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2014 Expected to be a “Banner Year” for Freight Logistics: Truck Driver Shortage Remains a Major Concern for all Sectors
Logistics Trends: Key 2013 trends identified by annual logistics report include freight logistics growing slower than GDP, declining truck capacity, low freight volume and high freight payments. Despite this, freight logistics is expected to continue improving even as the lack of truck drivers becomes a bigger and bigger problem.
By DeAnna Stephens Baker
Date Posted: 8/1/2014
State of Logistics Report
Annual report indicates truck driver shortage and freight capacity to worsen.
Last year was tough for the trucking industry, leaving it in a weakened position that the entire logistics industry will be dealing with for quite some time. However, current trends indicate that 2014 will be the best the freight logistics industry has experienced in a long time, according to transportation consultant Rosalyn Wilson.
Wilson authored and recently shared the findings of the 25th Annual “State of Logistics Report®”, which tracks and measures all costs associated with freight movements through the U.S. supply chain. It includes an overview of the economy during the past year and the logistics industry’s key trends. The report is published by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics.
The report reveals that logistics as a percentage of U.S. gross domestic product (GDP) also declined for the second year in a row to just 8.2%, indicating that the freight logistics sector is not keeping pace with the growth of the overall economy. Total U.S. business logistics costs rose 2.3% in 2013 to $1.39 trillion. This was significantly lower than the 3.4% increase seen in 2012. Weak shipment volumes and a lack of growth in rates caused transportation costs to rise only 2% in 2013. Consumers are still cautious and spending mainly on necessities. This caused manufacturing inventories to increase 2.1% during 2013 and a slowdown in manufacturing to occur.
Wilson called 2013 a complicated year from an economic standpoint. It included both high points and deep valleys for the freight sector with shipment volumes hitting several three-year lows and freight payments hitting multiple three-year highs.
“Freight volume in tonnage terms rose in 2013 more than the number of shipments and revenue figures suggest, but rates remained stubbornly flat,” said Wilson. “This has left the trucking industry, in particular, in a weaker position in 2013. Rising costs for drivers, equipment, and maintenance have pushed marginal trucking companies over the edge, as the number of bankruptcies rose in 2013.”
Trucking Capacity Issues
The trucking industry remains near 100% utilization, yet shippers seem to think that they can avoid rate increases. However, due to the capacity lost from vehicles and productivity, carriers should be able to significantly raise rates this year, Wilson predicted, as high as 5-8%.
Trucking revenues saw an increase of only 1.6%, one of the weakest in several years. Although the top 50 trucking companies experienced the largest revenues since the recession, losses from medium and small carriers, which control a significant percentage of the industry, were large enough to pull down the total, according to Wilson. Still, due to heavier average load size, weight tonnage was up 6.1%. This caused periodically tight capacity throughout 2013.
The lack of drivers to fill seats in existing equipment, decline in productivity of existing drivers due to Hours of Service (HOS) regulations, and an uptick in trucking company bankruptcies in 2013 contributed to truck capacity constricting as volume picked up. Wilson cited truck drivers as the number one concern in the trucking industry and close to the top for other industries’ executives due to the significant capacity issues.
The number of trucking company failures last year alone is cause for concern. During 2013 bankruptcies were at a three year high. The number of trucks pulled off the road due to closures was more than 2010 and 2011 combined. Add this to the existing driver shortage caused by the huge number of drivers that left the industry or retired during and since the Great Recession and it’s no wonder that executives are so concerned.
Compounding all this is the small number of new drivers entering the industry and the effects of the HOS regulations. Among other changes, the new HOS rules, which took effect on July 1, 2013, reduced the maximum average workweek for drivers from 82 hours to 70 hours. So not only is the industry losing drivers, but the potential productivity of the drivers it does have has been reduced significantly.
“An increasing number of drivers are walking away from the industry because of the increased burden of reporting and decreased wages,” said Wilson. “And potential new drivers have to factor these same things in when making the decision whether or not to become a truck driver.”
