Fun while it lasts

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Beginning in 2008, U.S. citizens will be required to show their passports when returning from Canada, Mexico and the Caribbean, but truckers who regularly cross the border will be able to show their Free and Secure Trade cards instead. The Western Hemisphere Travel Initiative goes into effect Jan. 1, 2008. U.S. citizens now are required to show only their driver’s licenses to re-enter from Mexico and Canada.

Tennessee Department of Transportation agreed with the Memphis Area Metropolitan Planning Organization to reduce speed limits for commercial trucks to 55 mph. The aim is to reduce vehicle emissions and help Memphis and Shelby County attain the Environmental Protection Agency’s federal air quality health standard for ozone.

U.S. Xpress Enterprises has acquired a 41 percent interest in Total Transportation of Mississippi and affiliated companies. The Total Transportation management team, led by Co-Chief Executive Officers Rick Kale and John Stomps, will control 59 percent of the company initially. U.S. Xpress has an option to purchase management’s interest at a specified price based on the current transaction price and specified annual return through Oct. 1, 2008, at which time the management team would have a similar option to buy out U.S. Xpress’ interest.

Logistics provider Power2Ship Inc. has purchased Commodity Express Transportation, a non-asset based carrier based in West Columbia, S.C. CXT provides services throughout the Southeast with its fleet of 75 tractors and 220 trailers.

For the first time in more than a decade, truckload carriers substantially jumped prices and made them stick. This is in addition to already charging customers higher transportation costs in the form of fuel surcharges, which often exceed 25 cents a mile.

How high have transportation rates jumped in the last year? No one knows for sure. In part, it’s a matter of definition. Suppose a carrier had insisted on high rates in a particular lane with a particular shipper. Because of this rate, the shipper never offered the carrier a load in that lane. Yet during the height of the capacity crunch last fall, the shipper probably asked the carrier with the high lane rate to haul loads. No rate increase took place, but the shipper’s cost of moving freight went up. In addition, many carriers adopted the practice of offering to deadhead a truck in from a distant market, if the shipper would pay for those miles. Again, the shipper’s rates didn’t go up, but transportation costs sure did.

On the other hand, many carriers presented shippers with across-the-board rate increases ranging between 10 to 20 percent. While shippers may have accepted the increases, how many started channeling loads to lower-cost carriers or increased their use of intermodal services? While shippers’ rates went up, transportation costs may not have risen as quickly.

A good estimate of a shipper’s increased transportation costs in the past year probably ranges between 8 to 12 percent depending on the region of the country. There are pockets of higher rates. For example, the rates from Los Angeles to New York at one point last fall went from $1.20 to more than $2 a mile. Yet such high rate levels aren’t sustainable. At more than $2 a mile, a long-haul lane like Los Angeles to New York becomes enormously profitable. That encourages carriers to move more trucks into Los Angeles, serving to increase capacity and bring the rate back down to more realistic levels.

Even so, Southern California has emerged into a strong headhaul market. It’s not uncommon anymore to haul out of California to a good destination at non-peak rate levels of $1.30 to $1.40 per mile. Those prices would have been unheard of a few years ago. With so much merchandise imported through Los Angeles, there now is more outbound freight than inbound. Carriers that traditionally avoided West Coast business may want to reconsider, especially since drivers love it.

Another emerging pricing trend is carriers’ willingness to compete for loads out of backhaul markets. Rates out of Miami have not seen much of a rise. It could be that carriers can make so much money on freight out of a good area that they are much more willing to discount out of a poor one. At the same time, rates into known backhaul areas have increased the most as carriers place a higher value on losing truck utilization in backhaul. Now rates are reaching a level – more than $2 a mile in some cases – where carriers can afford a lengthy empty to get the truck back working again.

How long will we see prices rise in the truckload marketplace? As rates go up, market forces will bring prices back in line. Today, there’s a shortage of equipment and drivers.

Equipment manufacturers have been ramping up to produce more. Carriers are passing most of these rate increases through to drivers in the form of higher wage rates. Average wages at many truckload carriers already are more than $50,000. Before long, wage increases will begin to increase the supply of drivers.

You probably can rely on one to two more good years of trucking before things return to a more normal state. Remember, this industry historically has averaged a pre-tax profit margin of 4 percent. That suggests the spread between rates and costs will always be lean. The most important thing a carrier can do in the current capacity crunch is to use the opportunity to seek out the best long-term business partners in the shipping community rather than to gouge shippers while the gouging is good.

Many carriers I work with tell me they want to “dance with the ones that brung them.” That’s great, provided those customers contributed to your profits during the lean times.
If not, it’s probably much more important to see whom you are still dancing with when the party inevitably ends.