Logistics Becomes More Expensive Says New Report

The state of logistics is worrisome as logisticians struggled with uneven 2013 freight demand levels while bracing for a capacity crisis that is becoming “more severe,” a new definitive report on the sector says.

The highly anticipated 2013 “State of Logistics” report, compiled by analyst Rosalyn Wilson and presented by Penske and the Council of Supply Chain Management Professionals (CSCMP), describes last year’s logistics environment as uneven. After a slow start to 2013, mid-year shipments were strong before a very deep dive at the end of the year with not much movement in freight rates across the modes.

But the picture appears much brighter for this year, with Wilson predicting 2014 to be the best year in the past eight. So far in the first five months this year, freight shipments are up 13.1 percent year-over-year with payments up 13 percent and higher rates and capacity problems looming, she said.
U.S. business logistics costs rose 2.3 percent in 2013, a significant drop from the 3.4 percent rise in 2012, the report says. Business logistics costs increased to $1.39 trillion, up $31 billion from 2012. In 2013, logistics costs as a percent of the nominal Gross Domestic Product (GDP) declined to 8.2 percent. This means that the freight logistics sector was growing at a slightly slower rate than GDP, Wilson said.

Inventory carrying costs and transportation costs rose slightly last year. Inventory carrying costs increased 2.8 percent. Transportation costs were up only 2 percent in 2013 because of weaker shipment volumes and a lack of growth in rates.

“2013 was a much more complicated year from a purely economic point of view,” Wilson said in releasing the SoL report entitled “Ready for a New Route” on June 11 at the National Press Club in Washington. “It (2013) was not a stellar year for the economy, but freight did not always mirror the economy.”

She said 2013 had a very slow start, a strong middle of the year, but ended in a “deep dive.” If the year were to be looked at as individual quarters there were definitely some high points for the freight sector, but also some deep valleys, she said.

“Freight shipment volume experienced five three year lows during 2013, while freight payments hit three-year highs in eight of the 12 months,” Wilson explained.

Freight volume in tonnage terms rose in 2013 more than the number of shipments and revenue figures suggest, but rates remained “stubbornly flat,” she said. This has left the trucking industry, in particular, in a weaker position in 2013. Rising costs for drivers, equipment and maintenance have pushed marginal trucking companies over the edge, as the number of bankruptcies rose last year.

Despite a surge in online retail growth (causing a holiday shipping meltdown for parcel giants UPS and FedEx), real GDP growth was a paltry 1.9 percent last year compared to 2.8 percent in 2012 (Slide 4). Factors behind GDP were mostly counter to the growth of freight volume, Wilson said.

These included increased inventory investment, a deceleration in imports, and strengthened state and local government spending that were the strongest upward drivers of third quarter GDP. The first two do not result in more freight. Exports fell in the third quarter also resulting in less freight, Wilson said.

Trucking capacity is becoming a “more severe” issue for shippers. The truck driver shortage is the “No. 1 concern for trucking executives,” who are coping with higher costs for drivers as well as compliance with tougher government regulations regarding hours of service and other driver standards.

Trucking bankruptcies are up. According to Avondale Partners’ analyst Donald Broughton, trucking bankruptcies increased for seven straight quarters last year and are at a three-year high. Some 21,775 trucks were idled last year due to company shutdowns, which is larger than 2010 and 2011 combined.

Those bankruptcies have continued into this year. Just this month, Delanco, N.J.-based New Century Transportation, a hybrid truckload carrier with 1,300 employees and 2,000 trucks and trailers, closed suddenly, filing for Chapter 7 liquidation.

All this capacity reduction in trucking likely means higher rates for shippers. Wilson said carriers should be able to “significantly” raise truck rates this year, “probably in the 5 to 8 percent range.”

Last year trucking, the largest component of transportation costs, posted just a 1.6 percent rise in revenue, one of the weakest revenue years in recent history of the SoL report. Intercity truck revenue rose 1.8 percent with local delivery up just 1.2 percent. “Rates have been relatively flat with the exception of spot rates when capacity is scarce,” Wilson said.

Logistics as a percentage of GDP dropped to 8.2 percent, a tick below the 8.3 percent in 2012. Those figures compare very favorably to 1981, the first year after trucking was economically deregulated, when logistics consumed 15.8 percent of GDP.

Other modal highlights from the SoL report:

• Cost of rail transport rose 4.9 percent in 2013, with Class 1 freight revenue per ton-mile rising 5. 3percent. Overall rail traffic was up 9.2 percent;
• Cost of water transport rose 4.5 percent, reversing the previous year’s downward slide. Ocean carriage is “slowly improving” despite additional capacity; and
Air freight revenue was unchanged in 2013, even though overall revenue tons carried by air fell 0.7 percent.

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