Before volumes for motor carriers began their gradual recovery earlier this year, it was not a secret that shippers were getting significant leverage when it came to rate negotiations with carriers for nearly a three-year period.
With a surplus of capacity, high operating costs, contentious relationship with their credit arms, and slim margins, carriers knew they could not be choosy—especially when it came to getting business and keeping trucks on the road. But the way things are shaping up now, it appears carriers may be getting some welcome relief in the form of higher rates, and shippers might as well bank on that, according to Charles W. “Chuck” Clowdis , Jr., Managing Director-Transportation Advisory Services, at IHS Global Insight.
In a research brief, Clowdis painted a definitive landscape of the myriad reasons, higher rates are en route.
“Since 2006, the rate levels in the transportation marketplace have favored the buyer of transport service,” wrote Clowdis. “More capacity pursued less available freight as the economy retracted. As capacity decreases and becomes more valuable to serve the released consumer demand, carriers will become more aggressive in seeking rate increases. Increases in the 7-10% range have already been signaled by the industry.”
Other factors pointing to higher rates identified by Clowdis include the need to service debt incurred by many of the carriers that resorted to borrowing—at high interest rates–
to sustain themselves during the downturn. He added that carrier shareholders have been patient during the downturn and will expect improvement in share prices and dividends driven by better earnings: demands which he said will be met by increased rate levels.
What’s more, increased rates are likely to occur due to: owner-operators offering less capacity as the economy gains steam; a possible reoccurrence of a driver shortage; carriers making fewer investments to upgrade fleet assets that are more fuel efficient and require less maintenance.
Robert W. Baird Inc. analyst Jon Langenfeld echoed this sentiment, explaining that with carriers not buying trucks as frequently and capacity tightening over 2010 and 2011, the trucking industry is at a stage where it has not been in about five or six years.
“For shippers and carriers, this means higher rates are coming,” said Langenfeld. “The economy is stronger than people give it credit for. Higher rates are coming…but it is hard to say how long it will last; it could be anywhere from two-to-six quarters. Rates are going up for shippers. If you want to run a strong supply chain and a precision inventory network, you need carriers to be healthy. Right now, they are not, and you will see that through this cycle.
With higher rates on the horizon, Langenfeld said now is a good time for shippers to meet with carriers to lock in rates for the next 12 months.
Shippers, meanwhile, are less than thrilled at what is ahead of them.
“I see a lot of trouble explaining to our management why we need…rate increases,” said Candace Holowicki, Masco Corp. logistics manager at the National Shippers Strategic Transportation Council (NASSTRAC) Annual Conference in Orlando. “I’m trying to be an advocate for both sides of this, but I can’t give everyone a 20 percent increase, so don’t ask …the money is not there.”
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