Tuesday, April 24, 2018

Freight rates expected to rise as capacity continues to shrink


Tuesday, May 11, 2010
“Capacity in the motor carrier segment has decreased from its over-abundance of a few years ago. To provide increased capacity as the economy recovers, rate increases are a certainty,” says an IHS report.
“Capacity in the motor carrier segment has decreased from its over-abundance of a few years ago. To provide increased capacity as the economy recovers, rate increases are a certainty,” says an IHS report.

Expect to see increased freight rates as capacity continues to shrink, writes IHS Global Insight’s Charles W. Clowdis Jr., managing director, transportation advisory services.

“Capacity in the motor carrier segment has decreased from its over-abundance of a few years ago. To provide increased capacity as the economy recovers, rate increases are a certainty,” Clowdis wrote in an IHS report.

He said ample capacity will be required to enable suppliers to ship to factories that in turn ship to customers and distribution centers, noting the substantial number of carriers that have exited the market during the economic downturn due to declining tonnage and shipments, as well as heavy debt service demands.

He gave the following predictions:

• Owner-Operators, those still in the marketplace, will also offer less capacity as the economy recovers

• It is also extremely likely that a repeat of the driver shortage will return and intensify as drivers turn instead to construction and other jobs as the economy recovers.  Higher pay for drivers will also necessitate rate hikes.

• Many carriers, both truck load and less-than truck load, have not replaced their fleets on a schedule that puts the most fuel-efficient equipment requiring less maintenance into service.

• Pressures to lower CO² emissions will also require investment in more fuel efficient engines to meet the "Green Initiative" which surely will be mandated by shippers. Decreased fuel efficiency likely to result from added emission control enhancements can decrease the miles-per-gallon trucks currently produce and  add to carrier costs that can be passed along to shippers.

• Terminal and infrastructure facilities also will require investment to restore efficiencies in operational areas and handle increased tonnage, and

• In effect, carriers must increase their margins to at least 8 %. Those carriers that have held their rate levels stable will also be pressured as their competitors offer increased capacity to the market.

As capacity decreases and becomes more valuable to serve the released consumer demand, he said, “carriers will become more aggressive in seeking rate increases.”  He predicted increases to be in the 7-10 percent range.

“Rates will also be driven upward by the need to service debt incurred by many of the carriers that resorted to borrowing to sustain themselves during the downturn, some at high interest rates.  Shareholders that have been patient will also expect improvement in share prices and dividends driven by better earnings. These demands must be met through increased rate levels.”

While carriers have learned important cost-reducing lessons in the downturn, he added, increased capacity has enabled many of these. As freight tonnages increase, many of those savings will disappear.

However, “should a rise in crude oil price occur, fuel costs to motor carriers will rise, and the fuel surcharge to the buyer of transport service will increase proportionately.”

Kevin Jones of The Trucker staff may be contacted to comment at kevinj@thetrucker.com.

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