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From SCDigest's On-Target E-Magazine

- March 12, 2013 -

Supply Chain News: Summary of Latest State of the Freight Report from Wolfe Trahan

Shippers Expecting 3.1% Increase in Rail Rates in 2013, Just 1.4% for Truckload; Conversion to Rail and Intermodal Continues

SCDigest Editorial Staff

SCDigest is always interested to see the quarterly "State of the Freight" report from the transportation industry analysts at Wall Street research firm Wolfe Trahan. Though the report is really designed to provide insight to current and potential investors in the transportation sector, invariably there is also much to be gained from the research for shippers as well.

The Q1 2013 report as usual is based on a detailed survey by shippers from several hundred companies who responded in the latter part of Q4 2012.

SCDigest Says:

All told, Wolfe Trahan believes that freight volumes and rates will "re-accelerate throughout 2013 after slowing throughout 2012."

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The report is modestly upbeat in terms of the freight market, with shippers expecting "same store" [meaning no outside changes, such as from an acquisition, for example] shipping volumes to rise a decent 3.3% in 2013, the highest level in more than a year, and up from 2.4% last quarter.

Most of that growth, however, is expected to come from increases in rail and intermodal volumes, expected to be up 4.4% and 3.4%, respectively, consistent with data from the Cass Freight Index last week that saw sharp increases in rail and intermodal volumes in February.

Shippers also expect relatively solid growth in ocean (+3.4%) and US ground parcel (+2.4%) volumes, followed by truckload (+2.1%) and less-than-truckload volumes (+1.9%).

However, respondents expect international airfreight volumes to decline almost 2% over the next twelve months, consistent with recent industry trends and the only mode in which shippers expect volume contraction.

All told, shippers in the survey expect total transport budgets to rise 4% including fuel surcharge costs over the next 12 months, up from 3% in the past quarter, which was actually a three-year quarterly low in terms of spend expectations.

What Way to Shippers See Rates Headed?

One of the most interesting charts always included in the quarterly report is one related to where shippers expects rates to be headed across modes, net of fuel changes.

As shown in the chart below, shippers expect rail rates to rise the sharpest this year, at 3.1%, followed by ground parcel at 2.5%. Respondents expect truckload and LTL rates to rise just 1.4% and 1.9%, respectively.

As we've noted in the past, rate expectations in this report tend have tended to underestimate rate increases versus those reported by carriers across modes in their earnings calls over the past two years. SCDigest has in the past and once again here suggests that could be the result of one of two phenomena: (1) over confidence in a shipper relative to its ability to negotiate lower rate increases; or (2) the fact that this survey is primarily composed of very large shippers, which may in fact achieve somewhat smaller increases than the overall market.

Slowing in China Outsourcing Bodes Poorly for International Air Volumes

The anecdotal evidence of increased interest in bringing manufacturing back to the US or at least "near-shoring" to Mexico or Latin America has been supported in this survey for two years, and that was once again the case this quarter.

As the report says, "37% of shippers currently have no plans to change their production sourcing, down slightly from 38% last quarter. Among those who plan to shift their production sourcing, 22% of shippers expect in-sourcing back to the United States, in line with last quarter and up from 17% the year ago period. This again marks one of the highest levels of expected in-sourcing to the US since we began asking this question over two years ago and this likely reflects the impact of cheap natural gas and crude oil in the US as a result of the shale revolution which is allowing for cheaper domestic industrial production."

(Transportation Management Article Continued Below)

CATEGORY SPONSOR: SOFTEON

Additionally, more shippers expect increases in sourcing from Mexico versus China by an 18% to 9% margin.
One sector that is likely to be hit hard by this trend is the international air freight market, Wolfe Trahan observes, leading to rate pressure on air freight carriers and freight forwarders in the face of lower or slowly growing volumes.

Rails Benefitting from Conversion from Truckload

As this report has shown consistently in the past, as diesel prices rise, more and more freight is shifted from truck to rail/intermodal.

In this report, 38% of shippers indicated that railroad rates currently are 0%-10% cheaper than truckload rates, and another 30% believe rail rates are currently 10%-20% cheaper, and 25% estimated that rail rates were more than 20% cheaper than comparable truckload rates. With rising diesel prices recently, shippers have on average diverted 3.1% of their freight shipments to rail from truckload, versus the .9% of freight movements switched from rail to truckload, for a net 2.3% move towards rail, with rounding. That is up from a net 1.4% change in the previous quarter's survey.

All told, "Looking forward over the next 6-12 months, our respondents expect the rails to take additional market share from trucks after reaching a bottom last quarter," the report said.

The chart below shows changes in oil prices versus plans for moving freight from truck to rail since 2007.

Other highlights from the report include:

Few Shippers Expect to Join the Rail Fuel Surcharge Class Action Suit: Only 10% of survey respondents plan to join the class action lawsuit against the rails, down from 15% last quarter. Wolfe Trahan believes the rails will aggressively fight these charges, but that a settlement seems possible over the next couple of years.

Truckload Capacity Remains Balanced: For the second consecutive quarter, the survey results indicate more shippers are seeing modest TL overcapacity versus tight TL capacity, and this reverses a trend from the previous nine quarters of perceived tight TL capacity. That should translate into less upward pressure on rates.

Expectations for Tighter TL Capacity Accelerate Modestly: 49% of respondents expect tighter truckload capacity going forward, up slightly from 48% but still down materially from 62% a year ago. While large carriers seem to be leaning towards modest fleet increases, Wolfe Trahan believes pending regulatory changes including Hours of Service rules will result in reduced capacity in the second half of the year, particularly as peak shipping season begins to take form.

LTL Capacity Seen as Abundant: Overall, shippers continue to indicate plentiful less-than-truckload capacity, with 62% of shippers seeing a balanced LTL environment in Q4 2012 and only 7% of shippers indicating tight LTL capacity.

Shippers Modifying Bid Strategy Ahead of Tighter TL Capacity: For the first time, the survey asked shippers what changes they were planning to their truck bid strategy in 2013. All respondents within the survey are planning some sort of change in their approach, with 30% planning to invite more carriers to bid and another 33% planning to start bid discussions earlier compared to last year. Further, 77% of respondents are planning to put more business out for bid in 2013.

Shippers Expect to Decrease Their Use of Freight Forwarders: The survey asked respondents what percent of their international ocean and airfreight volumes currently go through freight forwarders compared with five years ago and their expectations for five years from now. Shippers have modestly lowered their reliance on forwarders the past couple of years, a trend which they expect to continue into the future. (More on this subject soon from SCDigest.)

All told, WolfeTrahan believes that freight volumes and rates will "re-accelerate throughout 2013 after slowing throughout 2012."

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