2008: What's Next for Logistics and Transportation?

This is a "Best of Freightdawg" article

I originally published this in December 2007. Now that we are through the first quarter of 2008, this outlook still remains accurate.

What might 2008 hold for the logistics and transportation industry?

Here's what I think the key issues are and what impact they will have by mode.The key issue above all remains fuel. Security is a hot second.  Technology also has a big role to play along with the "Green" environmental movement. All will combine in unexpected ways to reshape our industry in the next couple of years.

The aggregate of this information is important to consider not only for budgetary reasons but as shippers and carriers enter pricing negotiations by mode.  Rates are important, but its not all about the price.  Available service will also be critical.   There were plenty of instances in 2007 where contracts signed at cheap rates didn't yield priority freight carriage, especially in air freight peak season. If you are a big shipper, you should consider that last sentence and how you will handle the 2008 negotiations.

Air Freight - main deck air freight I think will remain in high demand on the Asian trade lanes but not all because of volume.  European carriers such as Lufthansa shifted freighters out of Asian trades in order to take advantage of higher rates in the Transatlantic markets.  Latin American markets for main deck freight will be strong southbound. I see no reason for that to stop.   

Flights from Europe, North America and Asia to Latin markets remain strong.  Airline belly freight markets globally are reasonably strong and should stay so. Pricing however is much more competitive on the airline fleets worldwide.  The line between what freight should fly versus what freight should go by ocean freight however is blurring some. LCL freight increasingly is taking air cargo as shippers reconfigure their supply chains to adjust for fuel costs.

Airlines - US air carriers will continue to match smaller planes to longer routes in an effort to contain fuel costs. Fuel hedging, which has always been important, but better done by some airlines, will be huge.  Southwest Airlines is hedged through most of 2008 at $51.00 a barrel while open trading runs almost twice that.  Nevertheless, traditional discounters are now going to have to find new ways to compete with the big guys.  While Delta and Northwest emerged from bankruptcy in the spring of 2007 with a new battle plan, the fuel issue is complicating the competitive landscape and impacting their returns.   The recent extension of mandatory pilot retirement age to 65 could also be a complication as high time and highly paid pilots remain on the books instead of being replaced by younger (and cheaper!)  pilots moving up the ladder.   

These two issues could force merger talk to increase as airlines focus on optimizing air fleets and air crew costs.  I'm watching to see if Delta in particular places an order with Boeing to replace their 767's with B787's. An order of around 100 planes had been predicted earlier in 2007.  If Delta sits on it's hands, that means it could be looking at fleet rationalization under a merger before any new planes are ordered...especially since one of the possibilities is Northwest, who is already a big 787 customer. Merger talks for Northwest may also come in play as DHL, its largest air cargo customer, phases out of Northwest's cargo fleet in favor of its investment in Polar Air Cargo by late 2008.  Much depends on whether NWA can replace the DHL express volume.

The Green issue is an interesting one for the air carriers. The public sees airlines as huge fuel users and high carbon polluters.  Continental Airlines marketing department didn't do the industry any favors by offering to plant x number of trees for passengers willing to pay a premium.  That's well meant, but I think takes away from more important operational actions like matching planes with payloads and ranges, ordering the most fuel efficient jets available and optimizing the networks though rationalized services with airline partners.

Trucks and LTL - UPS and FedEx significantly reshaped the US Less than truckload (LTL) market in 2007 by acquisition of Overnite and Watkins Motor Lines respectively.  Using parcel express expertise and planning, both have upped the LTL service level by introducing time definite products in the LTL space.   LTL traditionally is a day definite business.  With parcel carriers now entering that business,  service requirements are going up while margins will go down.   Meanwhile available freight has been shrinking. If shippers can hold freight long enough to make FTL shipments, or zone skip, then they are doing it.   Freight that was moving domestic air is now moving back to deferred air freight, otherwise known as GROUND.   

For FTL, the slump in US housing was a major hit this year. That should continue at least into the first part of 2008. Despite market pressure I believe that the labor market in trucking will be stable going forward because UPS and the Teamsters have already concluded their 2008 contract renegotiation.  That will allow the National Master Freight Contract to be concluded using the UPS contract as a basis.

Parcel - All three major parcel players will take an increase of approximately 4.9% for express shipments in 2008.  However, watch for accessorial fee changes to figure the true cost to ship.  UPS, FedEx and DHL all carried record levels of parcel freight this holiday season, with UPS accounting for 22 million pieces on their largest day. In order to combat the increases I think shippers will work hard to choose deferred modes for parcel and especially on LTL shipments.  The US Postal Service could become an increasing factor in commercial parcel shipping if allowed by Congress to negotiate rates.  The US Post Office is the 800 lb gorilla in the mail room! The Postal Service also has access to the FedEx day air network as well.   

