legally aware shippers, brokers, and carriers is that plaintiffs’ attorneys will mine CSA data and then use the evidence they find to go after the shipper for negligence. The clear message is, "Shipper beware—you will become a target."

I wouldn't necessarily call these the Magnificent Seven. None of them are all that magnificent by themselves. But the combination of all seven of these factors will increase trucking rates. The only true way a shipper can combat any of these factors is to figure out ways to increase the density of the load and improve the overall productivity of their network. The only way to combat these rising rates will be to develop ways to reduce the number of trucks the shipper’s network needs.

As Rates Go Up, What Are Shippers Doing?

Tactic: Mode Change and Consolidation Network