Freight Rates Are Still Dropping, With No Immediate End in Sight

This story appears in the June 1 print edition of Transport Topics.

NEW YORK — Carriers and shippers say freight rates continue to drop and with no immediate end in sight, driven by three forces: weak demand, overcapacity and shippers’ moves to cut costs by soliciting new bids.

Customers “realize tonnage is down 15%,” Wes Frye, chief financial officer of Old Dominion Freight Line said here recently during the Wolfe Research Global Transportation Conference. “They know there is excess capacity. Customers are dealing with the same things we are. Their business is down as well.”

Pricing “is very, very competitive,” added Frye, who said he hopes to hold Old Dominion’s price decline to 1% this year. “We’ve had companies coming back to us in three months with new bid requests.”

Shippers’ interest in cost-cutting has been so strong that regional less-than-truckload carrier A. Duie Pyle received more bids through mid-May than it did during all of last year, CEO Steve O’Kane said.

The range of decline typically is between 5% and 8% below last year, said shippers such as Mike Vogt, procurement manager of bulk transportation for BASF Corp., and Eduard Jimenez, manager of logistics strategy and controls for MillerCoors.

Kelly Abney, vice president of corporate transportation for Wal-Mart Stores, said the company’s just-completed bid process lowered costs about 10%.

Ashley Dorna, director of logistics and supply chain for Niagara Bottling LLC, said the company won new contracts with Costco and Wal-Mart at “extremely competitive” rates and renewed a Kroger supermarket contract, where “we saw pricing go down roughly 18%.”

Individual comments about rate weakness were backed up by a shipper survey done by Wolfe Research and by American Trucking Associations’ trucking activity report.

“Accelerating truckload and less-than-truckload rate decline expectations by our shipper respondents reflects the weakening economy as well as the record number of truck bids completed so far or planned during 2009 in an attempt to lock in lower contractual rates,” a May 19 Wolfe Research report said.

ATA’s latest survey found that truckload rates fell 2.5% from February to March, measured in revenue per mile, while LTL pricing in dollars per ton declined 3.2%. On a year-to-year basis, the LTL decline in March was 13% and a 16% decline for truckload.

The Wolfe survey found truckload rates are forecast to fall 2.7% this year, while LTL drops 1.5%, a sign that price declines could abate later this year along with a sequential rise in freight volumes.

Spot-rate trends are even worse, the study found, as prices dipped 7.5% from the fourth quarter to the first quarter.

Profits are being hurt by shippers seeking price reductions, even as freight volumes increase slowly, said Max Fuller, co-chairman of U.S. Xpress Enterprises Inc.

“Freight volumes used to increase profitability; the problem now is . . . the bid packages and how cheap they have become,” he explained.

Others said they are feeling the pressure, too.

Werner Enterprises has had “a very, very significant bid season,” Chief Operating Officer Derek Leathers said, adding that continuing efforts to reduce fleet size were “directed almost exclusively at trying to maintain somewhat of a reasonable rate per mile.”

“The amount of bidding was staggering,” said Celadon Group CEO Stephen Russell, referring to first-quarter market conditions, which have moderated. “Spot pricing was horrendous.”

Swift Transportation Chief Fi-nancial Officer Ginnie Henkels agreed that “bid activity was very high” and that “there was pressure on pricing.”

John Smith, CEO of CRST In-ternational, and Fuller both said prices fell another percentage point or two after first-quarter freight bids were finished.

On a brighter note for trucking, other CEOs, such as Henry Ger-kens of Landstar System and Bruce Campbell of Forward Air, said pricing is beginning to stabilize.

“We have seen what we think is the bottom,” said Campbell. “We have all experienced downward [price] pressure from shippers. That is going to go on for a while. It is up to us to adjust to it and move on.”

Pricing has been tough for LTLs, as well.

Asked about pricing, John Labrie, president of Conway Inc.’s freight unit, said, “It’s been bad. It’s worse today, but the pace at which it is deteriorating is slower.”

“The status quo is not sustainable,” said Richard O’Dell, CEO of Saia Inc., who said pricing fell 3% in the first quarter and was worse so far in this quarter. “The entire industry is losing money. There is going to be an uptick in the economy, or there is going to be consolidation.”

“Shippers are still getting good rates — a few percentage points lower than they had in the past,” Satish Jindel, president of SJ Consulting Group, told Transport Topics. “The pricing isn’t better on a fuel-adjusted basis, but it may look better from a carrier point of view. The reason carriers have been able to show they have a little better business environment is better cost management.”