M33 Webinar: Prepapring for the Upcoming Capacity Crisis

Industry experts are predicting carrier pricing will rebound this year across both the TL and LTL sectors. Companies that take a proactive approach to this dynamic market will best mitigate the pricing impacts on their supply chain. We held a webinar to educate our clients, prospects and business associates about what industry-leading companies are doing today to better position themselves for the coming crisis. You can watch it here:


If you have any questions or comments about the issues and recommendations in this presentation, please feel free to contact us.

Transportation Update: 1st Quarter Review, 2010

The consensus concerning the trucking industry for the year of 2009 is that it was a dismal year. As manufacturers and the economy struggled, carriers fought to maintain profitability while providing service to their customers.

The less-than-truckload (LTL) sector ended the year at a collective 107 operating ratio, losing $.07 per dollar. This was a direct result of declining tonnage and diminished revenue yield driven by excess capacity and pricing pressures. There was speculation throughout the entire year that a major player in the LTL market would exit the industry, effectively balancing capacity and demand. That event never took place, and LTL carriers were forced to absorb losses that were historic in some cases. Across the board, we saw carriers reduce employee pay and benefits, initiate layoffs and downsizing, dramatically change their line haul networks, and shrink the size of their turn terminals from fully staffed operations with managers and clerical staff into ‘dark’ or unmanned operations.

Despite these cost-cutting measures, most companies still ended the year in the red. The competition that ensued was both a positive and a negative for shippers. Through bid processes and negotiations, companies were able to enjoy discounts at historic levels. As a direct result of such discounting, we saw deterioration in levels of service and the number of quality choices available in several lanes. LTL companies require a certain amount of volume to meet high operating costs. Discounting at the levels seen in 2009 caused many of these carriers to handle unprofitable business simply to keep freight volumes at an acceptable level.

An industry that operates at a loss for a full calendar year cannot sustain itself indefinitely and will correct itself in one of two ways; either freight volumes will rise to meet capacity or capacity will continue to shrink to meet the diminished demand. We expect pricing pressures in the LTL sector to linger throughout the first quarter. However, we see evidence of sporadic increases in demand from a variety of sources, and we know that companies are readjusting their capacity daily to ‘right-size’ their operations. By mid-year of 2010, we expect to see the supply/demand scale tip toward the carrier’s favor, which will lead to incremental pricing increases. Such price increases will likely be widespread across the industry. The speed at which this occurs, and the level of increases requested, will obviously be affected by the economy as a whole and each individual situation. But it would not be surprising to see an overall 5-6% effective increase in LTL pricing for the industry as a whole.

Truckload (TL) carriers have faced many of the same challenges in 2009. Despite 4000+ trucking company closures in the last seven quarters, we still see over-capacity. As with LTL, reports indicate some growth in demand at the end of last year and early this year, but experts still believe the industry is well over capacity. Large fleets are downsizing to accommodate business levels and smaller companies are feeling the pressure of reduced rates. We expect TL capacity to tighten significantly in some markets as early as this spring, with wider scale rate upticks beginning in the summer months.

We anticipate that the TL sector in particular will be heavily impacted as new safety requirements come into play. Comprehensive Safety Analysis 2010 rolls out later this year and will replace the current Safe Stat Scores, which indicate what a carrier’s safety performance has been. Although the impacts of this are still being explored, the Federal Motor Carrier Safety Administration believes there is a focused and determined initiative to raise the bar for companies entering the industry and to enforce safety compliance on a consistent basis for existing firms. The end result of this will hopefully be safer highways for all of us and our families. But it is important to realize that with strict enforcement of these new guidelines, companies will have to purchase new technology and adopt new standards. These new expenses may force some companies out business altogether. The impact of these failures and/or the inability for some companies to enter into the market is not easily measured, but verifiable statistics will probably begin to emerge later this year.

In summary, we expect pricing to rebound this year across both the LTL and TL sectors. Companies that take a proactive approach to this dynamic market will best mitigate the pricing impacts on their supply chain. Our commitment is to work with our partners in this period of market uncertainty to determine the best solution based on service, price and overall value.

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Jeff Thomas is the Director of Market Economics for M33 Integrated Solutions, a global logistics solutions provider. Jeff is responsible for the successful integration of new customers into the M33 Client Network, overseeing data analysis, procurement of carrier resources through the RFQ process, and carrier contract management. He can be contacted at (877) 369-0343 or via e-mail.

The commentary above is based solely on the professional opinion of M33 representatives, and is meant to provide M33 clients with the knowledge they need to make more educated decisions.

YRC Takes Another Hit

In keeping with the warnings we expressed last month, YRC has reported some more bad news:

YRC Worldwide, the country’s largest less-than-truckload carrier, lost $309 million in the quarter ending June 30 as shippers apparently abandoned the troubled company in large numbers, sending revenue down 45 percent.

The company, which has struck deals in recent weeks with its lenders and the Teamsters union to reduce its costs and debt troubles, saw shipping at its national LTL business fall more than 37 percent and tonnage per day at its regional unit decline 26.4 percent compared to the last year’s second quarter.

