Shippers Turning to Asset-Based Carriers Ahead of Expected Tightening of Capacity

This story appears in the Sept. 24 print edition of Transport Topics.

Shippers and carriers are considering putting more freight directly on asset-based carriers — potentially hurting middlemen who do not own trucks — as the supply of vehicles and drivers dwindles.

“As a shipper, I am very concerned about the capacity issue,” Judith Taylor, vice president of logistics and international compliance at medical products company NxStage Medical, said at a recent investor conference in New York.

“With the economy going sideways, it is not a big problem yet,” Taylor said. “When the economy improves it will be a big problem. If it becomes a crunch situation, it will be good to be an asset-based carrier.”

Taylor expressed concern about the number of loads going to third-party logistics providers that do not own assets, while also noting that she was receiving multiple “cold calls” from brokers about a single load.

“Eventually, there won’t be any trucks” if carriers don’t invest in assets, she said.

Max Fuller, CEO of truckload carrier U.S. Xpress Enterprises, said the driver shortage will soon worsen as hours-of-service and other regulations reduce the driver pool.

At the same time, he noted that financial constraints triggered by higher truck prices, driver wages and fuel costs limit the ability of many carriers — particularly smaller fleets — to invest.

“What will happen in the second half of next year as these laws take effect will be a squeeze of capacity,” Fuller said. “We are seeing evidence of shippers moving to large carriers for that very reason.”

Fuller said dedicated shipments for a single customer, and asset-based brokerage managed by U.S. Xpress are the two fastest-growing parts of its business. Brokerage now accounts for about 20% of business, compared with zero just three years ago.

“Today, as long as we are responsible for [the shipment], shippers don’t mind if we broker some freight,” Fuller said.

That’s a change from the past, he said, when shippers used to use brokerage whenever the economy slowed, allowing them to obtain rates below prices they contracted with fleets.

“Shippers have fundamentally changed the way they buy freight,” David Jackson, president of Knight Transportation, said at the Dahlman Rose investor conference in New York. “We have seen a shift to asset-based brokerages.”

Knight’s brokerage revenue has risen about 80% since 2009.

“If a massive shortage of capacity is looming in the future when we have any pickup in freight demand, [shippers] want to have someone who has assets,” Jackson said.

“Smart shippers are cementing relationships in the event of constrained capacity,” said Matthew Menner, senior vice president at third-party logistics operator Transplace. “You don’t want to be a new shipper in that relationship.”

Fast-growing, non-asset-based logistics operators will continue to play a strong role in providing capacity, said Evan Armstrong, president of consulting firm Armstrong & Associates.

He said on a recent webinar that the third-party logistics industry is growing 4 percentage points faster than gross domestic product.

Brokerage and dedicated contract carriage combined grew 5% a year from 2007 to 2011, Armstrong said. By comparison, GDP rose less than 1%.

“Shippers lean on 3PLs like C.H. Robinson, Menlo Worldwide Logistics, Ryder and Coyote to get capacity in multiple modes at the lowest cost when the market is tight,” Armstrong said.

He added that 82% of Fortune 500 companies use at least one 3PL.

“More sophisticated shippers are managing for the long term,” said Paul Newbourne, senior vice president of operations for food service industry supplier Armada Supply Chain Solutions, which uses asset-based companies for 98% of its capacity.

“The reality is that if you want stability in your network, you don’t want to be hopping around,” he said. “It’s not like the recession when it was ‘let’s make a deal’ every month.”

Jason Seidl, an analyst at Dahl-man Rose, said he sees a new freight climate ahead.

“Most asset-based truckload carriers aren’t growing their fleets,” he said. “They are struggling to hire drivers now. It seems like everyone wants to be non-asset-based.”

“These are definitely trends that can’t continue,” Seidl said. “At some point, there are going to be eight [shippers] coming into a trucking carrier wanting to move the same load. That is going to create a very,very different marketplace for shippers.”

The coming capacity squeeze may increase rates and help carriers defray rising costs for equipment, driver pay and fuel, U.S. Xpress’ Fuller said.

“Higher prices and lack of availability should squeeze margins and give the most trouble to small brokers,” Stifel Nicolaus analyst David Ross told Transport Topics.

“To mitigate rate increases, those shippers using brokers simply — largely — for better rates may search to replace them with direct carrier relationships,” Ross said.