Looming Capacity Concerns & Rising Rates

Written by Neal Willis

capacity concernsAs we enter the end of August, kids are beginning to go back to school and parents are going back to work after vacationing with the kids. The holiday season is around the corner and freight shipments will be ramping up soon. With all motor freight drivers and carriers obligated to comply with the ELD mandate requirements effectively beginning December 18, 2017, concerns over capacity in both the truckload and LTL industries are beginning to hit home.

Arguably, rising spot market rates as of late may be an indicator that the scales have already been tipped in favor of the carriers. The driver shortage and capacity concerns combined with the fact that eCommerce has already contributed to higher freight transportation costs leaves carriers obliged to pass higher freight rates along to shippers. Freight isn’t free. Supply and demand is nearly in balance in the LTL industry and the truckload market has somewhat rationalized as larger fleets have sold off excess equipment and capacity. In the midst of the ramp up for the holiday season, the ELD mandate will undoubtedly remove some capacity from the industry.

When capacity becomes tight in the truckload market, the LTL industry typically ends up getting the freight overflow. With no room to spare in the LTL freight sector, constricted TL capacity will leave both truckload and LTL freight carriers stressed. Some freight carriers are already struggling to keep pace with demand while continuing to provide quality service. Right now it is seemingly all about people and equipment, as two of the biggest challenges to overcoming capacity issues are with the driver shortage and government regulations, both of which are difficult, if not impossible to control.

rising freight ratesAdd to the driver shortage a demographic shift from an older to a younger generation and a list of government regulations that make becoming a truck driver less appealing and more difficult than ever for someone to meet the qualifications necessary, such as drug testing procedures, health screenings, a drug & alcohol database, hours of service rules and speed limiters, and the problem is exacerbated. There’s no immediate solution to the driver shortage in sight, and the ELD mandate is going to make the shortage worse. Some analysts have predicted that as much as 10% of capacity will be stripped from the market because of the ELD mandate alone.

Experts and analysts are warning shippers about the rising costs of freight rates and advising shippers to wrap up freight rate negotiations and secure contractual agreements before the situation gets worse. Freight rates are poised to rise and the capacity situation will undoubtedly drive freight rates higher for shippers. Some 3PLs have already fell victim to higher purchased transportation costs and their profits have taken a hit as a result. Nobody knows exactly just how much capacity will be taken from the market as a result of the ELD mandate, but some will be taken. Given the fact that there’s really not any excess in the industry at the moment, capacity now becomes a real problem for shippers without committed pricing and carrier partnerships, and shippers wise enough to understand these issues also understand they’re going to have to pay a little bit more in order to secure the capacity needed to meet demand.