With transportation costs gobbling up a growing portion of manufacturers’ budgets, here’s one guess as to where that money is going: railroads.
UBS just wrapped up its fourth railroad customer survey, and it showed the rails continue to capture a larger share of industrial shippers’ transportation budgets versus trucks. Indeed, about 75 percent of respondents to the survey expect to do more business with railroads over the next 12 months.
Of course, that doesn’t mean they’re happy about it.
Not only are shippers expecting to pay a 9.7 price increase to railroads this year, but they seem increasingly discouraged by the behavior of the railroad companies. Among the comments from the respondents: “The railroads are taking business for granted. Their arrogance will one day be repaid by industry when business conditions are no longer so good and railroads are clamoring for business lost to trucks.”
And that was one of the nicer responses.
“You have to put it in perspective,” said UBS analyst Fadi Chamoun. “Shippers had gotten used to price declines for many, many years and in the last two or three years they have started to see significant price increases. It’s just reflective of the supply and demand situation.”For the time being, railroads still appear to be holding onto their ability to raise prices, aided in part by the higher cost of fuel, and also by the shortage of truck drivers, to the point where the lack of drivers has become a limiting factor in some companies’ operations.
A 2005 study from Global Insight noted that the size of the white male population of ages 35-54 – a group that currently makes up half of all truck drivers – will fall by more than 3 million between 2004 and 2014. The research also showed that while the supply of new long-haul heavy-duty truck drivers will grow at an average annual rate of 1.6 percent over the next 10 years, the number of new truck drivers needed will grow at a faster pace.
The two critical issues in the driver shortage: competitiveness of wages hasn’t returned to pre-2000 recession levels, and the lack of qualified applicants.
According to Global Insight, which conducted the study for the Council of Supply Chain Management Professionals, Ozark Motor Lines, an irregular-route truckload carrier, spends about $5,000 to recruit each of its new drivers. The company went so far as to open a new million-dollar Driver Service Center as a perk to attract and keep drivers, offering showers, laundry facilities, computers with Wi-Fi Internet, and a fitness center.
Yes, the company has a better-than-industry-average retention rate, with turnover of 65 percent, but it comes at a cost: Ozark spent about $2.5 million recruiting the 495 drivers it hired last year.
Outsourcing has also played a large role in the trucking shortage, as the volume of containers coming into U.S. ports has surged, squeezing the available driver base.
So how big of an issue are transportation costs? Last year, U.S. transportation costs for businesses rose by 14.1 percent, and now account for a whopping 6 percent of U.S. nominal gross domestic product. Domestic freight transportation, measured in tons of fright transported, has jumped by more than 20 percent in the last decade and is expected to rise another 65 to 70 percent by 2020.
Meanwhile, UBS’ survey showed that industrial companies see railroads as less expensive than trucks, although the difference (when excluding fuel surcharges) is narrowing.
“In 2005, approximately 60 percent of respondents saw railroads as more than 10 percent cheaper than trucks,” said Chamoun. “In our January survey, 75 percent of respondents regard railroads as 10-percent-plus cheaper, while our recent edition found only half of those polled citing railroads as more than 10 percent cheaper than trucks.”
That pullback apparently hasn’t impacted the railroads just yet. Last week, the Association of American Railroads said the rail companies capped off a robust July with a record-breaking week for intermodal traffic. Intermodal traffic for the week ended July 29 hit 250,966 trailers or containers, topping the record of 250,115 set in October 2005.
By no means is the backdrop all positive for the rail companies. In the UBS survey, almost all respondents characterized the price increases as “unfair,” as they aren’t justified by improved supply-chain efficiency, service reliability or even consistent with inflation in costs.
“To the contrary, shippers believe that they are paying more for less,” Chamoun said.
Shippers believe the cost factor will continue to help railroads versus trucking as long as fuel prices remain so high, but, as one transportation manager put it, “Railroads need to continue to improve their delivery consistency in order to become a meaningful part of the supply chain.”
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