The past year started with some solid tailwinds as the economies of the United States and Canada appeared to be in a growth mode. Then a number of unexpected events took place that changed the trajectory of the year. Here is our synopsis of the major freight transportation stories of 2015.

The Collapse in Energy Prices

The rout in oil prices began in late 2014 as Saudi Arabia stood firm in its insistence not to cut production quotas. The downturn in China’s economy produced less demand as oil supply remained at pre-downturn levels, a recipe for low oil prices and other challenges throughout the year. This had a huge impact on Canada’s oil sands companies, producing significant layoffs. There were also spillover effects in other energy sectors such as coal mining. The latter experienced very large price drops and decreased shipping volumes.

The steep decline in fuel and oil prices has, in turn, been a boon to freight transportation and logistics services providers primarily in the form of lower operating costs, while at the same time tremendously aiding carriers and providers serving retail-based customers, as lower fuel prices have dramatically impacted the amount of discretionary income consumers have.

In my last blog, I outlined a set of tips to help carriers achieve greater success with Freight Bids. Here are a few more.

Put your best foot forward early in the process

Many of us receive information from multiple news sources on a daily basis. You may start your day with the morning newspaper in hard copy or on your iPad or Surface. If you are in the transportation industry, you are likely receiving trade magazines in hard copy and/or digital form, news feeds and white papers from various sources, updates from your LinkedIn groups, Twitter feeds, Facebook updates and of course dozens or even hundreds of e mails and text messages throughout the day.

Of course many of us have interests beyond freight transportation that may include Business, Investing, Sports, Technology and/or a range of other topics. Trying to stay abreast of the news in these areas can often result in another set of publications and news feeds. The management of information can be quite a challenge.

Using software developed by paper.li, Dan’s Transportation Newspaper tries to make life easier for transportation professionals. Published daily, 7 days a week, 52 weeks a year, the primary focus of the paper is Freight Transportation. Stories on truck, rail, air and ocean shipping are included as are stories on supply chain, trucking, warehousing, technology, data and energy management. Since many of us are keen students of Business, Economics, Social Media and Sports, the scope of the newspaper includes important stories in these areas.

The freight sections include articles from the Journal of Commerce, Transport Topics, American Shipper, Inbound Logistics, Truck News, Today’s Trucking, Logistics Management and other American and Canadian sources. The Business section contains features from the Wall Street Journal, Harvard Business Review, The Economist and other leading publications. There are 25 major news feeds that supply articles to the newspaper on a daily basis.

During the Great Recession, the LTL freight industry experienced a “near death” experience as declining freight volumes, excess capacity and falling rates conspired to dramatically reduce revenues and profits. The LTL market shrank from more than $33 billion U.S. at the peak in 2006 to $25.2 billion at the recession's trough in 2009. As we approach the mid-point of 2015, the fortunes of this industry look much brighter. Here’s why.

The industry has consolidated

Looking back over the past 25 years, only 4 of the top 50 carriers are still in operation. Over the past 10 years, there has certainly been a changing of the guard at the top. As noted in a recent Stifel transportation report, “Old Dominion has replaced FedEx Freight/Con-way Freight as the most profitable carrier in the industry. USF was bought by Yellow Roadway to become YRC Worldwide before it nearly went the way of Consolidated Freightways, Overnite became UPS Freight, Central Freight Lines went public then private, Vitran was sold in pieces, Saia sold Jevic (which then went bust), and Roadrunner acquired Dawes and Bullet to become the only national asset-light general commodity LTL carrier. The industry is more concentrated than ever . . . “

The report goes on to report that “the top-5 (U.S.) carriers have roughly 55% of the market. And those top-5 - FedEx Freight, YRC Worldwide, Con-way Freight, UPS Freight, and Old Dominion Freight Line - are all either historical disciplined pricers or have been burned in the past by their undisciplined ways or have no choice but to push price to improve margins.” The Canadian market is quite similar with TransForce, Day & Ross and Manitoulin dominating the LTL sector. Unlike the truckload sector, consolidation means more leverage and pricing power for the top LTL players.

