Newsletter Freight Costs Expected To Increase Douglas P. Kroll Director of Consulting National Traffic Service Posted: 4/20/2010 Now that it appears that the U.S. economy is headed back in a positive direction, shippers should expect to see increases in freight rates in the coming months and even years as the recovery is expected to be gradual. Many carriers are reporting high single or low double digit increases in shipments, though keep in mind this is being measured against a very depressed 2009 benchmark. Here's a look by mode of what to expect: Ocean: International ocean rates have already began a steady climb and in some lanes are changing almost weekly. Rates had fallen so low in 2009 as carriers looked to fill vessels, that all of the major vessel-owning companies lost huge amounts of money (by some estimates $15 billion for the year). This has led many carriers to announce ERI's (Emergency Rate Increases) since the beginning of the year, often one higher and replacing a previous one as carriers attempt to bring some rationality back to rates. Carriers have also withdrawn vessels from service. This restricts supply and pumps up demand and hence price. In an attempt to save money, some carriers have also slowed vessel speeds to conserve fuel, though adding days to sailings (Unfortunately, shippers pay the same BAF rate, no matter how much fuel was consumed on a particular voyage). Truckload: Shippers can expect to see small to moderate increases in TL rates as the year progresses. Truckload carriers also parked equipment during the recession, but putting them back on the road is not as easy as turning the key in the ignition as many laid-off drivers have left the industry. So even though the carrier may have enough trucks, there may not be enough drivers immediately available. Equipment shortages are already showing up in some lanes and for some types of equipment. Flatbeds, for example, are already tight. Less-than-Truckload: In the LTL area some shippers will see small to moderate increases while others may see no change in rates. Some carriers, by offering rock bottom discounts, aggressively pursued YRC's customers in late 2009 perhaps hoping to drive the ailing carrier out of business. The result is that many of these same carriers reported losses for 2009. Much to their chagrin, YRC appears to have pulled through their financial crisis (at least for the short term) and now those carriers are faced with hauling the freight they "stole" at non-compensatory pricing. Many have already gone back to their customers looking for increases. The bottom line is if you are a shipper who uses some of the carriers that reduced their pricing to lure YRC business from you, expect some price increases in the near future or at your contract renegotiation. If you are a shipper who uses carriers who refrained from the YRC pricing frenzy, then your pricing will probably be able to hold pretty steady this year. Parcel: No matter the condition of our economy, Fed Ex and UPS cannot resist their yearly opportunity to raise rates, as they did this past January (3.9% - 4.9%). The upside of this is that shippers at least have pricing certainty for the rest of the year, knowing that the next increase will not be until January 2011. Rail: Unlike truck and ocean, rail carriers maintained price stability and did not reduce rates during the recession, even though traffic fell as with all other modes. Of course the railroads never met an increase they didn't like, so rail shippers should expect normal, moderate increases in the coming months. Fortunately there is plenty of rail capacity for the foreseeable future to keep prices from seriously escalating. Freight Costs Headed Down Douglas P. Kroll Director of Consulting National Traffic Service Posted: 6/15/2009 One glimmer of good news during the current recession is that most shippers report a decrease in their transportation costs. One reason of course is less freight being shipped by most companies, but other issues are involved here, one being a reduction in fuel prices and the corresponding fuel surcharges. But also very important is that freight rates are down as it is a buyers’ market in transportation. Most carriers are reporting a decrease in tonnage of between 15-25% over last year, and many are heavily discounting prices in order to retain as much market share as possible. And interestingly, in spite of the poor economy, fewer carriers went out of business in the first quarter of this year, vs. the same period last year, so you have a classic case of over capacity. Some carriers are pricing shipments simply to cover out of pocket expenses only, such as fuel and labor and bidding on new freight with pricing that produces a 100+ operating ratio. I have seen N. Europe to East Coast US ocean rates as low as $200 @ 20’, port to port (subject to BAF) and LTL discounts are approaching the previously undreamed of 90% level (off current base rates). All of this points to now being an excellent time for shippers to negotiate new rates. Many carriers have publicly stated that they expect rates to rise once the economy begins to recover as they