Freight Transportation Adjusts to a Resetting World Economy

The year 2011 was another momentous one that was shaped by events on all continents of the world.  Uprisings in the Middle East and the overthrow of Hosni Mubarak and Muammar Gadhafi, the European debt crisis, the Occupy Wall Street Movement, the assassination of Osama Bin Laden, the earthquake and tsunami in Japan, the wedding of Prince William to Kate Middleton, and the premature passing of Steve Jobs were just a few of the signature events of another action-packed year. 

Closer to home, the three countries in North America all faced significant challenges.  The powerful drug cartels in Mexico are threatening its very existence as a democracy as the country gears up for elections in 2012.  The untimely death of Jack Layton, the very popular leader of the New Democratic party and the demise of Michael Ignatieff and the Liberal Party have given Steven Harper a majority government and a free hand at steering the Canadian economy over the next four years.  The U.S. situation is exactly the opposite as Democrats and Republicans cannot reach agreement on almost anything and as a result the country is in gridlock on most economic initiatives to spark its economy. 

Against a background of 8.6 percent unemployment in the U.S., millions more underemployed, one in four homes is worth less than the value of the mortgage, tight credit, anxiety over job security and a possible relapse into another recession, the economy is resetting.  Americans are saving more.  As various generations of families live together to better withstand the current economic uncertainties, home builders are erecting homes with two master bedrooms to address the social consequences of these challenging times.   Smartphones, tablets and the internet are reshaping so many of our day to day activities.  The economies of North America and around the world are being reset by this confluence of forces and by the rise of China and other developing nations around the world.

On several occasions I have commented in this blog about a looming truck capacity shortage.  A soft North American economy coupled with political uncertainty and concerns about Europe and China, are discouraging carriers from making investments in their fleets.  Truckers are seeking to maximize the utilization of their existing assets and improve yields, particularly with rising equipment costs, increasingly burdensome government regulations, and a shrinking pool of qualified drivers. However, the on demand truckload model creates uncertainty as truckers wait for shippers to book a load and/or to balance a lane.   

Shippers are becoming increasingly concerned about finding the capacity they need to move their freight.  They are also concerned that tight capacity will lead to rising freight costs.   Capacity shortages in various North American markets this year have caused shippers to seek out options to current transportation processes.

A “Mutually Beneficial Antidote” to Securing Capacity and Rate Stability

One solution to these problems is dedicated contract carriage—the practice whereby, as the name implies, a trucker dedicates equipment and drivers to serving an individual shipper, allowing that customer to lock in rates and capacity with that carrier for a multi-year period.  John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., calls dedicated trucking the "mutually beneficial antidote" for carriers that want to get paid for capacity and shippers that want to know it's available.

"Both shippers and carriers are increasingly realizing that dedicated trucking may be just the solution that meets both their needs," Larkin wrote in early October.  He stated that shippers who own and operate private fleets could "see 10-percent savings right off the bat" from switching to dedicated service. That's because specialized operators can usually manage fuel, insurance, maintenance, equipment utilization, and driver schedules more efficiently than a shipper that operates its own trucks can, Larkin notes.  What's more, companies that outsource their fleet needs can free up their balance sheet capacity and reinvest more of their cash into their core business, which is generally not transportation, Larkin says.