Today’s LTL Carriers are leaner and meaner

In President Obama’s State of the Union message that he delivered to a joint session of congress on Tuesday, January 20, he stated that the “shadow of the (economic) crisis has passed” in the United States. The very next day, the Governor of the Bank of Canada dropped interest rates by 0.25 percent “to stave off emerging risks such as weak inflation and a real-estate downturn.” The rate cut, the first by a Group of Seven country in the face of oil prices that have tumbled to about $46 (U.S.) a barrel from $110 last June, caught financial markets off guard. The Canadian dollar plummeted about 1.5 cents to close at 81.07 cents.

This raises a number of questions. First, are the economies of Canada and the United States that different? As two large trading partners that share the largest unprotected border in the world, why has the U.S. signaled that the recession has passed while Canada has highlighted its fears of falling backward into a downturn?

It is interesting that this announcement comes as the manufacturing sector in eastern Canada revs up. Anecdotal evidence from truckers (in eastern Canada) suggests that freight volumes are strong for the month of January, stronger than in prior years. Why make this move and why make it now?

There are two ways to frame the move by Steve Poloz, the Governor of the Bank of Canada. One could look at yesterday’s announcement as an act of desperation, as the sign of a country that blinked first in the face of the challenges facing the energy industry. While we have been receiving hints of increases in interest rates for some time, this action runs contrary to expectations. It may signal a worry, possibly based on early reports of layoffs and cancelled capital expenditures in the energy sector, that the Bank of Canada had to do an “about face” and take dramatic action to counter this potential threat to the economy. Of course, this also signals Canada’s overdependence on energy, that we have two many “eggs in one basket” and that our economy is nowhere near as diversified as the American economy.

Clearly the quick drop in the value of Canadian dollar is unsettling and may not instill confidence in the Canadian government, the BOC, our currency or the Canadian economy. The central bank warned that lower oil prices would take a sizable bite out of economic growth in 2015, delay a return to full capacity and hurt business investment – a trend that has already triggered layoffs and spending cuts in Alberta’s oil-and-gas industry. Canada’s two-speed economy is undergoing a major reversal of fortunes, with the once-booming energy sector fading while the manufacturing sector is rebounding, Mr. Poloz said. Economist David Madani of Capital Economics said that “clearly, [the BoC] is far more worried about a severe housing market correction.”

This past year was a tumultuous and transformative year in Freight Transportation. What is in store for us in 2015? Here are some trends to watch.

1. Dimensional LTL Pricing

The National Motor Freight Classification (NMFC) system, developed during the Great Depression by the National Motor Freight Traffic Association, classifies goods based on four elements—density, stowability, handling, and liability—that reflect a shipment's "transportability." However, the ratings from the system are not derived from the dimensions of the actual shipment but from average shipment characteristics. The classification methodology was not designed to accommodate the changes in modern-day production methods, where goods tend to be lighter and generally cube out in a trailer before they weigh out. For nearly eight decades, less-than-truckload (LTL) carriers have been using this system to allocate their trailer space.

Change will come to the LTL freight industry in 2015, driven by so-called dimensionializing, or dimensioning, machines that precisely calculate the amount of space a shipment will occupy in a trailer. The machines measure a shipment's dimensions—arrived at by multiplying length, width, and height—and provide proof of their calculations. A high-end "static" machine designed to measure stationary objects sells in the low to mid-$80,000s. The payoff can be rapid—30 to 60 days, depending on how a carrier uses the machine and how it calculates return on investment (ROI). Carriers like UPS Freight and FedEx Freight, LTL units of highly visible companies that have used dimensioners in their parcel operations for decades, are going that way. Old Dominion Freight Line Inc., that has used dimensioning equipment since 2009, YRC Worldwide Inc., and many of the other leading players in the LTL sector will likely follow the leaders.

