Rates Rise, but Carriers' Costs Rise Faster

Carriers have been under tremendous pressure, as their costs are rising faster than rates. Even when truckload rates are higher than historical norms, carriers are burdened with high fuel costs, driver retention issues and new expenses for regulatory compliance.

This week, I saw confirmation from industry analyst Donald Broughton of Avondale Partners. Broughton noted that: "the per-mile costs of operating a truckload carrier are going up at a pace twice that of the pricing power currently being achieved." Twice the pace? Wow.

Avondale tracks large public companies, but I got a sneak peek at the DAT annual carrier survey, and small fleets (averaging seven power units each) and owner-operators reported similar troubles in 2012. It was hard for these small companies to clear much more than $3,000 per truck per month in gross profit. That doesn’t sound like a lot, considering the financial risks associated with an asset-based company.

In previous years, carriers who improved their fuel efficiency or pared empty miles could be successful even when they were paid a lower rate than their peers. In 2012, fuel and asset utilization were secondary to revenue per mile, which was the most significant factor in profitability for all survey respondents. Carriers are likely to ask for a rate increase soon, if they have not done so already.

The spot market is a barometer for the freight market as a whole. A sustained increase in demand indicators on the spot market – including the load-to-truck ratio – typically translates into an increase in spot market rates, often within days or weeks. If rates remain at the new high, and are not just a seasonal or event-driven blip, they are typically followed by an increase in the shippers’ contract rates. The statistical relationship is strong enough to explain about two-thirds of an increase in contract rates. (I’ll spare you the math lesson here, but feel free to contact me if you want the numbers.)

Give your customers a heads-up now: Van rates are very likely to rise in Q2 for contract carriers. If your shipper customers are negotiating contracts now, they should not be surprised if their favorite carriers are already asking for an increase. Fuel is also trending up now, with its own effect on transportation costs via the fuel surcharge. I expect fuel prices to slip back to 2012 levels in due course, but I am not as confident about that prediction as I was a couple of months ago.

If you are responding to shippers' RFPs now, you might want to take a look at my white paper: "Win By Losing: How to Respond Effectively to a Shipper's RFP." I give some guidance on negotiating with shippers, based on my decades of work as a fleet manager, 3PL and pricing analyst. This white paper can be helpful for brokers and 3PLs as well as carriers.

Please add your own comments and questions below, and let's continue the conversation.





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