cannot haul freight at the microscopic or non-existent margins of today and continue to re-invest in their business over the long haul. Therefore, if you believe that the economy is near to or has reached the bottom, then this is the optimal time to negotiate new rates and lock those rates in for as long as the carrier will agree to, preferably 12 months at minimum. Parcel Rates Take Large Increase Douglas P. Kroll Director of Consulting National Traffic Service Posted: 10/2008 In spite of a weak economy and slowing demand for air freight services, both UPS and Fed Ex have announced hefty increases for 2009. UPS announced a 6.9% increase on air and international shipments, coupled with a 2% reduction in the fuel surcharge, which will result in a net increase of 4.9%. On the ground side, the increase will be 5.9%. Fed Ex previously rolled out their own 6.9% increase and 2% fuel rollback for air and international shipments, but has not yet made public their plans for a ground increase. It should be noted in both cases that these increases are an average with some weights and zones increasing more or less than the specified 4.9%. In the past UPS has tended to “load up” air increases at the higher zones which are not as subject to ground competition. Also, neither carrier has announced specifics on which accessorial charges (such as remote delivery surcharges or residential surcharges) will increase or how much. All of these increases are to be effective on Monday, January 5, 2009 with further details forthcoming, probably in mid-December. Also, back in September UPS quietly added another “revenue enhancing” rule wherein late delivered shipments will only be eligible for a refund of the basic freight charges, with UPS keeping the fuel surcharge. By contrast, Fed Ex continues to refund the entire invoice charge for a late delivery. Perhaps the most surprising news to come from UPS was the announcement that UPS Freight, their LTL carrier, will also raise their base rates 5.9% on the same day. In addition to being a substantial increase it is several months early, as most LTL carriers announce their General Rate Increase in March or April of each year. Whether other LTL carriers will take advantage of this and move their GRI up remains to be seen, and of course shippers with frozen base rates will not be immediately affected by this but should expect some sort of increase at contract renegotiation time. DHL To Restructure U.S. Operations Douglas P. Kroll Director of Consulting National Traffic Service Posted: 06/2008 DHL recently announced a massive restructuring plan for its U.S. operations which have been losing money at an astonishing pace ($1.3 billion this year alone). A part of the plan will result in cutbacks at DHL stations throughout the United States by closing some stations and consolidating others, and reducing some outlying pickup and delivery routes. While saving money, the cutbacks are expected to have minimal customer impact, affecting about 4 percent of DHL’s current volume, and the company expects to be back in the black in 2012. The part of the plan that is getting the most attention though is the decision to outsource lift or air transportation to rival UPS. This will eliminate the need for DHL to use ABX (formerly Airborne Air) and AirStar (formerly DHL’s air division) and pumps about $1 billion per year in revenue into UPS’ bank account. It also allows DHL to close its air hub in Wilmington, OH. While DHL will now rely on its main competitor to fly its packages, the two will still compete for common clients. The use of shared equipment is not a new concept to the transportation industry. Consider: NVOCC’s (Non-vessel operating common carriers) buy space from ocean liner companies which they market as their own. Passenger airlines have ‘code share’ agreements which allow one airline to book seats on another’s plane in order to serve a city without using their own aircraft. Railroad-owned cars move in a nationwide pool on all rail carriers and once empty can go anywhere for the nearest re-load. LTL carriers often use agents to deliver shipments to remote areas, while competing with these same carriers for other freight. TL carriers often function as both an equipment owning carrier and as a broker and may broker out a load to a competitor in order to protect a pickup. Fuel Prices Changing Supply Chains Douglas P. Kroll Director of Consulting National Traffic Service Posted: 04/2008 As this is written in April of 2008, the Dept. of Energy National Average On-Highway Diesel Price has broken the $4.00 per gallon mark for the first time in history. Many experts are predicting the price will hit $5 per gallon in the next 12 months and as scary as that is, I recently received a copy of a carrier fuel surcharge table that made provisions for fuel as high as $8 per gallon! (FYI, the TL surcharge will be 76% if that comes to pass). With this in mind many companies are looking at their supply chains and re-assessing the way they do business. “Near Sourcing” is a term being heard now and reflects the idea that in some cases it may now be more economical to source product