2. Low Energy Prices will continue for much of 2015

As the year draws to a close, it is time to reflect on the major news stories in the world of freight transportation. These are the ones that struck me as being the most impactful.

1. The Economy – Two Steps Forward/One Step Back

US GDP grew by over 3 percent in 2014, its best showing in several years. A rise in employment levels, coupled with an increase in consumer spending, helped lift the American freight market. The long, slow post Great Recession recovery finally kicked into a higher gear, driving an upswing in freight activity.

However, November data highlighted a slowdown in the pace of recovery across the U.S. manufacturing sector. At 54.7, down from 55.9 in October, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest overall improvement in business conditions since the snow-related setback in January. Although the latest reading remained well above the neutral 50.0 threshold, the index has now dropped for three months in a row. Weaker rates of output and new business growth were the main negative influences on the headline PMI figure in November.

2. America - the Super Energy Power

At the 2013 Summit, Jacquie Meyers, President of Meyers Transportation Services, made shipper-carrier collaboration a “hot topic” with an impassioned plea to both sides to take a more enlightened approach to working together. Her argument was that this is the best way to reduce freight costs. Since this plea resonated so well with the attendees, Jackie was invited to come back and participate in a panel discussion on this topic with another carrier and two prominent shippers.

This year Jacquie was joined by Elias Demangos, President & CEO, Fortigo Transportation Management Group, Anna Petrova, Associate Director, Supply Chain, Ferrero Canada Ltd., and Susan Promane, Director, Supply Chain, Whirlpool Canada. To lead off the track, Jacquie was asked to provide a definition of a successful shipper-carrier partnership. She expressed the view that true shipper-carrier collaboration is the opposite of a poorly-run freight RFQ that goes to 105 transport companies with the lowest price carriers being awarded the freight. Jacquie stated that a true shipper-carrier partnership is based on honest communication, trust, commitment and investment. A 2, 3 or 5 year commitment allows her company to invest in equipment and develop special customer service solutions. While there is room for “good” RFQ’s, working together will achieve greater efficiencies and cost savings.

The two shippers on the panel presented their views on what it takes to make this happen. Anna Petrova suggested that they key is “alignment on strategy. The carriers we hire are an extension of our brand.” Since retail customers can “fire us” or “punish us” for poor performance (e.g. poor case fill rate, poor on-time service), the shipper and carrier must perform in these areas. On-time service is a carrier KPI and it is up to her carriers to provide the service.

Susan Promane reinforced this point by highlighting the importance of “execution.” She stated that very few carriers operate as true partners. Susan mentioned that she shares her annual goals with her carriers and monitors their performance on a monthly and annual basis. While she agrees with the concept of a multi-year commitment, to her that means 2 years since the world changes too much in that time frame to lock in for a longer period.

Anna suggested that there is value in “formalizing SLAs” (service level agreements) so as to clarify expectations with respect to trailer drops, dedicated CSRs, service reports etc. Providing a carrier partner, particularly a new partner, with this information helps build trust and creates accountability. When a carrier meets their service expectations, they aren’t just talking the talk; they are “walking the talk.” Susan also emphasized the importance of tracking safety, EDI compliance and billing accuracy.

Freight costs have historically been calculated on the basis of gross weight in kilograms or pounds. By charging only by weight, lightweight, low density packages become unprofitable for freight carriers due to the amount of space they take up in a trailer or container in proportion to their actual weight.

Dimensional weight is also known as DIM weight, volumetric weight, cubed weight or density-based pricing. The concept of Dimensional or Cube Weight is gaining popularity in the LTL freight industry as a uniform means of establishing a minimum charge for the cubic space occupied by a carton or pallet. Three of the largest LTL freight carriers, UPS Freight, FedEx Freight and YRC introduced dimensional LTL freight pricing this year. Currently FedEx Ground only applies dimensional pricing to packages measuring three cubic feet or greater.  Effective January 1, FedEx and UPS will apply dimensional pricing to all packages.  

