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June 6, 2006
Moving Things Along In 2006
Goods don't get to their destinations via osmosis, thus the importance of one of the world's largest industries: transportation. Here we look at the overall state of each mode used for transporting goods: trucks, trains, boats and planes.
Transportation is one of the world's largest industries. In total, during 2006, the U.S. transportation will account for about $1.4 trillion, according to Plunkett Research Ltd.
In its veritable facets and sectors, the transportation industry employs about 22 million Americans, or about 16 percent of the nation's workers. At a bit more than 10 percent of America's economic activity, transportation companies — hauling freight on trucks, trains, planes and ships — are remarkably efficient, considering the fact that the service is one of vitality for every other sector of the economy.
To wit: thanks to increasing use of advanced information systems and such strategies as intermodal traffic (wherein truck trailers or containers are moved via at least two different modes of transportation), the transportation industry's productivity level is excellent, says Plunkett. The ratio of ton-miles of freight shipped in the U.S. per dollar of GDP declined by a remarkable 35.3 percent from 1970 through 2002. In the U.S. alone, total freight shipment volumes are expected to increase by 70 percent between 1998 and 2020, according to a U.S. Department of Transportation (DOT) estimate. The amount of freight moved through ports of entry (foreign goods into the U.S.) are foreseen as more than doubling in the same period.
Further, employment in the transportation industry is expected to increase from 4,205,000 jobs in 2002 to 5,120,000 jobs in 2012 — an increase of 915,000 jobs. (Source: U.S. Bureau of Labor Statistics)
Here we offer a snapshot of trends in each of the primary modes of transporting freight. Settle in for a long haul.
Keep on Truckin'
Seventy percent of the goods in the U.S. move on a truck, which largely accounts for the attention shippers give to the motor carriers who carry the freight. While carriers now are enjoying "the swinging pendulum to their side" after shippers' control for the first 20 years following deregulation, motor carriers themselves are facing tough issues: driver shortages, continually increasing fuel prices requirements to purchase cleaner burning engines, to name a few.
The current driver shortage is expected to last for years, as carriers face competition from the manufacturing and construction industries for essentially the same labor pool, says a recent Logistics Today feature. "It comes down to pay, treatment and accommodation of life style," explains Scott Arves, president of truckload carrier Schneider National's transportation sector.
Of course, there are concerns over fuel costs, as well. To combat rising costs, for example, FedEx Freight is looking at more fuel-efficient diesel engines and more efficient networks as keys to burning less fuel, while also testing a wide range of fuel supplements and the use of wide tires, which reportedly have significantly less resistance and produce an improvement in fuel mileage compared with tandem tires. Other companies are looking at minimizing idle time and any other loss of production in fuel use or consumption.
Then there are new Environmental Protection Agency (EPA)-compliant engines. The 2007 diesel engines must not only meet more stringent emissions standards, but they'll also have to run on fuel with lower sulfur content. Beginning next year, carriers must start incorporating this new technology into their fleets. Standards in 2010 will be even more stringent.
Most shippers using commercial carriers have felt at least a pinch from lack of truck capacity over the past few years. While capacity is less an issue than it was a few months ago, shippers still report lane-specific concern. Whether truckload or intermodal, a heavy lane will have capacity constraints and potential service issues. It doesn't appear shippers are assigning the easing of capacity to any significant economic slowdown or general volume decrease.
Meanwhile, the ever-evolving Hours of Service (HOS) regulations have forced truckload carriers to focus on efficiencies in operating trucks, as they are faced with lower productivity. And if there is one thing all carriers agree upon, it is "the dire state of the country's roads […] in an economy that is increasingly global and so under more competitive pressure than ever," notes Logistics Today.
Yet, despite all of these challenges, truckload rate increases above historic two-percent-per-year levels are leading shippers to use smaller carriers and transportation intermediaries to lower costs. With capacity more in balance, shippers are shifting freight back to truckload from rail, based on service, and LTL, based on cost. Within truckload, however, shippers are also seeking lower-cost carriers to avoid some of the rapid increases in truckload rates.
Although shippers predicted truckload rate increases above three percent in the last four Freight Pulse surveys (including the current one), actual rate increases have exceeded expectations. (The Freight Pulse study is a semi-annual survey of shippers conducted by Morgan Stanley with Logistics Today and the National Transportation League.) In March 2004, shippers forecast their rates would rise 3.7 percent in the coming six months; the actual increase averaged 5.8 percent. In September 2004, shippers predicted a 6 percent increase; actual was 9.9 percent. In March 2005 and September 2005, actual increases averaged 6.8 percent, though shippers predicted rates would go up 4.7 percent and 4.3 percent, respectively.
Freight Railroads a Bit Off Track
According to World Bank data, the U.S. freight railroad industry leads the world or is near the top among all nations in terms of track, freight revenue, traffic volume, productivity and affordability. Further, U.S. freight railroads employ approximately 177,000 workers, according to the Association of American Railroads.
