Girotti Says:

The lanes that will be hardest hit will be those that are hardest to fill--those with limited backhaul out or head haul in. What do you say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Is the rate reduction party over?  Have we gone too far?

We are getting reports from a number of points in the market that capacity in the TL market has tightened up in a significant way in the past few weeks. There doesn’t appear to be a significant demand increase (other then maybe a “blip” due to the tax rebates), but the supply of assets in the market is dropping much faster then earlier in the year. There appears to be a massive exodus of owner/operators from the market as they succumb to the relentless pressure of too many truckers chancing too little freight and rapidly increasing costs, including fuel prices and insurance rates. It is a classic case of Adam Smith’s “invisible hand” at work.

The question is: where is the equilibrium, and what will it cost? It is certain that rates will need to rise to enable small carriers and owner/operators (who are the backbone of North America’s TL market) to stay in the market. But given that there is no evidence of demand significantly increasing, the rate increase on average is likely small (maybe 1%). However, it could be large on specific lanes or regions. The lanes that will be hardest hit will be those that are hardest to fill--those with limited backhaul out or head haul in. For example, the rates into the Pacific Northwest (a traditionally tough market to get carriers to fill) have already started to rise by 10%, according to one carrier source.

One interesting twist on the business cycle this time is that there is a ready market for used power units in developing countries. With the weak dollar and developing nations still growing fast, they have driven up the US dollar value of power units. What this means is as Owner/Operators look at the prospect of an uncertain market vs. exiting the business, there is a ready avenue for them to get out. And if they do not owe too much on the unit, they may make a little bit of cash (not profit).

So what does this mean for shippers?

• If you have not gone to bid in the last 12 months, the window to reduce base rates is likely still there and you should move quickly to take advantage of it.
• If you have gone to bid in the last 12 months, keep an eye on the very “cheap” lanes and problem lanes. If you don’t have a back-up carrier in these lanes, find one and start feeding them some freight.
• Conduct regular plan audits that analyze, by lanes, by carrier, how actual costs are varying for budgeted rates.  Look for lanes that are most vulnerable to dramatic rate increases if the primary carrier is not available.
• Check the financial health of your partner carriers (the three or four that are integral to your business). Stay on top of them both from a financial heath perspective and a relationship perspective.
• If you have lanes that are handled by brokers that rely heavy on Owner/Operators, talk to them and make sure they have a plan to deal with market change (other than charging you more).

I am always interested in your opinions on my blog, and on transportation issues in general.

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