Dan Goodwill, the President of Dan Goodwill & Associates, a leading provider of freight management consulting services to shippers, carriers and 3PL’s throughout North America has just posted his list of the top 10 transportation stories of 2012. While a nearly all of them affect the U.S. and Canadian competitors in the courier express and postal (CEP) industry, the following are likely to have the biggest impact on impact on the industry in 2013 and beyond.
Same Day Deliveries in the Retail Sector
Mr. Goodwill notes that:
The internet has transformed a number of industries such as books, electronics and music. Each year, many consumers are increasing their online purchases of a variety of items. To respond to customer demand for rapid delivery of their purchases, companies like eBay and Wal-Mart stores are putting pressure on their transportation partners to deliver customer orders on the day of purchase (e.g. same-day delivery). To compete, Amazon and Google are also trialing same-day delivery in certain markets. They are turning to local and major small parcel players such as UPS. Of course, these types of changes drive new processes, expanded warehousing capabilities and carrier start-ups. While some retailers appear to be “eating” the cost of transportation to grow their market share, watch this sector develop as it achieves more critical mass.
In addition to UPS, other carriers that are experimenting with or expanding their same day delivery offerings are the U.S. Postal Service, FedEx, and Dynamex, and numerous other local and regional carriers.
The Ultra Slow Economic Recovery
Mr. Goodwill states that:
Unlike other economic recoveries, this one is particularly slow. As we approach year end, the United States still has an unemployment rate of 7.9 percent with over 23 million citizens out of work. The high unemployment and high debt levels have provided strong headwinds to the recovery and have had a direct effect on trucking firms throughout North America. Combined with a lack of consumer confidence, this has inhibited trucking firms from making investments in new equipment. It also limited the requirement for qualified drivers. A serious driver shortage did not take place in 2012. Ample truck capacity also helped put a lid on freight rate increases.
While there was some encouraging economic news this year (e.g. uptick in housing starts, improvement in household balance sheets), the ongoing debate over America’s debt levels and so-called fiscal cliff, is not helping spur growth. The modest economic recovery has been a major transportation story for the past couple four years and 2012 was not a breakout year.
The slow recovery has been a major factor in the restructurings underway at both FedEx and the United States Postal Service. The slow recovery in the United States more than likely made it easier for carriers in the industry to meet the rapid growth in demand for more resource-demanding residential deliveries.
Trucking Takes to the Rails
Mr. Goodwill’s inclusion of transportation of truck trailers by rail (trailer-on-flat-car or TOFC) as a top story is somewhat surprising. TOFC service has been a major component of rail revenue for well over two decades. However, Mr. Goodwill noted that:
The year 2012 was a “transformational” period for intermodal transportation as trucking companies, large and small, added intermodal service to their portfolios. Many truckers realized that long haul drivers are getting harder to find. As a result, they chose to focus their resources on short and medium haul lanes and shift their longer haul lanes to intermodal service. This led truckers to view the railroads as service providers rather than enemies.
J.B. Hunt has been the leader in migrating much of its full load business to intermodal service. Schneider National, another huge player, is now moving a third of its truckload business on the rail. U.S. Xpress and Swift Transportation are growing their intermodal programs. To support these initiatives, Norfolk Southern and CSX expanded their eastern U.S. networks to handle increased volumes. To further bolster their service, the railways have been offering “expedited” rail service on distances less than 1000 miles and supplying 53 foot domestic containers.
The CEP industry, and in particular United Parcel Service has long been one of the largest if not the largest domestic user of intermodal rail. Rail intermodal schedules identify specific trains as UPS trains given the large number of UPS trailers carried. The development of expedited trains on key lanes under 1,000 miles allow UPS, and FedEx to transport trailers by rail that would not have happened before.