Even if you ignored these figures, two factors would indicate that YRC is in its last throes:

1. Bankruptcy is often a self-fulfilling prophecy. Simply because YRC might go under, responsible managers are making contingency plans with other carriers. Those carriers are already eating into YRC's market share, resulting in less revenue.



2. People used to joke that the Detriot automakers were health care companies that made cars on the side. The same could be said of YRC's pension fund. No matter what kinds of deals the company makes with labor, the unavoidable commitments YRC owes to pensioners is unsustainable.

YRC may eventually get their finances in order, but that doesn't mean shippers shouldn't be making contingency plans. Capacity will be tight, and those with existing contracts will lock in the good rates.

Continued Concern over Future Capacity

We have been speculating about what will happen with trucking capacity since the middle of last year. In the most recent quarter, supply and demand have both been racing downward at breakneck pace. As a result, industry analysts, trucking companies and shippers are attempting to predict what the landscape will look like when we achieve a more balanced market place.

In a recent article in the Journal of Commerce, statistics released from a report by Transport Capital Partners indicated some fairly significant trends:

Almost one quarter of the truckload carriers surveyed by the firm this month said they were giving “serious consideration” to leaving the business or liquidating if tonnage does not increase within the next six months—an event only 21.4 percent of the carriers said they expect.

As previously reported, we saw a large number of Truckload (TL) carriers leave the marketplace in 2008, and this report seems to indicate that number will continue to grow at a rapid pace without significant improvement in the overall economy.

There is an equal amount of speculation and unrest in the Less-Than-Truckload (LTL) sector. YRC, which contains the former entities of Roadway and Yellow, has experienced well-documented financial difficulties over the past 18 months. The company recently made cost-cutting measures in many areas, even securing an agreement with the Teamsters to reduce wages. Fortunately, YRC has received a great deal of cooperation from their banking partners to date. The next milestone will come at the end of the 2nd quarter of 2009; current loan covenants require the company to turn a profit during that quarter.

We at M33 are consistently monitoring developments, and will continue to update you as events occur that may impact your transportation program and your business.

Transportation Update: 3rd Quarter, 2008

As part of a continuing effort to keep each of you up to date with the trends in the transportation industry, we would like to examine some recent occurrences and statistics that continue to shape the present and future of transportation as we know it.

While we all are tuned in to the trials and tribulations of the credit and housing markets,, and the unfortunate direction the economy has taken, we would like to focus on some of the immediate and long-lasting effects that the overall economy is having on the transportation infrastructure that we all rely on.

The immediate effect has been to create a surplus in truck capacity. While earlier this year we spoke of an alarming rate of trucking companies that were leaving the marketplace, the demand for trucking services has kept pace by declining on an even more rapid pace. As it stands today, the supply of available trucks exceeds shippers’ demand, which equals excess capacity and increased purchasing power for the shippers.

While none of us can speculate with any certainty as to how soon the economy will rebound and freight volumes will increase, there is much speculation that trucking capacity will soon fall short of even the current reduced demand.

Fresh from the headlines today, there is renewed concern over the financial stability and sustainability of YRC Worldwide, the parent company of Yellow Transportation and Roadway. Despite cost cutting efforts that include the recently announced plan to consolidate Yellow and Roadway into a single operating unit (Yellow Roadway Transportation), the company appears to be in dangerous waters, financially. Numerous competitors have witnessed an increased flow of inquiries from shippers that used to rely on the two companies, looking for contingency plans should the trend continue.

While Yellow and Roadway do not handle a significant amount of business within the M33 Collaborative Network, the larger picture is that Yellow and Roadway handle an estimated $9 billion in annual revenue. That is the combined approximate volume of annual revenue handled by FedEx, Conway, Estes, Southeastern Freight lines, and Old Dominion freight lines combined. If Yellow/Roadway were to go under, the demand would have a potentially crippling short term effect on service, felt across customers of virtually every less-than-truckload (LTL) company in the US, and would extend into the truckload (TL) market as well. The excess capacity we are currently experiencing would be nowhere near enough to absorb the demand shift.

TL capacity is still in excess of volumes, but the number of companies leaving the market this year continues to rise rapidly. As stated earlier in the year, the industry lost 1155 companies, or 2% of available class 8 trucks, in the first quarter. By the end of the 2nd quarter, that number had increased to more than 1900 companies. Despite our personal concern with the volatility of LTL capacity, many industry analysts are far more concerned with the future balance of supply and demand in the TL market. For more information on what other companies are saying and what actions are being taken to prepare for what many see as a transportation crisis, you may want to review this article.

M33 continues to work with providers of all shapes and sizes in the LTL and TL market to secure the best options available for our customers, based on lanes, service parameters and financial impact. By dealing fairly and openly with your carrier base, we feel that we provide a unique advantage in the marketplace through continually building loyalty and trust into the relationship with your carriers.