Coal is perhaps the most important single commodity carried by rail. In 2004, it accounted for 43 percent of tonnage and 20 percent of revenue for Class 1 railroads. Railroads handle approximately two-thirds of all U.S. coal shipments. Other major commodities carried by rail include the following: chemicals; grain and other agricultural products; nonmetallic materials; food and food products; steel and other primary metal products; forest products; motor vehicles and their parts; and waste and scrap material.
In addition to efficiency (and, according to some, cost competitiveness), freight railroads offer major public benefits: energy efficiency over other modes; environmental friendliness; significant reduction of highway gridlock; and major safety advantages over other modes.
A number of independent and peer-reviewed studies confirm that rail rates have fallen sharply since passage of the Staggers Rail Act in 1980, which partially deregulated the rail industry. However, shipper frustration with the Class 1 railroads seems to be increasing almost as rapidly as the cost of using the rails.
Indeed, rail rate increases expected from now through September 2006 are at record levels and will continue to accelerate through 2007, according to Morgan Stanley and Logistics Today. Shippers' predictions for rate increases of 5.9 percent topped the previous high of 5.6 percent level reported last September. Based on shipper responses to the aforementioned Freight Pulse study, Morgan Stanley projects rate increases at a 7.4 percent rate through 2007.
One possible explanation for such dramatic expectations in rail rate increases is that an estimated 21 percent of contracts have not been re-bid since 2004. Those contracts, according to Morgan Stanley, "can be from 10 percent to 30 percent below current market rates." Other shippers in the Freight Pulse study voiced concerns over the unregulated railroads abusing captive shippers, and suggested that re-regulating the rails might be the answer.
The perception that some of the railroads are using fuel surcharges as a cost center, while offering less service, is driving shippers off the rails and back to motor carriers. Based on shippers' comments, some companies are convinced that the railroads are pricing certain commodities unreasonably high to drive them off the rails and, ultimately, help the railroads improve their own operations. The railroads may find that after all of their capacity and service improvements come into play, they may have lower volumes as disaffected shippers shift modes.
Yet despite all of this, the intermodal freight industry has seen the number of units shipped on train cars rise 27 percent from 2000 to 2005, reports The Pittsburgh Post-Gazette (via CommercialAppeal.com). They're up another 8 percent so far this year, with higher fuel costs playing the biggest role. The run-up in gasoline prices has prompted companies to switch from shipping their goods by truck to rail over long distances. Overall fuel costs are at least three times cheaper by train versus truck, says Tom White, spokesman for the Association of American Railroads. According to L.B. Foster CEO and President Stan Hasselbusch, the favorable trends for rail have had a direct — and lucrative — impact on local rail supply companies.
Flying Low, Flying High
Air freight volumes have been on the rise in international lanes, while domestic U.S. volumes have stagnated. Carriers are adding freighter capacity, and airframe companies are stepping up programs for freighter conversions. The air freight industry saw a slowdown in growth last year as traffic rose only 3.2 percent over 2004.
Air Cargo World notes that, "although it was unlikely the industry could sustain the rapid expansion of 2004 into the next year," several environmental factors contributed to slower air freight growth, including the Asian Tsunami and Hurricanes Katrina, Rita and Wilma. Such unexpected events affected consumer demand, especially in the U.S., and correlated with a decline in business investment that caused inventory levels to rise as demand for products traditionally carried by air (such as high-tech intermediary goods and finished products) slowed.
Reports Air Cargo World:
Demand was further weakened as the industry coped with the spike in energy prices in the second half of 2005. As jet fuel prices increased, the cost differential between air freight and other modes of transportation widened further, dampening demand for air freight.
Yet aviation consultancy firm BACK Aviation Solutions says the outlook is "bright" for the vast majority of the key air freight trade lanes, while globalization continues to take hold and market participants evolve their business models. As global business pushes for greater connectivity, more complex logistics chains and increased flexibility to meet ever-changing consumer demands, the air freight market is uniquely positioned to reap the benefits over the next 10 years.
The Africa, Middle East and Asia regions, which all had in excess of 10 percent year-over-year growth in air freight traffic during 2005 — driven mainly by continued strength of Chinese air exports — are expected to take on a greater profile in development of new services and new growth, says BACK. The aviation consultancy firm forecasts worldwide freight ton kilometer traffic to grow at 6.8 percent average annual rate through 2015, driven by strong intercontinental trade flows (7.5 percent), while regional trade flows will see relatively slower growth (3.8 percent) as air capacity faces fierce competition from other modes, mostly from truck capacity.
Minus unforeseeable events such as major natural disasters, BACK Aviation believes the outlook for air freight is "promising as the market expands, new emerging markets develop, and the worldwide freighter fleet begins an anticipated renewal."
Keep From Sinking
Finally, on the waterfront, shipyards are near capacity, building massive containerships to handle trade that has focused mostly on China. "Larger vessels will begin to drive changes through the maritime industry as they find fewer ports that can accommodate the new class of super containerships," reports Logistics Today. The larger ships are expected to bring about an increase in feeder services to hub ports where the draft and landside capacity exists to handle the larger ships.
