The BOC Blast 221 – Air and Truck Concerns

 

Air and Truck Concerns

  1. E-commerce and pharma piloting strong air freight performance into 2018

(excerpted from TheLoadstar.co.uk, January 24, 2018)

2018 looks set to be a year marked by air capacity shortages, with forwarders already concerned about booking sufficient space through the year.

Routes ex-Asia, which sported the highest rates during the peak, with transpacific westbound in particular seeing some record rates, remained strong and Asian airports and carriers cited good results.

Singapore’s Changi Airport reported air freight volumes up 7.9%, year on year, reaching 2.13m tonnes for the year. Imports rose 8% while exports grew 14%, with its top five markets in China, Australia, Hong Kong, the US and India. December tonnage rose 6.4%.

In Hong Kong, Cathay Pacific announced its tonnage in 2017 grew by 10.9%, while capacity grew 3.6%, measured in available tonne km, and revenue tonne km rose 9%. The carrier said that, together with Cathay Dragon, December cargo and mail rose 10.2%, while load factors rose 2.4 percentage points to 71.9%.

“Cargo’s strong momentum continued well into December, with volumes growing well ahead of capacity,” said Ronald Lam, director commercial and cargo.  “We were able to sustain a high load factor and high yield during the month.

In Europe, capacity-stricken Schiphol Airport failed to see double-digit growth, but enjoyed a tonnage increase of 5.4% in 2017, although it saw 7.4% growth between January and October. Asia, it said, was its largest market, with imports up 3.1% and exports up 8.8%.

“The upswing in e-commerce shipments, both inbound and outbound, was a large contributor to the cargo volumes for this market,” said Jonas van Stekelenburg, head of cargo for the Dutch airport.

“A number of flights transit Europe enroute to Asia, and we can attribute a proportion of the growth in our European figures to the developing Asian market.”

  1. Shippers told to brace for record US trucking rates

(Excerpted from JOC.com, January 23, 2018)

William B. Cassidy, Senior Editor | Jan 23, 2018 8:29AM EST

ATLANTA — US freight rates are set to rise not just this year, but into the near future, an investment analyst and economist said at the SMC3 2018 JumpStart Conference. “We could break records this year” in an economic cycle “unlike any other,” said Benjamin Hartford, senior research analyst at investment firm Robert W. Baird & Co.

At the logistics conference, Hartford and consulting economist Donald Ratacjzak on Monday painted an economic picture that should concern shippers moving goods in North America. On the positive side, their goods or raw materials will see higher demand. Barring a significant, and unexpected, expansion in capacity, however, it will cost more to deliver products to market.

This year looks to be the strongest year for truckload and less-than-truckload pricing since 2005 and 2010, “when we had 4 to 5 percent core pricing growth” excluding fuel costs, Hartford said. “In 2005, housing was artificially inflated, and then in 2010 we had a pricing recovery of 5 to 6 percent coming off a steep decline” during the 2008-9 recession, he said. 

In 2018, “we’ve been saying expect an increase of 5 percent plus, and there could be upside on that,” he said. “We’re hearing anecdotal reports of contract renewals at 10 percent. If volume growth does accelerate, we could get into a situation in the spring where if there are capacity issues and intermodal service problems, there’s suddenly no relief valve” for shippers. “That sets the stage for carriers to march into [contract] negotiations and say, ‘What more evidence do you need? We need price.’ This year could be similar to prior peaks in rate growth.” Even if rates peak in terms of rate of actual increase in 2018, they could continue to rise into 2019 and even 2020, he said, barring a recession that he doesn’t immediately foresee.

“We’ve got some underlying changes, including an improving demand environment, new regulations and rising energy prices, that will lead to higher freight rates for the foreseeable near future,” he said. In specific, he mentioned the electronic logging device mandate for truck drivers, depleted inventories and rising industrial production, and higher fuel prices.

The biggest factor priming rates isn’t the ELD mandate or lack of transportation capacity: It’s the economy. Ratajczak expects US gross domestic product grew 3.1 percent in the fourth quarter, which would make the last quarter the third in which GDP expanded 3 percent or greater. The International Monetary Fund now expects the US economy will grow 2.7 percent in 2018.

“The global economy is rebounding, showing strength, and it’s more uniform,” Ratajczak said. “It’s not only China now. It’s the rest of Asia, pieces of Latin America.” Although Europe’s economies are expanding more slowly, the value of the euro is rising, he noted. “The big issue with Europe is Brexit,” he said. “Not just the UK, the rest of Europe has a Brexit problem too.”

