Capacity crunch refers to having less truck containers and truck container space available for freight. This imbalance makes it very difficult for a shipper to find a full truckload for their freight to be hauled to a specific destination. This crunch and also cause an increase in full truckload pricing.
4 Factors Creating the Capacity Crunch
There are four current factors contributing to the transportation capacity crunch. Money, driver productivity, market forces and a continued decline in available trucks all contribute to today’s capacity crunch.
Economics remain the most important factor in how carriers evaluate and rate shippers. Carriers indicate that market competitive rates and fair fuel surcharges are“critical” or “important” factors in dealing with shippers. Payment terms and average length of time until payment are also a key area for many carriers ranking it as a “major factor” and considering it “important but not critical” when choosing shippers. In today’s economy 30 day payment terms are considered acceptable by the majority of carriers. Shippers who routinely pay in less than 30 days really differentiate a shipper. Volume potential and positive credit rating were also consistently rated as a major factor. When carriers are forced to choose one shipper over another, all indicators come back to the ability to be paid timely and the opportunity for increased volume shipping.
2. Driver Productivity
Driver productivity is continuing to be a focus for carriers. This may be one of the most critical factors that is controllable by a carrier. Carriers consider dwell time as an “important” or “critical” factor in determining the preference status of a shipper. Dwell time is the amount of time a driver and equipment is parked and waiting on a shipper or receiver to clear the freight. In-transit delays are also a major and important factor. A carrier’s ability to use drop trailers, shipper load count and choose the type of freight are also key factors in the ability of the carrier to be profitable when moving freight.
Carriers rank driver-friendly practices highest based on those that enhanced driver productivity, such as onsite parking and available bathrooms for drivers. Regular updates on loading and unloading status and a guard shack for drivers to receive instructions are also high on the list. In this area shippers can be a real partner with carriers to make the driver experience more hospitable and productive. Our blog last week expands on the role shippers can take to assist the carrier.
All market influences that affect shippers show being unfavorable and a “less-than-ideal environment for shippers.” According to FTR Transportation Intelligence, their Trucking Conditions Index (TCI) increased to a reading of 8.49 for July. This index rating is one of the highest of 2014 and reflects rising prices and service lapses resulting from the current capacity tightness. Jonathan Starks, FTR’s director of transportation analysis, noted in a statement that the firm’s TCI could go even higher this fall if the economy accelerates.
The reasons for this, explained FTR, have to do with both spot rates and contract rates heading up in a full capacity environment and with the fall shipping season rapidly approaching; it explained conditions for shippers could further deteriorate. “When looking at the TL market, for much of 2014 it has been a tale of two markets,” he explained. “Spot activity has been very strong, especially in rates, [while] the contract market has been less robust but still showing signs of stress on capacity, costs, and rates.” Starks said FTR expects those two markets to merge this fall as a shipper’s core carrier get further stressed and contract rates move higher. “Keep an eye on spot rate as we head into 4th quarter as they will be an early indicator of capacity shortages and stress in the system,” he added.
“To date in this recovery, aside from the weather-plagued winter of 2014, freight growth has been both fairly stable and relatively modest. This has allowed fleets to operate with very little excess capacity and keep contract rates relatively low as they focused on base load contracts. This has moved much of the demand fluctuations to the spot market – in which price swings can be much more dramatic. Spot rates have started to show an early upward movement at the end of the summer season, highlighting potential capacity issues as we move into the fall freight shipping season. Contract rates will be moving up, but it will be wise to watch spot rate activity to see how demand and capacity are matching up.”
4. Shortage of Trucks
According to a recent article in “Fleet Owner”:
A shortfall in trucking capacity is not expected to fully develop until at least two years from now, according to several industry experts, as current “supply and demand” between available trucks and loads is more in balance than many might think.
“Supply and demand is not currently imbalanced, in the aggregate,” noted Scott Moscrip, founder and CEO of load-board provider the Internet Truckstop, in a conference call last week host by Wall Street investment firm Stifel, Nicolaus & Co. “It is just that some trucks are positioned where little freight is available and some freight is available where an insufficient number of trucks are positioned,” he explained. “In theory, through better use of [load availability] data, these imbalances can be partially eliminated.”
Moscrip stressed that the driving force behind us not seeing the real struggle of the transportation capacity crunch is due to sweeping transportation regulations. It is unknown what impact new regulations such as electronic logging devices, increased drug testing, and speed limiters will have on capacity. “Too much effort is focused on trucking industry safety and the truck driver and not enough attention is paid to the other 99% of the traffic that plies our highway network,” he said. As with FTR’s Shipper Conditions Index, this points to a rush to Spot Market to cover loads. That increased demand will boost spot pricing which, in turn, will convince more carriers – typically small carriers, but increasingly mid-sized carriers – to allocate capacity away from contract customers and towards the higher priced segments of the spot market.
The New Normal
All indications suggest that we will be in the midst of this capacity crunch for sometime. Carriers and shippers both benefit when they are aware of the conditions influencing the crunch and begin to work together to mitigate the negative effects of decreased shipping capacity. Paramount Freight depends on increased communication and a partner like relationship with our shippers so we can provide the best service possible. As a 100% Owner Operators and Lease Purchasers fleet we are dependent on our drivers to deliver on time with excellent customer service. We invite you to stay up to date on the truckload shipping industry here on our blog and on social media. Like us on Facebook and follow us on Twitter to learn more about how PFS does business different for our shippers and our fleet of Owner Operators and Lease Purchasers drivers.