The capacity shortages in truck transportation witnessed in 2004 and the resulting hike in rates require your immediate attention. They represent fundamental changes to the procurement of transportation services that threaten to have a long-term impact on supply chain costs.
Our first annual survey of Transportation Service Buying Trends, conducted in partnership with the Canadian Industrial Transportation Association and CITT, found significant evidence of transportation rate increases across the board, particularly so in the trucking sector.
More than 60% of respondents said their rates had increased over the previous year, regardless of mode, with 80% of those using truck transport paying higher rates. More than half of truck transportation buyers reported rate increases higher than 4%. About a fifth were paying more than 7% over the previous year’s rates.
Added to that are several surcharges. Almost 100% of shippers surveyed using truck transportation are now paying fuel surcharges with fuel costs representing almost 25% of truckload costs for some shippers in certain lanes.
And that’s not all. We are also seeing the introduction of surcharges for such things as detention time and border delays. About a third of shippers reported paying detention charges for loading dock delays. A quarter were paying a surcharge for border delays; another quarter were paying a surcharge to cover carrier costs related to the new border security programs.
There are several reasons both economic and political — why we are experiencing such a rise in transportation costs.
The first is obvious. Demand for transportation services is being fueled by overall growth in the North American economy. Shipment volumes grew every month for the first three quarters of 2004 before running into a slump in the final quarter. Our survey found that 71% of Canadian shippers increased their shipment levels in 2004. About 60% reported double-digit increases.
The North American economy is expected to grow at a similar pace in 2005 and faster in 2006. Sixty eight percent of shippers plan to increase shipment levels in 2005 with 30% expecting them to remain around 2004 levels.
But there is something different about the way transportation prices are being affected by the current improvement in the economy this time around.
The rise in fuel prices since the late 90s the price of crude has risen from a low of about $15 a barrel to around $50 a barrel is an obvious reason. More than half of shippers surveyed in the U.S. point to higher fuel costs as the main reason behind higher rates. There really was no way carriers could absorb such an increase and survive. In fact, between 1999 and 2001, one quarter of Canada’s small motor carrier base companies with 10 trucks or less, and who likely were not quick to implement fuel surcharges disappeared from the market.
The second major reason for the increases is the shortage of capacity. Our survey found that almost half of shippers are concerned about there not being enough truck capacity to handle their shipment needs. This capacity crunch is not happening because motor carriers are not adding on new trucks. In fact, 2004 proved to be the second best year ever in terms of Class 8 truck sales in Canada but 99% of those sales were for replacements not additions to Canada’s truck fleets.
Motor carriers are being stingy on capacity because it remains very difficult to find drivers. They are also being extra careful not to repeat the mistake they made during the 80s and 90s of adding capacity across the board in response to a rising economy. That abundant supply of capacity back then hurt their ability to raise rates and improve profit margins.
Consider: 1996 to 2001 represented the greatest economic expansion in Canada’s history. It was also a period of great revenue gains for motor carriers yet there was little growth in profitability for them as rate increases grew just 1.5%. The end result was financial performance too anaemic to attract necessary investment.
Over the last two years there has been a concerted effort among the major players to drive up rates and introduce surcharges. They’re finding this strategy easier to pull off this time thanks to the thinning of the ranks of small carriers, typically the ones offering lower rates. And significant new barriers to entry high insurance costs, new border security costs, for example will keep capacity tight.
The cards are stacked against you this year in trying to keep a lid on rising truck rates. But that doesn’t mean you should fold. In my next column we’ll look at strategies that can improve your odds in the rate game.
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