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From SCDigest's On-Target E-Magazine

March 14 , 2012

Logistics News: Latest State of the Freight Report Finds Rate Expectation Rising Again Across Most Modes

Wolfe Trahan says Rail, Truckload Rates will Rise 4-6% Again this Year, above Shipper Predictions

SCDigest Editorial Staff

The always interesting "State of the Freight" report from the Wall Street analysts at Wolfe Trahan is just out, with the headline news being that most US shippers see truckload capacity continuing to tighten and predict rail shipping rates will rise the fastest in 2012.

SCDigest Says:

The expectation is that TL capacity will tighten this year, with 66% saying that capacity will tighten moving forward, versus 54% last quarter. Only 21%, however, predict tightening capacity in the LTL market.

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The quarterly report surveys several hundred shippers on a wide variety of topics. Though the real audience in the end are the firm's clients that are interested in investing in carriers and related services companies, the report always contains a wealth of information of interest to shippers themselves. The just released report summarizes responses obtained during the late fourth quarter of 2011.

With signs of a growing economy, shippers were increasingly bullish about their freight volumes, the report says, with expectations for a 3.5% increase in "same store" shipments in 2012, well above the previous quarter's results (2.4%). During the same period, shippers expect their freight budgets to rise 5.5%, meaning there is an expectation for about a 2% rise in rates and increased fuel costs (5.5% minus 3.5%) across all modes combined.

However, it seems to us that these rate predictions of late have been short of what has really happened in the market place.

As shown in the chart below, for example, in Q1 of 2011, shippers said they expected a rise in rail rates over the coming year of 3.8%, a 3.5% rise in truckload rates, and just a 2.5% rise in LTL rates. That seems by all accounts several percentage points below what actually happened, with by nearly all reports and the recent earnings calls by carriers across all three modes supporting that rates were up more like 4-6 percent depending on the carrier.

The Cass Linehaul Truckload Index just reported that TL rates were up 8.2 year over year in January. Wolfe Trahan does note that the results are more directional than specific, and that the changes in rates it saw last year were in that higher 4-6% range.

Nevertheless, most respondents see rates continuing to increase in 2012, with every mode with the exception of intermodal showing predictions for more aggressive hikes (or a drop in the decrease) over the next year than was predicted in the Q3 2011 report (intermodal rates are still expected to rise 1.6%, but at a slower pace than was expected in Q3). As shown, the highest expectation for rate increases this year is in rail, with an average prediction of a 3.3% hike. Wolfe Trahan says it actually expects rail rates to rise 4-6% again this year for rail, before fuel surcharges.

(Transportation Management Article Continued Below)

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The report says that among large truckload carriers Wolfe Trahan follows, rates (revenue per loaded mile) were up on average 4.3% in Q4, a level about what is also expects for 2012, given what its prediction that shippers will face "increasingly tight, supply-driven capacity conditions."

With regard to shipper expectations, the report notes that this marks the eighth straight quarter that shippers have expected rate increases in the truckload sector to exceed those for LTL.

Capacity Seen as Somewhat Tight in Truckload, Balanced in LTL

Reports more generally of growing tightness in the truckload sector were modestly supported by the shipper responses, with about 31% saying they are seeing "tight" conditions, versus just over 1% seeing an "extremely tight" market, and almost 50% saying the TL market is balanced at present. The number saying the market is tight right now is down about 6 percentage points from Q3 2011, but that could be due largely to simple seasonality issues. That number is up slightly versus Q4 2010.

As also shown in the graphic below, the story is much different in LTL, where only about 6% see capacity as being tight right now, nearly the same as Q3 2011 and Q4 2010. More than 60% see the LTL market as balanced, down slightly from the previous quarter in favor of a small increase in the percent who see modest overcapacity in the LTL market.

However, the expectation is that TL capacity will tighten this year, with 66% saying that capacity will tighten moving forward, versus 54% last quarter. Only 21%, however, predict tightening capacity in the LTL market.

Other highlights of the report:

• While expectations for the level of decrease in ocean rates fell, shippers predicted still more reductions in those rates for the third straight quarter.

• Consistent with all the news about "re-shoring," almost 35% of shippers expect more of their production to return from China to the US or Mexico (about split between the two) over the next five years, versus 26% who expect volumes sourced from Asia to increase at their companies. 41% expect no change in sourcing.

• Though the vast majority of shippers (71%) say they are currently paying the same level of accessorial charges (excluding fuel surcharges) to truckers as last year, 19% say those payments are higher year over year, the same percentage as in Q3.

• Shippers in general see improved in troubled LTL carrier YRC Worldwide after its near-death experience and then massive reorganization last summer. 16% say they are seeing YRC's service improving, versus only 4% who see it declining. 15% say they will increase their freight moved by YRC versus 8% that say they will reduce YRC volumes.

• 40% of shippers expect some level of rate increase specifically as a result of changes to hours of service (HOS) rules as the July, 2013 implementation date gets nearer.

• 23% plan on switching some heavy air cargo to ocean, versus just 4% who are planning the opposite switch, indicating a preference for cost over speed.

• Shippers see continued improvements in rail service levels.

That's it for the Q1 report summary. We'll be back with the Q2 2012 report in three months.

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