or raw materials from within your region of the country instead of half-way around the globe as rising transportation costs (due to fuel) eat away at the lower labor or out-sourcing costs of overseas countries. Other companies are re-examining JIT operations as again, rising transportation costs may exceed the dollar amount of carrying additional inventory in transit. This then allows shippers to use a slower, but more economical method of transportation, say second day or deferred air vs. next day, or taking it a step further, ground parcel vs. any air service. For larger shipments, use of intermodal may make more sense than long haul over-the-road service, again keeping in mind the transit time/service tradeoff. Likewise for imports from Asia to the U.S. East Coast, a growing trend is the use of ocean ports on the U.S. East Coast, which while again longer than a combination West Coast port and rail bridge, is often cheaper and may avoid congestion out West. In some cases shippers may need to gently persuade their customers into new habits of ordering in larger quantities and lengthening their supply chain, particularly if the shipper is paying the freight as part of the delivered price to the customer. Take for example an LTL shipper located in Buffalo, NY shipping to his customer in St.Louis, MO. The customer typically orders in 200 lb. lots. A typical shipment costs $98.251 which the shipper pays as part of his selling price, and equates to a cost per hundredweight of $49.13. If the shipper can get the customer to double up on his order, to 400 lbs., the cost of the shipment is now $158.08 and the cost per cwt. has dropped to $39.52, a reduction of almost 25% in freight costs per pound. Overall, logistics and our society in general may need to undergo a transformation from an instant gratification, get it there yesterday approach, to a more measured, deliberate, and patient approach to transportation, not only to save costs and fuel but to relieve congestion on a limited infrastructure. 1Example based on a 70% discount off Czar Lite 2007 rates, FAK class 70, with the fuel surcharge at 31%. The Future of the NMFC and CZAR Lite rates Douglas P. Kroll Director of Consulting National Traffic Service Posted: 12/2007 As of January 1, 2008, the Surface Transportation Board (STB) of the U.S.D.O.T. has terminated the antitrust immunity for collective ratemaking of the 12 remaining motor carrier rate bureaus1 and the National Classification Committee (NCC), the NCC being responsible for the National Motor Freight Classification (NMFC). Under previous agreements, member motor carriers could sit down and decide on rates (Rate Bureaus) and on the classes for various commodities (NCC) used by LTL carriers. Under STB decision Ex Parte 656 issued on 6/28/07 the Board thought that competition in the industry would be better served by not allowing carriers to collectively decide on rates and classes and terminated that authority as of September 4, 2007 (later extended to 1/1/08). Since that time, some shippers have raised concerns that the class system published in the NMFC and the Czar Lite rates sold by SMC3 will be abolished as of January 1. Not to worry, neither is going away anytime soon. First, the classification system published in the NMFC will remain in effect on 1/1/08. The way that classes for new products will be added or changed for existing commodities will be different however. No longer will representatives from the various trucking companies sit down, discuss and vote on classes for commodities. The classes will now be determined by the staff of the NCC, and carriers will be free to use the class published in the NMFC or to ignore them (as it stands today, carriers in effect ignore classifications when they establish an FAK rating for a shipper). Second, the Czar Lite rating system has always been independently established by SMC3 with no carrier input, so no change is necessary in the way that it is produced. Shippers and carriers may continue to use the current and previous versions of Czar Lite as a base rate for their LTL shipments just as in the past. If you have any questions regarding either of these issues, please feel to contact me at 800-775-8253, x223. 1EasternCentral-MAC Conference; Household Goods Carriers Bureau; Machinery Haulers Association; Middlewest Bureau; Nationwide Bulk Truckers; National Bus Traffic Association; Pacific Inland Bureau; Rocky Mtn. Rate Bureau; Southern Motors Carrier Conference (SMC); New England Motor Rate Bureau; N.American Transportation Council; Western Motor Tariff Bureau. Fuel Surcharges: Cost Recovery or Collusion? Douglas P. Kroll Director of Consulting National Traffic Service Posted: 10/2007 Several recent developments have shippers questioning the role and legitimacy of carrier fuel surcharges: On the international side, the U.S. Dept of Justice launched an investigation into air cargo fuel surcharges in conjunction with several other countries. At the heart of the issue is the fact that virtually all international air cargo surcharges are the same and move up or down in unison (for example when this was written, $.60/kg). This