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From SCDigest's On-Target E-Magazine

Dec. 14 , 2011

Logistics News: Q3 State of the Freight Report Says Rate Hikes Across Modes Still Relatively Strong, but Expectations Dropping a Bit as Plans for Shipments, Inventory Coming down for 2012

Public Rail Carriers Show Profit Growth Well Above Changes in Volumes; LTL Carriers are Slowly Turning the Financial Ship Around On Rate Increases, Business Discipline

SCDigest Editorial Staff

As always, we enjoyed reviewing the quarterly "State of the Freight" report from the transportation industry analysts at Wolfe Trahan. Though the survey of several hundred shippers is meant to support the needs of investors in the transportation sector, always there is some great insight and data of use to logistics professional as well.

SCDigest Says:

In Q3, on average shippers diverted 8.2% of such freight to rail from truck, versus just 1.6% of this freight from rail to truck. Wolfe Trahan continues to believe the share of rail.intermodal will continue to rise.

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Included in the report was the firm's own analysis of pricing trends across several modes. It found that truckload pricing across a group of six large TL carriers was up an average of 3.6% in Q3 versus a year ago, and 1.6% versus Q2. Rates on a year-over-year basis had been up between 4.7-5.3% over the previous four quarters, and were up sequentially 2.6% in Q2 after dipping 1.1% sequentially in Q1.

The story was even stronger in the LTL sector, which saw average rates increases of 6.9% in Q3 year-over-year, and 3.4% versus Q2. LTL Rates had been dropping sharply on a year-over-year basis from at least Q1 2010 and most likely before that until the sector ended the slide in Q2 of this year, when rates also rose by a strong 5.1% over 2011. (These numbers are all net of fuel surcharges.)

Interestingly, that 6.9% growth in rates in the LTL sector exactly matched the level of the general rate increase many LTL carriers announced in August and September, meaning those price hikes appear to have been realized in the market.

The report notes that LTL carriers such as Con-Way and FedEx Freight have culled much unprofitable customers and freight from their networks in recent quarters.

Shippers, however, have relatively modest expectations for rate increases in 2012, the survey found.

On average, shippers expect truckload rates to rise 2.6% in 2012, down a bit from the expectations for a 3% rise in the Q2 survey. The expectations for LTL are for an average 2.1% rise next year, again down a bit from the predictions for a 2.5% rise in the previous quarter's survey.

Rail Pricing and Expectation Still Strong

On the rail side, shippers expect direct rail rates to rise 3.4% in 2012, about on par with expectations in Q2. 18% of respondents think they will see rate increases of 5% or more next year, and a full 71% plan for rate hikes of at least 2%.

Interestingly, survey respondents see Union Pacific as the most aggressive about rate hikes, slightly ahead of Norfolk Southern, BNSF and CSX, which were in a virtual tie for second place. The Canadian rail carriers and Kansas City Southern were viewed as far less aggressive.

For intermodal service, the expectations are for a 2.3% hike in rates next year, up a bit from 2.1% last quarter. But, 40% expect a near to flat rate environment in intermodal in 2012, up from 33% in Q2. The report notes that in general, intermodal shipping is subject to more competition than straight rail car carriage, hence the lower expectations for rate hikes.

(Transportation Management Article Continued Below)

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The report notes that the survey results tend to consistently report shipper expectations for rail hikes to come in below the actual numbers reported by carriers - recently 4-6% in rate hikes - because the survey population has relatively few respondents from the coal and grain industries that may be more subject to higher bottleneck rail pricing, and the survey is over-represented by very large shippers which may have more leverage versus the carriers than small and midsized shippers.

Freight Volume Changes by Mode

We found this chart from the Q3 report very interesting. It shows year-over-year monthly changes in freight volumes by different measures and modes over the past two years or so.

Source: Wolfe Trahan State of the Freight

The data shows, for example, that rail volumes rose sharply in 2010 as the US climbed out if the disastrous 2009 economic and shipping environment, but that the growth in rail volumes has slowed dramatically so far in 2011 - even as rail pricing rose about two times as fast as volume growth during the year.

As most may know, import volumes generally and especially at West coast ports have been weak in 2011, even as exports have risen a sharp 7.2% so far in the year.

Both domestic and international air cargo have been in the the dumps this year, down 2.0% and flat, respectively, as companies are willing to wait longer for deliveries for lower logistics costs.

We're not quite sure why the strong difference in the Cass and ATA trucking indexes, and are taking this as a note to dig into this issue more.

Companies Planning Less China Production

Another interesting chart from the report looked at planed changes in product sourcing by world region.

As can be seen, the number of companies planning on moving more production to China has fallen by half over the past year, while those plamning to bring more back to the US has about doubled, giving support to those who are predicting a strong return to domestic sourcing in the face of rising labor costs and other factors in China.

Source: Wolfe Trahan State of the Freight

There was also a 25% rise in the number of companies planning on increasing use of Mexico as a sourcing location.

Other highlights of the report include:

• Expecations for 2012 shipment volumes are decreasing. On average, shippers see a 2.4% increase in "same store" shipments, down from 2.9% in Q2. The survey coincided with US budget troubles and the financial crisi in Europe, which may account for the drop despite still reasonably strong economic growth in the US. The 2.4% expectations forfreight volume growth is the lowest in two years.

• Truckload capacity still seen as tight. 40% of respondents said TL capacity as tighter than normal during Q3, and 54% expect capacity to tighten further in the next 12 months. Few shippers are seeing tight LTL capacity.

• More freight is moving truck to rail. Wolfe Trahan believes that the numbes that follow are relative to the 5-10% of freight that on average shippers can easily move from truck to rail/intermodal and vice/versa. In Q3, on average shippers diverted 8.2% of such freight to rail from truck, versus just 1.6% of this freight from rail to truck. Wolfe Trahan continues to believe the share of rail.intermodal will continue to rise.

Any reaction to the Q3 State of the Frieght report. Let us know your thoughts at the Feeback area below.

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