Shipping Costs Expected to Increase as Freight Carriers Seek Higher Rates

This story appears in the Sept. 29 print edition of Transport Topics.

SAN ANTONIO — Shippers can expect to pay more to secure freight-hauling capacity as truck and rail carriers raise rates to cover rising costs and to fund investments in equipment and infrastructure, according to transportation and logistics executives.

They were addressing the Council of Supply Chain Management Professionals annual conference here Sept. 22.

“2015 will be a tough environment for shippers,” said Tommy Barnes, president of Con-way Multimodal, a unit of Ann Arbor, Michigan-based Con-way Inc.,  which ranks No 4 on the Transport Topics Top 100 list of U.S. and Canadian for-hire carriers.

Joe Carlier, senior vice president of sales for Penske Logistics, said he expects shippers to pay 3% to

5% more for freight transportation over the next year, although some shippers are seeing requests from carriers for rate increases of up to 10%. The Reading, Pennsylvania-based company ranks No. 32 on the TT100 for-hire list.

“The tide is turning,” said Paul Svindland, CEO of EZE Truck Holdings, a heavy specialized motor carrier based in Houston. “It’s a carrier’s marketplace and we’re seeing rate increases.”

EZE provides flatbed and heavy and specialized-hauling services, and is seeing high demand for its services from oil and gas drilling activity.

A report from the American Transportation Research Institute last week showed the average marginal cost per mile was $1.68 for trucking firms in 2013, up from $1.63 a mile in 2012.

“Carriers have experienced significant increases in equipment and labor costs,” said Andrew Boyle, executive vice president of Boyle Transportation in Billerica, Massachusetts.

ATRI’s survey also showed carriers facing rising costs for equipment and secondary items, such as tolls and health-care benefits.

Much of the pressure on costs for trucking is coming from driver-pay increases.

“The driver situation is real,” said Craig Harper, chief operations officer at J.B. Hunt Transport Services in Lowell, Arkansas, which ranks No 3 on the TT for-hire list.

Harper said his company is spending $700 million this year on equipment and facilities to accommodate growth in its intermodal and dedicated contract carriage businesses, but faces shortages of drivers in its asset-based truckload and drayage units.

Michael Miller, chief commercial officer in North America for short-line rail operator Genesee & Wyoming Inc. in Darien, Connecticut, said Class 1 rail carriers are spending about $24 billion this year on capital improvements to enhance the flow of freight.

High demand for rail cars to carry oil has “changed the flow of traffic” and slowed rail service in many parts of the country, he said.

A representative of BNSF Railway said the company, the nation’s largest railroad, is buying 500 new locomotives and spending $5 billion on improvements to its rail lines. The plan includes double-tracking

portions of BNSF’s northwest route in Montana and North Dakota to ease congestion caused by an increase in oil shipments.

The company is also hiring 5,000 people to fill positions on train crews, track maintenance and management, said Zackery Roskilly, a regional sales manager for BNSF in Columbus, Ohio.

To get more capacity, Harper of J.B. Hunt said shippers and carriers will need to work more closely to get better utilization out of existing truck and rail equipment.

“Freight costs are going to go up if you continue to do things the same way you’ve been doing for the past three to five years,” declared Mike Regan, a shipping industry consultant and co-founder of TranzAct Technologies in Elmwood, Illinois.

Regan received the 2014 Distinguished Service Award from CSCMP in San Antonio.

To avoid paying higher rates, logistics and freight industry experts said that shippers need to make their freight more appealing to carriers by reducing delays for drivers, reconfiguring routes and consolidating shipments and shifting freight to lower-cost transport modes.

Regan urged logistics personnel to take up these issues with top executives so there is a better understanding of how corporate decisions about production and sales affect transportation and distribution.

“Controlling and reducing cost is not something you can do by yourself,” he said.

Many companies that saw logistics costs fall during the global economic downturn are now confronting a new reality, according to carrier executives and logistics industry observers.

“We’re seeing logistics costs rise again,” said Piotr Pregner, senior management consultant for Establish Inc., a consulting firm that has analyzed shipping data from several hundred shippers across a broad range of industries since 1974.

“The main driver is transportation,” Pregner said.

Transportation accounts for nearly half of total logistics costs, followed by the cost of holding inventory and warehousing, customer service and administration.

Logistics costs rose to 9.34% of sales in 2014, up from 8.41% in 2013, Establish reported. Logistics costs tend to increase most during periods of economic growth and when freight hauling capacity is tight.

The peak level for logistics costs as a percentage of sales for companies surveyed by Establish was 9.74% in 2007.