The lack of US transportation and distribution capacity could be a bigger worry, Hess said. “It’s a little early to tell you what’s happening with capacity, but it does appear that capacity has tightened” in early 2018, he said. He’s not just talking about trucks or trains. Thanks to high chemical and resin demand, “the Texas Gulf Ports will run into capacity issues,” he said.

  1. Analysis: ‘Perfect storm’ factors to lengthen US trucker shortage

(Excerpted from JOC.com, January 23, 2018)

Lawrence J. Gross, President, Gross Transportation Consulting | Jan 23, 2018 1:57PM EST

When it comes to prognosticating, perhaps the four most dangerous words a forecaster can utter are “this time it’s different.” If history has anything to teach us, it’s that the past is prologue and pronouncements that fundamental change is underway often turn out to be more wishful thinking than prediction. The North American supply chain is now in the teeth of a substantial shortage in truck capacity. Is this a normal cyclical event, or is a more profound change underway? How long will the current situation last and what will the world look like when things return to “normal”?

Earlier this month at the University of Denver’s Capstone Executive Seminar, several very-well-placed trucking and intermodal executives offered their insights. The conversations provided plenty of food for thought. What are the ingredients of the current shortage and how might they differ from previous cyclical events? While I’m not yet convinced that “this time it’s different,” the list of factors pointing in that direction is quite impressive.

A level playing field

Now that the electronic logging device mandate (ELDs) is the law of the land, we are well on the road toward a level-playing-field where all truckers play by the same rules. It stands to reason that those who have delayed implementation to the last minute were the ones who felt they had the most to lose. The full impact remains to be seen, but even after the inevitable adjustment period, productivity won’t get back to where it was prior to the ELD era, because yesterday’s truck productivity had a certain percentage of illegality baked-in that will never return.

Free surge capacity is history

One by-product of the relentless search for improved productivity has been a willingness to operate at ever-higher levels of capacity utilization. Simply put, today no one is willing to provide surge capacity without compensation. The net result is diminished capacity for the system as a whole to absorb disruption, be it a weather event or unexpected growth.

Competition for drivers

Although carriers have always competed fiercely for drivers and much of the sky-high turnover rates frequently cited is actually “driver churn,” with drivers cycling from one carrier to another, there’s another, more-fundamental competition underway. That is the competition between the commercial heavy-duty driving profession and alternative careers. Hurricane-ravaged areas of Texas and Florida have plenty of well-paying construction / rebuilding jobs available. Growth in housing and commercial construction are also soaking up potential drivers. In addition, a resurgence in fracking, due to higher oil prices, is also demanding its share of drivers, at oil-patch wages that dwarf those earned by the conventional, over-the-road driver.

The tax cut

The recently-enacted US tax cut comes at a time where the economy was already growing at 3 percent and unemployment was at 4.1 percent. The likely effect will be the economic equivalent of feeding a five-year-old a chocolate bar at 10 p.m. While the long-term hangover may be painful, in the near-term, we can expect to see further acceleration, which will only exacerbate the competition for trained, blue-collar labor (i.e. drivers).

The autonomous truck threat

Paradoxically, the long-run potential of autonomous trucks may hurt things in the near-term. While truckers generally felt that autonomous trucks were not “around the corner,” preferring the term “driver-assist” to autonomous, they agreed that the recent publicity around the autonomous truck was hurting current driver recruitment efforts. After all, who would want to go through the special training needed to master the art of driving a big rig, when you are hearing news reports that your skills will be obsolete in a matter of a few years?

A shrinking driver pool

Setting aside the well-known demographic challenges of today’s aging driver base, there are a couple of special circumstances to consider. One is the immigration debate. Just what percentage of the driver population is undocumented is not exactly known, but anecdotally, the number is significant in certain sectors, including port drayage. With current federal policy forcing more of these individuals underground, what will the effect on port cartage be? A second factor is the drug situation. More states are legalizing marijuana as time passes, but the drug-free requirements for a CDL remain unchanged. Further, the inevitable onset of hair follicle drug testing promises to bump the already-high failure rate into the stratosphere.

History says the market will eventually adjust and rebalance. An adequate number of drivers will eventually be found after wages adjust (upward) sufficiently to generate supply. In the meantime, as wages and prices move skyward and candidates work their way through the rigorous qualification and training process, the shortage will endure. While currently there may be just a bit of easing, from a seasonal perspective, the looming double-whammy of ELD enforcement beginning April 1 plus the normal Q2 seasonal peak promises a new round of pain for shippers on the horizon. The extensive list of contributing factors tends to lead toward a conclusion that the shortage will be a long one, stretching well into 2019. Further, when the shortage does begin to ebb, it appears that the “new normal” will look quite different from the normality of yesteryear.