Demand for transportation services sank along with the economy in 2008. While there have been improvements, particularly with air cargo, recovery is still a long time coming.

These days, people are spending less on transporting goods primarily because there are fewer items to ship. For the first time in six years, total spending on logistics in the United States dropped to $1.3 trillion in 2008, falling by $49 billion from 2007, according to the Council of Supply Chain Professionals’ (CSCMP) annual State of Logistics Report.

After rising by more than 50 percent from 2002-2007, business logistics costs fell to 9.4 percent of U.S. gross domestic product (GDP) last year, down from 10.1 percent in 2007, Modern Materials Handling reports.

“The biggest problem right now [for transportation providers] is the lack of freight,” Gary Girotte, vice president of Chainalytics LLC‘s transportation segment, explained to Global Logistics & Supply Chain Strategies (GL&SCS). “On the trucking side in particular, there is a massive imbalance between supply and demand.”

Land Transport: Trucks
Accounting for 78 percent of transport revenue and half of all business logistics costs, trucking costs rose a mere 1.3 percent last year, resulting in bargain rates for shippers, Rosalyn Wilson, long-time author of the CSCMP report, told Modern Materials Handling.

“Abundant capacity, particularly in trucking and ocean shipping, push[ed] rates down [in 2008], often below cost,” Wilson added. “Many companies have not survived the prolonged downturn and many more will not survive the upcoming months as we continue to ride out the recession.”

More than 3,000 motor carriers shuttered last year, taking out 7 percent of truck capacity, Modern Materials Handling reports. In Q1 of 2009, 480 trucking companies went out of business — roughly 1 percent capacity — according to a report from equity research firm Avondale Partners. More than 5 percent of the current trucking capacity would have to leave the market before capacity would match demand, the Avondale report said. (Source: Purchasing)

To cope with the lagging demand, many trucking companies reduced their equipment burdens and some have simply parked their trucks until demand returns, GL&SCS notes. Others changed their coverage, with long-haul carriers accepting loads with shorter transits and many moving freight on the intermodal network to save on diesel prices, GL&SCS adds.

Along with business from trucking companies, the railroads also snatched up contracts from companies who opted to use rails rather than trucks. As such, railroads had a 10.5 percent rise in rates last year, which is expected to continue this year, Modern Materials Handling reports.

Rails aren’t completely immune, however, as North American rail carloads were down nearly 20 percent this year through May, the Association of American Railroads reports. However, the U.S. Department of Transportation’s Bureau of Transportation is optimistic that the demand hit bottom in Q1 of this year and can now start stabilizing.

Air Transport
Similar to trucking, the slump in air cargo demand at the tail end of last year also continued into 2009. The International Air Transport Association (IATA) reported that the 22.6 percent air-cargo demand drop in December 2008 worsened in January with a 23.2 percent year-on-year demand drop.

By May, however, the air cargo market seemed to have made some improvements. According to IATA, air cargo demand was only down 17.4 percent in May, compared to May 2008. It was also a relative improvement compared with April’s 21.7 percent decrease.

Additionally, May’s freight volumes went up 3 percent above April levels, and capacity adjustments in freight markets have been catching up to demand declines. “We may have hit bottom, but we are a long way from recovery,” Giovanni Bisignani, IATA’s Director General and CEO, said in a statement. “Capacity is [still] not aligned with demand.”

The IATA maintains that inventories are still 10 percent to 15 percent above normal in relation to sales and significant recovery is not anticipated in the near term. Purchasing managers are more optimistic, however, saying that further improvement in airfreight demand could be experienced in June or July, IATA adds.

Ocean Transport
After enjoying almost guaranteed 10 percent annual container volume growth, the ocean carrier industry is facing further deterioration in 2009 after the retreat in negative growth back in Q2 of 2007, Philip Damas, division director at Drewry Supply Chain Advisors, wrote at Supply Chain Brain earlier this year. Damas forecast that fleet growth will dramatically outpace demand.

According to A.P. Moeller-Maersk A/S, the world’s largest container shipper, cargo volumes may drop more than 10 percent this year and show no cargo growth in 2010, Bloomberg News reports. Drewry Shipping Consultants estimates that the drop may be even greater after shipping volumes tumbled 15 percent from January through May.

“A worrying balance between supply and demand won’t level out until 2015 and further job cuts will be needed following a 24 percent reduction in the past 18 months,” Eivind Kolding, CEO of the Maersk Line container unit, told Bloomberg News.

The lack of demand also caused freight prices to drop as carriers compete for an ever-diminishing number of contracts, pushing operating margins to record lows. “Getting lower down from this point will actually mean you have to pay the customer to take his business,” Kolding said.

Drewry predicts that ocean carrier capacity will grow 8 percent this year and 10 percent next year as market demand declines. As a result, the industry stands to lose a combined $20 billion before interest and tax, compared with a $5 billion profit last year.

Transportation providers are not anticipating relief any time soon, says GL&SCS. Despite the hardships, there is one positive aspect of the economic crisis. John Coates, president and CEO of The Fennimore Group, told GL&SCS that the current situation will give carriers the “impetus to move forward” with their streamlining plans.

“The ultimate answer,” Coates said, “lies in a creation of a true pull-oriented supply chain, tied to actual customer orders.

Resources

State of Logistics Report
Council of Supply Chain Professionals, June 17, 2009

U.S. Logistics Costs Drop for First Time in Six Years, Benchmark Report Says
by John D. Schultz
Modern Materials Handling, June 19, 2009

What’s Next for the Logistics Market, Once Things Settle Down?
by Robert J. Bowman
Global Logistics & Supply Chain Strategies (via Supply Chain Brain), May 07, 2009

Capacity, Carriers Continue to Disappear in Trucking Freight Slump
by David Hannon
Purchasing, June 18, 2009

Another Down Week for Rail Freight Traffic
Association of American Railroads, May 14, 2009

National Transportation Statistics
Bureau of Transportation Statistics (U.S. Dept. of Transportation), April 10, 2009

Economic Gloom Continues in January Traffic
International Air Transport Association, Feb. 26, 2009

Passenger Decline Stabilises – Some Improvement in Freight
International Air Transport Association, June 25, 2009

Safely Navigating Treacherous Economic Waters
by Philip Damas
Drewry Supply Chain Advisors (via Supply Chain Brain), Feb. 19, 2009

Maersk Says Container Market to Shrink More Than 10%
by Christian Wienberg and Kim McLaughlin
Bloomberg News, June 23, 2009