Sorting the Landscape by Land, Rail and Sea
Have a look at John Wagner’s perspective on the economy and today’s logistics landscape trends: Land, Rail and Sea.
The Federal Reserve noted that the economy continued to expand modestly from late August to early October as the transportation sector expanded. Minneapolis, Atlanta, Cleveland, Richmond and the Kansas City Federal bank heads spoke to transportation constraints in their Beige Book report. They noted truck driver shortages and rail disruptions were hindering the nation’s economy in their respective districts.
The Fed also reported that factory production increased 0.5 percent in September, replacing the minus 0.5 percent contraction reported in August. Interestingly, auto production decreased 1.4 percent in September, meaning that utility output, mining and non-auto manufacturing were very active.
On the negative side of the ledger, retail sales dropped 0.3 percent in September with autos (-0.8 percent), building materials (-1.1 percent) and apparel (-1.2 percent) suffering the biggest declines. The good news is that general merchandise stores saw an increase of 0.2 percent and electronics/appliances gained 3.4 percent, for a big sales month.
The monthly Short-Term Energy Outlook published by the EIA was also positive, showing relatively stable diesel and gasoline prices. The average price for diesel is expected to be $3.68 for the remainder of the year and $3.74 in the first quarter of 2015. Fuel has averaged $3.91 so far this year as compared to $3.92 in 2013. We can thank increased domestic production and stable crude prices for the lower price trend
You have likely noticed this same trend applies to gasoline prices as you fill up your own car. The EIA expects gas to average $3.23 for the remainder of the year and to rise slightly to $3.38 for 2015. This is good news as there is a direct correlation between lower gas prices and higher retail sales. Gas averaged $3.45 so far this year and $3.51 per gallon in 2013.
Consumers are feeling better about the economy, due in part to the rising job picture. The Labor Department said there were 4.84 million job openings in August, a 13-year high. The JOLT report (Job Openings and Labor Turnover Survey) says 4.64 million people were hired in August.
In transportation, the American Trucking Associations reported that truck tonnage held at its historic high level, rising 3.7 percent in September year over year. ATA uses the year 2000 as its 100-reading benchmark, and the seasonally adjusted for-hire index held at 132.6, matching August.
The Cass Freight Shipment Index came in below seasonality in September, up 0.7 percent year over year and down 1.4 percent from August. Two factors may have contributed to the lower shipments: the stronger U.S. dollar, which harms exports, and Hurricane Norbert in early September.
It looks like LTL trucking companies enjoyed a financially rewarding second quarter with strong volume and higher freight rates. Bigger shippers are finding success in negotiating back some of the general rate increases that were rolled out last summer. Look for rate increases to be more modest going forward as freight volumes soften this winter.
The Teamsters have been active in the LTL segment, successfully organizing a Con-Way terminal in Laredo, Texas and a FedEx facility in Croydon, Pennsylvania. This is the toehold the Teamsters have wanted for a long time at these two nonunion companies. In my experience, fair treatment and open communication with employees is the best defense against unionization.
Truckload freight looks like it will continue its strong trend as companies fight to retain and grow their driver ranks. Spot rates remained high on DAT’s load boards in September and are 5.7 percent higher year over year.
A number of trucking companies are rolling out higher compensation plans for drivers, with a few switching from a pay-per-mile model to an hourly rate model in order to encourage driver safety. U.S. Xpress Enterprises raised pay for solo truck drivers 13 percent, moving drivers’ salaries into the high $40,000s to low $50,000s. Drivers away from home receive a bonus of 3 cents per mile. Swift and Con-Way have also opened their wallets for enhanced pay to attract and keep experienced drivers.
As e-commerce continues to grow, more retailers are looking for those companies capable of providing “last mile” deliveries. E-commerce is up 19 percent in compounded annual growth rate since 2000. Over the last two years the average number of online orders has grown 45 percent. It is no wonder the search is on for companies that can make home deliveries effectively and efficiently.
The challenge in all this comes from the online retailers who have basically taught consumers that delivery is free in order to stimulate sales. Add the perception that free shipments are fast and you have a formula that isn’t sustainable.
As consumer expectations for speed, delivery window and service quality grow, there is also an expectation for in-home setup and/or installation. Watch for new investment to flow into the market as companies try to take a piece of this market away from UPS, FedEx, and USPS.
On the Rails
I thought railroad mergers were done. The last few were so badly put together that service took years to improve, so I was surprised by word that Canadian Pacific wanted to purchase/merge with the CSX. While CP has announced merger discussions have ended, it points out that anything is possible. It has been 15 years since the last major railroad merger discussion.
Speaking of service, the railroads are continuing to struggle and the Surface Transportation Board is requiring the rails to submit monthly service metrics. Of particular concern is the continued problem with congestion in Chicago, the No. 1 rail hub in the U.S. The STB wants to know which freight commodities are being delayed, as well as grain and coal service performance by region.
High demand for carload, coupled with inadequate rail infrastructure, is making it very difficult for the railroads to get current. The AAR metrics for week 40 showed that rail velocity (train speed) was off 7 percent year over year and that terminal dwell time (time the equipment remains in the yard without moving) was up 12.6 percent. Eastern Class 1 railroads CSX and NS are struggling with high volume and, in the west, BNSF is fighting its challenges.
Even with the service delays, spot shortages of drayage capacity and chassis availability, the intermodal segment keeps surging. In the first 41 weeks of this year intermodal volume has increased to 10.62 million units – 5.5 percent above the same period in 2013.
The carload segment is likewise up 5.9 percent year over year for this period, driven by coal, oil, gravel/sand and chemicals. It is this kind of demand on the rail system that is making it hard to operate and leaving shippers angry.
On the Sea
In ocean shipping the negotiations with longshoremen are dragging along and delays at the ports of LA-Long Beach are growing.
Containers coming off ships are taking as long as 17 days to clear the docks, so watch as more shippers adopt an East Coast strategy and continue using the Suez Canal to avoid the largest port in the U.S., LA-Long Beach.
Here at Wagner
At Wagner we are in full holiday mode as we build and fulfill retail displays for retailers and provide load planning to make the retailers’ “must arrive by” dates. Transportation activity at Wagner remains high and we are launching two new distribution operations. One is a transition from a client-run facility to a Wagner-operated distribution center and the other is a new location for us in Omaha, Nebraska.
We continue to work on planning for the future by reviewing our technology and making certain we remain best in class. Our strategic planning process is helping us to gain focus and we are excited about the opportunities we are seeing.
If you have a project for a new distribution center in 2015 or just need some help in moving loads, please don’t hesitate to reach out and engage us in a conversation. We love challenges. Bring it!
Have a great day,
John Wagner Jr.