I am also intrigued to see whether the US Government will force the union issue with FedEx in 2008.  FedEx has always claimed its employees need to be covered under the Railway Labor Act while UPS and other Teamster employers are covered under the National Labor Relations Act. Airlines are covered under the RLA and it's much harder to nationally organize under that law. However, with the FedEx folks now offering every single mode and service that UPS has, a difference in labor laws seems outdated. Fred Smith may find himself in front of a congressional microphone again on that this year.

Railroads - Warren Buffett and Berkshire Hathaway decided to buy the ultimate train set.   Buffett invested this year in BNSF, Union Pacific and the Norfolk Southern Railroads. All are major players in the movement of coal and other energy products. With oil being as high as it is and European markets now clamoring for US coal,  Buffett is buying into the primary capacity to move coal and biofuels to market.  Not a dumb guy.  These commodities will drive rail capacity and rail pricing for some time to come.   Buffett strengthened and underlined that strategy this week when Berkshire Hathaway secured 60% ownership of Union Tank Car Company.  UTLX is one of the primary constructors and repair facilities of tank rail cars.   Matching use of the rails with available capacity puts Berkshire in tremendous position to capitalize. 

Ocean Freight - Asian imports continue to drive volumes in the international ocean markets.  Fuel remains the biggest part of ocean transportation costs.  However pressure from security concerns at US Ports in the form of the new Transport Worker Identification Card (TWIC) will force all port workers and those with access to the ports to have background checks in order to work in US port facilities.  Security will add cost to liner infrastructure costs and will show up in the freight rates in due course.   

Green pressures from local environmental groups will also add costs as Southern California ports force new environmentally friendly trucks and truck modifications on local drayage firms. In order to fund the conversions the ports will charge a $35.00 port fee per container. Those fees will immediately show up on ocean bills of lading as surcharges. For mid-size importers these fees almost immediately add 5 figures to the transport budget, and for the really big guys, this number represents millions in cost.   

Look for importers to strongly consider alternative ports in Canada and Mexico such as Prince Ruperts Island in British Columbia, or Lazaro Cardenas in Mexico.   Both have significant rail tie ups with the Canadian National Railroad for Prince Rupert and Kansas City Southern De Mexico for Lazaro Cardenas.   These are two seriously great port alternatives if SoCal is a problem.

APL added exciting new container equipment to the ocean business by introducing 53 ft international ocean containers. While potentially market disruptive, These box sizes will be welcomed by importers of volume cargoes from Asia where they have the order management technology to cut a store level distribution list from origin.

This is my view on the last day of December 2007.    I will look back on these quarter by quarter to see what's changed. With this much cargo in play, along with the major market dynamics of fuel, currency, security, sourcing and the attendant technology,  I am sure much will change.

I haven't even touched on the 3PL and contract logistics markets or supply chain technology. Perhaps I will write on those within the next several days.

Happy New Year.  I think it will be exciting.

Eric

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Comments

[The Legend]

On the port security issue, there are so many stake holders involved. If this is aim at just a few of those stake holders it is not right. Targeting one group over another to imply they need to be identified alerts the general public into a stereo typing mind set. I say id everyone involved with the port operations. Heck a harbor pilot can cause more harm in our water ways than anyone else. Dubai got squash real quick, but the sales of OOCL's terminal on Staten Island NY to a Canadian Retirement Pension Fund and the Sale of Mahr Terminals in Port Newark/Port Elizabeth NJ to a German Bank went through without a hitch.

[Eric]

Hey Leg.

53 foot containers have supporting chassis readily available from APL as well as other parties as this has been a common domestic container size for some time. Any number of domestic intermodal operators already have fully wheeled 53 foot fleets.

Your comment on hedging is an astute one. Southwest Airlines and Alaska Airlines are both well known for being excellent forward buyers of fuel. I think the number for 2008 for SWA is something like $51.00 a barrel vs open market 101 or better. Massive advantage.

I wouldn't worry about foreign port ownership. I think thats all garbage regardless of ownership or management, all ports are subject to the same US Customs and TSA regulations and inspections. The Dubai Ports World (P&O) deal rejection was the most xenophobic, politically minded bullshit I have seen in 25 years in this business. A straight up mix of ignorance and arrogance.

Eric

[The Legend]

TWIC, does this program extend to identifying all port workers including management? Many ports have terminals run by foreign own lines are they included in this scrutiny as well?

53' containers are they going over the road on 53' chassis or just on flat beds? Seems like the added capacity poses a logistics issue or is it just a growing pain? Sort of reminds me when Cma/Cgm started bringing in 45' high cubes into USA.

Fuel costs anyone competing in this market really needs to be sharper on their futures trading to stay competitive, as usual the consumer will fit the bill and those cheap buys at Walmart will be long gone.