Natural Gas hits Energy Utilization Milestone
Given the number of highway miles driven by the delivery vehicles in the CEP industry, identifying ways to reduce delivery vehicle operating costs has made CEP firms leaders in testing alternatives to diesel and gasoline fueled engines. Natural gas fueled vehicles are one of the approaches employed and as of December of 2011, United Parcel Service had 1,100 natural gas powered vehicles in its global fleet including 59 long haul tractors. Mr. Goodwill notes that cheap natural gas may start looking like an attractive alternative for fleet vehicles.
One change went unnoticed this year by most shippers and carriers in the United States. In April 2012, the amount of electricity generated by natural gas-fired power plants equaled that produced by coal-fired plants for the first time, with each accounting for 32 percent of total U.S. power generated. This is the lowest coal percentage since the 1970s. The sheer abundance and low cost of natural gas is making it an attractive option as an alternative fuel for trucks, and potentially for locomotives and container ships.
While the percentage of natural gas as compared to diesel fuel is very small at present, the conversion process could be driven by early adopters seeking to secure cost savings. Of course, the widespread use of natural gas would require major investments in infrastructure. Nevertheless, this year’s milestone event and the willingness of selected truckers (e.g. Robert Transport) to purchase and trial LNG vehicles suggest that this is a trend that needs to be followed closely in the years ahead.
Forward Thinking Carriers Invest in Technology
Mr. Goodwill concludes his list with a comment on technology.
Financially stable carriers seeking to gain competitive advantage invested in technology in 2012. This included fuel efficient equipment, testing LNG or hybrid equipment, improved driver screening and training. Creating and growing their brokerage/logistics businesses was also a trend. Larger carriers made investments in technology beyond basic load matching services to increase their margins. Transportation management as compared to basic freight brokering continues to evolve. Using a managed transportation management system (TMS), companies can provide contract management, load optimization, freight auditing and payment. The top carriers are using yield management tools to rank their clients on profitability and tailor rate increases to specific shipper requirements.
The Story that Mr. Goodwill Missed
Key to Mr. Goodwill’s comment on technology is the phrase, “financially stable carriers. The effective “bankruptcy” of the Postal Service, regardless of the cause, creates great risk to the United States goods distribution network and in particular the distribution of e-commerce shipments to households. Increasingly, UPS, FedEx and other carriers are relying on the Postal Service for last mile deliveries as consumers expand the range of products they buy on-line and the average shipment weight for consumer on-line purchases declines and consumers demand free and/or low cost delivery. Given the current importance of the Postal Service in the business-to-consumer supply chain, the failure of Congress to put the Postal Service on a path to financial viability will likely have at least as big an impact on the United States transportation market as any of the other stories that he noted.
The financial weakness of the Postal Service in 2012 was so severe that there was concern last spring that it could have run out of cash in September or October. Fortunately, heavier demand for bulk 1st Class mail throughout the year and an unprecedented volume of political advertising mail generated enough revenue to prevent the Postal Service from running out of cash. Unfortunately, 2013 is not an election year and the Postal Service will not see a boost in revenue that saved it last fall.
Congress’s failure to act in 2011 or 2012 on Postal Service reform has put the Postal Service in a weaker long-term competitive position. The chance that the Postal Service could run out of cash has been a driver in its investment decisions for information systems, vehicles and network restructuring that is critical to meet current and future needs of its customers since at least fiscal year 2010. Projects that would ensure that the Postal Service remains a viable delivery partner for the private sector have been delayed, deferred or held back from full implementation. Steps to restructure the workforce through offers of early retirement incentives were delayed and incentives were likely set at below-optimal levels that will likely result in higher hourly labor costs in the future than would be ideal. These delays have more than likely raised the cost of delivery of online sales to households and increased interest in shippers in finding alternatives to the Postal Service for last-mile delivery.
By the end of the decade retail sales competed on line and delivered by the CEP industry will represent between 30 to 50 percent of the sales of items that could be delivered. The failure of Congress to act on USPS reform in 2012 will shape this market and determine if the Postal Service is still a viable provider of last-mile delivery at the end of the decade. Whether Congress can repair the new wounds in the Postal Service’s competitive position that it created by delaying postal reform in 2012 will likely be a top ten story in 2013.