The implication of this change in pricing methodology has caught the attention of the media (see article in Wall Street Journal). Experts say the impact could result in increased shipping costs of 5 to as much as 25% - - - if shippers don't take action. This blog will provide shippers with a guide to prepare for the introduction of this LTL pricing methodology.

A Definition of Dimensional or Cube-Based Pricing

Dimensional weight is a calculation of a theoretical weight of a shipment. This theoretical weight is the weight of the package at a minimum density chosen by the freight carrier. If the shipment is below this minimum density, then the actual weight is irrelevant as the freight carrier will charge for the volume of the package as if it were of the chosen density (what the package would weigh at the minimum density). Furthermore, the volume used to calculate the Dimensional Weight may not be absolutely representative of the true volume of the shipment. The freight carrier will measure the longest dimension in each of the three axes (X, Y and Z) and use these measurements to determine the shipment volume. If the carton or pallet is a right-angled box, then this will be equal to the true volume of the package. However, if the package is of any other shape, then the calculation of volume will be more than the true volume of the package.

As I look at the LTL freight transportation today, it is hard to believe that just a few years ago, this was one of the most battered sectors of the freight industry. The LTL freight industry took a tremendous pounding during the Great Recession as business volumes contracted by about twenty-five percent. As operating margins shrunk, LTL carriers closed or consolidated terminals and cut staff in an effort to right size ether businesses. Shippers took advantage of the situation by conducting multiple freight bids to leverage their volumes to extract rate concessions.

Seven years later, the industry has changed dramatically and the pendulum has swung back in the carriers’ favour. As volumes return to pre-recession levels, LTL carriers are finding their networks full of freight. As the North American economy improves, manufacturing is on the rise. The near shoring movement is also bringing some manufacturing jobs back to America. In addition, the driver shortage is making it difficult to find drivers, particularly for long haul truckload routes. A clogged intermodal system is limiting the opportunities to divert over the road truckload freight to the rail system. The net result is that some of this freight is being diverted to large LTL shipments so it can move with an LTL carrier. In other words, this is creating traffic for an already full LTL system.

Unlike the truckload sector where even the largest players control only a small (single digit) percent of the total truckload sector, the LTL industry is highly concentrated among a core group of companies. The top 9 LTL carriers in the United States (e.g. FedEx Freight, Con-way, YRC, UPS Freight, Old Dominion, Estes, USF Holland, Reddaway and New Penn, ABF, R & L Carriers and Saia) control almost seventy percent of the LTL market. In Canada, the major players, TransForce (e.g. TST Overland, Canadian Freightways, Kingsway, QuikX, Quiktrax, Clarke Transport and Vitran), the Day and Ross Group and Manitoulin would also control a major share of the LTL market. With limited capacity and pricing discipline, this gives this group of companies considerable pricing power. With high quality costing models, these companies can now seek meaningful rate increases or de-market poor paying accounts. In other words, the “fun” is back in this business.

To further improve yields, FedEx Freight and UPS Freight are introducing density based or dimensional or cube-based pricing. I wrote about the potential of this trend years ago(http://www.dantranscon.com/images/downloads/mtr%20sep_oct%202009.pdf) and it is finally starting to take hold. Just as airlines charge for “bums in seats” and adjust their plane sizes to each route and the potential passenger traffic, LTL freight carriers are going to become much more diligent about charging shippers for the cubic space occupied on their trailers. Shippers with poor packaging, who don’t nest their products effectively or don’t design their products well or load them smartly, will face a nasty surprise. With so much industry consolidation, it won’t take long before dimensional pricing becomes more standard across the industry.

Another reason why LTL carriers are having more “fun” is in their attitudes toward logistics service providers. A few years ago, 3PLs were viewed as the enemy. They were seen as trying to poach LTL customers and replace their carriers by taking control of the direct customer interface. Times have changed. LTL carriers are increasingly viewing 3PLs as business partners. They are forming alliances with companies that have common objectives and customer profiles so they can collectively bring value to the customer. The large LTL carriers are going a step further by creating their own internal logistics or at least freight brokerage arms.