is questionable when one considers that a diverse group of airlines are operating in different parts of the globe and sourcing their fuel from divergent sources, yet their pass through cost is exactly the same. Further “fueling” the debate, two of the airlines being investigated recently agreed to pay fines and avoid further prosecution. Earlier this year, the Surface Transportation Board ruled in docket #EP-661-0 that the railroads’ fuel surcharges were unreasonable when based on a fixed percentage of the freight costs and that the carriers were ‘double dipping’ by including fuel costs in their general rate increases when they were simultaneously charging a fuel surcharge. All of the above has led at least one LTL shipper to conclude that he too is being ripped off. The shipper, a California farm equipment wholesaler, has filed a lawsuit in Federal District Court against 10 large LTL carriers1. The company asserts that the fuel surcharges are set collusively and represent a price fixing cartel. Additionally the company says that entry of new truck companies into the industry is prohibitively expensive, increasing the pricing strength of existing carriers, and that regional carrier alliances further strengthen the cartel. Though an exact amount has not been set, the shipper is asking for 3 times damages, in excess of $5 million. Although it is not surprising that someone would eventually file such a lawsuit given the high dollar amount that fuel surcharges now represent (about 20% on LTL freight currently), it is doubtful that this case will prevail. Unlike air cargo carriers, LTL fuel surcharges are often close to each other, but not exactly the same across the board. Additionally, though most nationwide carriers use the Dept. of Energy National weekly average as their base price, many regional carriers use the more localized averages published by the D.O.E., such as the West Coast average or the New England average. And perhaps most importantly, the fuel surcharge is negotiable, as many large volume shippers can and do negotiate individual fuel surcharge schedules as part of their contract with their carriers. It will take months or years for the outcome of this case, but one of the defendants, Fed Ex Freight, recently announced a 25% reduction in their fuel surcharge schedule, perhaps as a means to differentiate themselves from the other carriers and avoid this type of nuisance lawsuit from repeating itself in the future. 1The LTL carriers named in the lawsuit are ABF, Averitt, Con-Way, Fed Ex Frt, Jevic, New England Motor Frt, R&L Carriers, Saia, UPS Freight and Yellow-Roadway Corp. UPS to introduce DIM Weights in Ground Service Douglas P. Kroll Director of Consulting National Traffic Service Posted: 11/2006 Starting January 1, 2007 UPS will begin assessing the greater of the DIM weight or actual weight on ground shipments. This will replace the current oversize rule and applies to any ground package over 3 cubic feet (5184 cubic inches). Although UPS and all air carriers have long assessed DIM weights on air packages, this is the first application by a major carrier in this country on ground packages. For shippers with larger, lightweight packages this could be a huge cost increase. On top of the basic rule change, the fuel surcharge for an individual package rated with a DIM weight will also increase, as the surcharge is based on a percentage of the billable freight. And expect UPS to announce their annual rate increase (GRI) in the first week of January as well. For example, a 36 x 18 x 16 box weighing 25 lbs. and being shipped to a zone 5 point would currently cost $10.24 plus $.46 fuel (4.5%) for a total of $10.70. Under the new rules, this package would be DIM rated at 54 lbs. for a new charge of $20.26 ($19.39 plus $.87 fuel). This is an increase of 97%! Additionally, this does not take into account the GRI which will likely be an increase of 2-4%. Also, shippers will have to update their automated shipping software to accommodate dimensions on ground packages and enter that information for each package shipped. Be prepared for reweighs too, as UPS, along with Fed Ex and DHL, employ laser dimensional measuring devices to check package size. As of early November, Fed Ex has announced that they will implement the same rule, but not until February 5. DHL is studying the situation and has not yet announced their intention on whether they will adopt this practice. How to Figure DIM Weight Multiply the length, width and height of your package, remembering to round all measurements up to the nearest whole inch. If the result is 5,184 cubic inches (3 cubic feet) or greater, continue. If less, your package is not subject to the new rule and will be rated at the actual weight. If greater than 5,184 cubic inches, divide the total by the DIM factor of 194 (use DIM factor of 166 for shipments to Canada). The result will be the DIM weight, in pounds, remembering to round up to the nearest whole number. Home | Freight Auditing & Payment Services | Online Reporting | UPS & FedEx Auditing | TrafficPro Auditing Software | About Us | FAQs | Contact Us | Newsletter | Login