All the transportation modes posted similar revenue increases, Wilson said. Neither rate nor volume growth was particularly strong – except during the middle of the year. But she pointed out that revenues are not an accurate representation of the underlying activity that is taking place in the industry as a whole.
Railroad sector costs grew 4.9% as intermodal gained market share in response to the truck capacity shortage. But just as in trucking, rates have not responded to the tight industry capacity and have not grown as fast as volume.
Total carloads for the year went up 8.1% and intermodal volume increased 10.6%, but revenue per ton-mile increased only 5.3% for class 1 freight. According to Wilson, volume has been rising faster than the rail industry can absorb it. During 2013 there were many problems with equipment shortages. The industry is working to increase capacity, but is still trying to figure out what is needed operationally to make that happen.
“The railroads have the ability to increase their volumes carried on paper, but it’s a lot more difficult to actually reposition the equipment,” Wilson said. “That can’t be done in a day or two; it usually takes 10 days to a couple of weeks. That’s the reason we’re seeing these kinds of things.”
The water sector saw a 4.5% increase last year. Global shipment volumes are up, improving the ocean carrier sector. Operating costs are being improved by the continued shift toward the larger twenty-foot equivalent (TEU) container ships and many smaller ships are being retired or scrapped relatively early in favor of the larger ones. Slow steaming has become standard and many of the new TEU ships are built for this.
Overall, the ocean sector is becoming a less reliable transportation option unless there is a built-in time buffer. With the larger ships, carriers have cut some ports of call, reduced frequency to other ports, been taking longer roundtrips and often delayed departures if the ship has not reached a certain capacity level.
“Right now with carrying costs relatively low, that works,” said Wilson. “But as carrying costs rise again, that’s not going to be a very good way to work.”
The inland waterway system dealt with low volumes in 2013, mostly due to weather-related issues such as waterways thawing later than usual, floods and droughts, that made navigation extremely difficult. The most significant news for this sector was the enactment of the Water Resources Reform and Development Act (WRRDA), according to Wilson. The purpose of the legislation is repairing and rebuilding the U.S. Ports and lock systems, thereby improving efficiency and safety of the inland waterways.
Revenues for air freight saw no change from the previous year. Revenue tons increased less than 1% for both domestic and international shipments. According to Wilson, chronic overcapacity and deteriorating yields have caused the cargo jet fleet to contract. It lost over 30 aircraft last year. The sector also faces stiff competition from cargo space in passenger jets. Because it is so profitable, passenger airlines have been aggressively pursuing more cargo and transporting a growing percentage of freight, claiming over 20% of the revenue ton-miles in 2013.
Despite all the issues seen throughout 2013 and a drop in GDP during the first quarter of 2014, the past few months have shown some positive signs for the logistics industry. This includes increases in shipment volumes and payments, the number of new orders, truck sales, and new jobs in both the logistics and construction industries. Inventory levels are also beginning to flatten now due to a strengthening in manufacturing, which is drawing down inventories.
“The first five months of 2014 have been the strongest since the end of the Great Recession,” said Wilson. “While this seems counter to the dismal GDP reading for the first quarter which shows a 1% drop, or a contraction in the economy, much of that decrease can be attributed to declining inventories, slowing exports and weather-related issues. Many other economic signs, especially growth in the manufacturing sector, point to an uptick in the five-year-old recovery and a continued rise in freight movements.”
Looking forward through the end of this year, Wilson said she expects 2014 will be a “banner year” for freight logistics. Although the overall economy performance has not been stellar, freight continued to gain momentum and accelerate into the second quarter.
Wilson further said that all indications are that freight will grow moderately for the rest of the year, and the economy should follow suit.
“I believe by the end of the year, we are going to see logistics growing a lot faster than GDP because we are on such a strong track,” said Wilson. “Manufacturing is increasing, home building is increasing, and the number of employees that we’re hiring in this industry is increasing. Still the number one issue is truck drivers. That’s going to be one of the limiting factors to capacity.”
For more information on the State of Logistics report or the CSCMP, visit http://www.cscmp.com.