Perhaps the biggest and most overlooked issue at this time, though, is the fallout from the failed attempt of Dubai-based DP World to acquire terminals at several U.S. ports. Despite the die-down of hubbub and media attention, the defunct Dubai Ports World deal continues to have repercussions for shippers. Most significantly, the deal has led to Congress more closely examining the broader issue of port security and port operations.
In March, Capital Hill proposed the Security and Accountability For Every (SAFE) Port Act. Main provisions of the bill include: requiring the Department of Homeland Security (DHS) to scan inbound containers for radiation; check all port employees against terrorist "watch lists"; develop protocols for resuming port operations following a terrorist attack; establish standards for securing containers within 180 days; and conduct additional research on port security technology.
Passed last month by the House of Representatives, SAFE Port aims to increase the security of our sea ports and make the American people safer. Yet some shippers see the beefed-up regulations as possibly causing trouble for those involved in global trade.
Says Michael A. Regan, CEO of supply chain solutions provider TranzAct Technologies:
Because there is little excess capacity at our ports, any disruption or decrease in efficiencies will have an impact on shippers with import/export activity. Potentially, this is a steep price for well-intentioned, but seriously flawed, legislation.
Although fairly uncontroversial, the bill does not call for 100 percent scanning of containers, a fact that worries many.
The amendment was based on a bill introduced earlier this year — H.R. 4899, Sail Only if Scanned Act (SOS ACT) — which the National Retail Federation (NRF) called on Congress to reject last month. The bill required all cargo containers destined for U.S. ports to be scanned in the foreign port before being loaded on ships headed to the U.S.
One objection from the NRF was that the legislation put forth in the House of Representatives did not adequately define the term "scanning" and that it could result in costly delays that could harm the national economy. Steve Fister, the NRF's senior vice president for government relations, recently pointed out to Logistics Today that "scan" could mean use of X-ray equipment, gamma ray scan or the Integrated Container Inspection System (ICIS) used in Hong Kong. Further, noted Fister, the bill doesn't say who would perform the scans nor how they would pass the results on to the U.S. Department of Homeland Security.
As well as possible ramifications at home, fallout from the Dubai Ports World deal could hurt U.S. companies seeking business in the Gulf Arab states, according to a recent poll conducted by Aeroceanetwork, a network of logistics and international freight-forwarding professionals. Aeroceanetwork recently surveyed 450+ shipping and logistics professionals in Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates and Yemen, and found that more than 50 percent of respondents believe the United States' commercial image will suffer mid- to long-term damage in the region as a result of the Dubai deal.
Though respondents did not believe U.S. companies operating in the Gulf Arab region would feel immediate business effects, they do see long-range ramifications, according to Gary Dale Cearley, executive director of Aeroceanetwork, in an Inbound Logistics feature. "In the long run, respondents believe Arab-based shipping and logistics companies will think twice before making any investments in the United States," he says.
In the end, despite the many challenges the industry faces now, as well as those expected in the coming future, spending on transportation appears set to grow. A recent Purchasing magazine survey found that 92 percent of buyers plan to either increase (40 percent) or hold steady (52 percent) their spending on transportation services.
Sources
Transportation Trends
Plunkett Resarch Ltd.
Staring down the miles
by Roger Morton
Logistics Today, March 2006
Shopping for better rates
by Perry A Trunick
Logistics Today, May 2006
Overview of U.S. Freight Railroads
Association of American Railroads, January 2006
Shipping by train returns to favor
by Anya Sostek
The Pittsburgh Post-Gazette (via CommercialAppeal.com), June 4, 2006
BACK Aviation's 2006 World Air Freight Forecast
by Marty Graham
Air Cargo World, May 2006
Two steps forward, one step back
by Perry A Trunick
Logistics Today, December 2005
House signs off on SAFE Port Act in effort to improve port security
by editorial staff
Logistics Management, May 5, 2006
Congress plays political football with cargo
by editorial staff
Logistics Today, May 2006
Port Security: The Dubai Aftermath
by Amy Roach Partridge
Inbound Logistics, April 2006
Additional
Transportation Services Industry Profile
Yahoo! Finance
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Comment
4 CommentsThe USA needs to invest as heavily in new modes of rail transportation as in the Interstate project years ago. Rail done right, with underground passage through populated areas, could:
1. significantly reduce carbon emissions overall;
2. reduce or eliminate foreign fuel dependence;
3. speed major load travel times;
4. free up burdened Interstates and air cargo;
5. ease truck driver road hours;
6. increase safety and destination reliabilty;
7. allow better, safer passenger transportation;
8. allow advanced cargo tracking capabilities;
9. and more.
The saddest part of all these problems is the amount of import of goods versus our export. Air, ground or rail, we have one of the best transportation infrastructures in the world to service our great country. Now if we could have some more jobs in the USA so we export more or equal to our imports.
June 11, 2006 9:12 AM
