Changes in NMFC Classifications

The Commodity Classification Standards Board of the NMFTA recently approved a couple of changes that will have far reaching effects on LTL shipments of certain commodities in the National Motor Freight Classification that are based on density ratings, for example, Plastic or Rubber Articles, Expanded, NOI (157320). Previously, most items assigned a class based on density were subject to one of two tables. The so called 9-tier classification broke down density into 9 sub ratings as follows: ...

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Beginning this summer, many shippers began noticing a new surcharge added to their LTL freight invoices. The “California Compliance Surcharge” was first instituted by ABF and Old Dominion, but has since been adopted by most LTL carriers operating in the state.

The charges was added in response to new regulations in California labor laws that require truck drivers to be paid for their down time, such as meals, refueling, detention, etc, instead of just for miles driven.

This charge applies to any shipments that originate in or are destined to a point in California, and are NOT subject to any discounts that the shipper may have with that carrier.

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Effective July 1, a new international law passed by the International Maritime Organization will go into effect, as the SOLAS (Safety of Life at Sea) Act will require that shippers provide a verified gross weight for all containers in international trade.

Containers without this certified weight will not be accepted for ocean transport. The containers will then have to be weighed at the port and a charge for this may be passed on to the shipper. Fines for non-compliance will vary from country to country and could range from fines to imprisonment.

Most countries seem to be adopting a tolerance level of 5% allowance in the reported weight. The two commonly accepted methods to achieve the VGM (verified gross mass) are detailed on the attached link.

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10 Interesting Facts About Rail Freight

When we think of logistics, trucks are often the first thing people picture. While trucks excel in time-sensitive delivery over short distances, rail is the unsung hero of the U.S. freight system.

Here are some interesting facts about rail freight in the United States, provided by the U.S. Department of Transportation, the Association of American Railroads, and the Transportation Research Forum.

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Small Package Stealth Increases

Both Fed Ex and UPS have announced their annual general rate increases for 2016, with Fed Ex taking a 4.9% increase on both air and ground on 1/4/16, while UPS is taking a 4.9% on ground and a 5.2% increase on air shipments effective 12/28/15. However, both carriers have or will be increasing rates in other, less obvious ways. For example, last year, both carriers implemented dimensional pricing on all ground packages in addition to their general rate increases.

Just recently, Fed Ex has quietly adjusted their fuel surcharge upwards. Effective with 11/2/15 new fuel surcharge tables went into effect that increased the air fuel surcharge by 1.5% and the ground fuel surcharge by 1%. To be fair, this brings Fed Ex up closer to where UPS already was, with Fed Ex still being .25% lower on air and 2.5% lower on ground packages. This increase affects all Fed Ex shippers, unless they have a specific fuel table built into their contract (and that is very rare). Most shippers who have a fuel concession, have it in the form of a discount off the fuel surcharge, say 15% for example, so although the 15% discount is retained, the base fuel it is taken off of, has still gone up.

UPS on the other hand, will implement a new accessorial charge effective 1/4/16. Any third party billed shipment will be assessed a service charge of 2.5% of the billed amount. A third party shipment is one where the paying party is neither the shipper nor receiver of the package. This will have a big effect on vendors who may ship a product direct to their customer from the manufacturer instead of their own warehouse.

So far, there is no word from Fed Ex if they will implement a similar rule. Perhaps they are waiting to see what kind of pushback UPS gets, or perhaps they may use it as a selling point to get large third party shippers such as retailers to defect to Fed Ex.

Ocean Rate Wars

Ocean container rates have fallen to historic lows in many lanes this summer as carriers battle for containers to fill their ships. As an example, in early July the Los Angeles to Shanghai spot rate for a 40’ container fell to $611 which included the fuel surcharge (bunker). That same $611 would not take that container very far over the road in the U.S. from the Los Angeles port, but half way around the world is a different story. The Asia to Europe lanes have been even worse, with carriers hauling containers below their break-even point since February according to some sources.

Ironically much of this damage is self-inflicted as simple supply and demand factors come into play. Ocean carriers are taking delivery of ever-larger super ships that can carrier up to 20,000 TEU’s (20’ containers) almost double the size of ships in common use a few years ago. These mega-ships can only be used in high volume lanes, primarily out of Asia, so the 10,000 TEU ships then cascade down to secondary lanes that previously used 7,000 TEU ships and so on. The end result is an increase in capacity at a time when the global economy is only slightly growing or stagnant depending on the countries involved.

The solution to the problem would be for carriers to take capacity out of their system, either by having fewer sailings in problem lanes and/or taking older ships out of service. The problem with this option is that none of the carriers wants to give up market share to their competitors, so instead everyone suffers on the carrier side, while shippers enjoy a windfall to their budgets.

There have been some attempts at rationality, with carriers cancelling a few sailings out of Asia and bumping cargo to following sailings, and attempts at GRI’s (General Rate Increases), none of which have held for very long. With average load factors of only around 83% carriers still have a way to go, but it should also be noted that some lanes have held up fairly well, rate wise, for example the Europe to N.America lanes.

Fun With Fuel

As anyone who drives a vehicle can attest to, the price of gasoline has fallen dramatically since the end of 2014. In the transportation industry, diesel fuel prices have also fallen, though not as dramatically as gasoline. Yet earlier this year, as the Dept of Energy (DOE) national average price was falling week by week, LTL and small parcel carrier fuel surcharges suddenly jumped. How could this be?

Back in the 1990’s when fuel prices suddenly escalated, carriers instituted the fuel surcharges with the idea that the sudden increases in costs due to fuel would be 'passed through' to the shipper, based on the weekly DOE average price. Therefore the surcharge would rise or fall with the price of diesel. Over the years however, the surcharge has morphed into a revenue source for the carriers more than a simple cost pass through. So when diesel prices took a sharp downturn, many carriers were faced with declining revenues because of the smaller surcharges. In fact, several carriers and Wall Street analysts cited declining fuel surcharges in a potential reduction of quarterly carrier earnings.

To make up for this loss, many of the LTL carriers quietly adjusted their fuel surcharge tables in February with the result that their fuel surcharges went up between 1-3 percent during a period when the diesel prices were declining or holding steady. As a defense, many carriers noted that they were also adjusting the higher end of their surcharge tables, so that if diesel does again go up to $4.00 per gallon, the surcharge will be less than it was in 2013. In effect the carriers are flattening out the surcharge schedule, so that the fuel surcharge does not increase, nor decrease as dramatically with wild fluctuations in fuel price.

Further evidence that fuel surcharges do not truly reflect a “pass through” mentality is the fact that the surcharge itself is based on freight charges paid, not necessarily the amount of fuel the carrier uses. For example, take two shippers located in the same city, shipping the same product. Shipper #1 has a 75% discount based on their volume. Shipper #2 is four times the size and therefore has an 85% discount. If both shippers send out a 1,000 lb. shipment from their plant in Chicago to a customer in Atlanta, Shipper #1 will pay a larger fuel surcharge, as his net freight charge will be greater than shipper #2. Yet, the amount of fuel for the carrier to haul the identical sized shipments from the same point to the same point is the same. Rail shippers grappled with the same issue, until the Surface Transportation Board ordered the railroads to base their fuel surcharges off of mileage, not how much in freight the shipper paid. Perhaps someday, LTL carriers will do the same.