Spot Market Freight Rates Dive as Recession Slashes Demand

By Rip Watson, Senior Reporter

This story appears in the Feb. 2 print edition of Transport Topics.

Rates for freight services bought on the spot market have nose dived to 1990s levels as shrinking fuel surcharges have sent prices falling further while the recession continues to ravage shipping demand.

Spot freight is moving now for about 80 cents a mile, 33% less than this time last year and one-third of the price when demand was strong in 2005, said Stifel, Nicolaus & Co. analyst John Larkin. That price includes fuel surcharges, he said.

Surcharges measured by Trans-Core have fallen 61% since July and were at 25 cents a mile for truckload fleets in December, when tonnage fell 14% according to American Trucking Associations.

“Truckload spot rates are ‘in the toilet,’ ” Larkin said. “The massive drop in volumes over the past eight weeks, off an already depressed base, is wreaking havoc.”

“We are seeing a precipitous drop in the spot market,” said Jeff Tucker, president of the Tucker Group, Cherry Hill, N.J. “In some of the East-to-Midwest traditional backhaul lanes, we are seeing rates as low as they were in the early- to mid-1990s. It is not profit time [for carriers]. It’s survival time.” 

Carriers find themselves in the position of cutting rates to attract freight, another broker said.

“Everybody is looking for more freight and everybody is getting pretty aggressive on rates,” said Chip Smith, president of Twin Modal in Minneapolis. “We are getting pounded.”

Fleets aren’t the only ones feeling the pressure, Smith said.

“Shippers are hard-pressed to find cost reductions,” he said. “Some shippers are saying we have no choice — they are desperate to find some help in a tough market.”

“Right now, the power is in the hands of the customers,” said Ray Greer, chief executive officer of Greatwide Logistics, No. 23 on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada.

Shippers shared that view.

“For the last four or five years, carriers had the chance to raise rates to very substantial levels,” said Wayne Johnson, director of logistics for American Gypsum. “Now in 2009, shippers are trying to survive — there is a lot of competition out there.”

Johnson said he just completed a new round of bids for trucking service at rates between 5% and 10% below the prior contract.

Larkin noted a sharp distinction between spot and other truckload rates that typically are based on contracts.

Those rates have been “trending flat,” Larkin said. Publicly traded fleets’ rates have dropped 2 or 3 cents a mile, or about 2% for the fourth quarter.

“It’s easier for big shippers to justify holding base rates flat given the precipitous drops in fuel surcharges of late,” Larkin said.

Shippers are wary of pushing high-quality carriers too hard

for rate cuts, he added, because customers want those fleets still to be in business in the future, after the current shakeout in capacity that has been triggered by the recession.

Terry Button, an owner-operator from Rushville, N.Y., who hauls hay and produce, appreciates both sides of the fuel-surcharge question because he also ships products to his family farm.

“Some shippers are getting more reluctant to pay fuel surcharges [to him],” Button said. “Some customers just quote you an all-inclusive rate. Others break the surcharge out.”

Button said he is willing to pay surcharges when he’s the shipper.

“I try not to take it out on the trucker,” he explained. “Without trucks we have no economy.”

There is broad agreement on one point: Fuel surcharges need to be preserved for fleets in good times and bad, despite anecdotal reports of customer pressure to drop them altogether.

“Shippers understand that fuel is one thing that the carrier has no control over,” Johnson said. “Fuel surcharges are still in place. Nobody wants to stop that.”

“Given the great diversity in fuel-surcharge agreements, it seems unlikely there will be a general demand among shippers to have them completely discontinued,” said Terry Palmer, general director of transportation for True Value Co., a hardware chain.

“There could be some shippers that have fuel-surcharge methods that are over-compensatory to their carriers at current fuel-cost levels, so their desire for discontinuation is understandable,” said Palmer. He said shippers should work with carriers to find a surcharge formula that reflects current conditions.

“Fuel is going to come back and capacity is going to tighten again,” said Greatwide’s Greer, adding that when it comes to surcharges, “The industry cannot afford to give up those kinds of things. If we allow that to happen, shame on us.”

From a broker’s perspective, “for shippers to want to get rid of the fuel surcharge is ridiculous,” Smith said. “To pretend that fuel is not a factor is ignorant.”

Tucker, who also is a broker, said, “Carriers want to hold onto fuel surcharges as a line item because it would be so difficult to reintroduce the scale when fuel prices rise again.”

David Schrader, senior vice president of TransCore, said shippers should preserve surcharges because a continued squeeze on the carriers would lead to more bankruptcies.