Carriers' Balancing Act:
Managing Capacity for Profitability as Demand Declines
The Journal of Commerce, March 9, 2009
By Satish Jindel

Transportation industry leaders need to take bold and immediate action to manage an unprecedented decline in demand that threatens their survival and the viability of their customers' supply chains.

All industry segments are operating at excess capacity - from global ocean container liners to local same day couriers. Companies with significant fixed assets, such as shipping lines, LTL trucking companies and the nation's giant parcel carriers, are in the most difficult position.

They've already cut capacity drastically. Ocean carriers are combining services and laying up ships, while railroads sideline railcars and motor carriers park tractor-trailers. Thousands of jobs also have been cut: 15,000 at DHL Express, 3,750 at YRC, 1,500 at FedEx Freight and 1,450 at Conway.

With executives of large parcel and trucking companies unable to provide earnings guidance for the first quarter and no expectation of economic recovery for the rest of 2009, the industry needs more prudent actions to reduce capacity at a rate faster than the decline in demand.

Overcapacity is affecting pricing in every mode in every segment. On the seas, Asia-Europe rates have dropped from $3,000 to $300 per container within last 12 months. This is the impact on pricing after industry capacity has been reduced by 1.35 million TEUs - 10.7 percent of the container fleet.

The imbalance in air freight capacity and demand is even greater. While capacity in the North America market declined 5.4 percent in December year-over-year, demand plummeted 22.6 percent. That's raising expectations among shippers for a further decline in pricing, which will lead to lower margins for air freight capacity providers.

In the express and parcel market, fourth quarter results were grim. Even with DHL's withdrawal from the U.S. domestic market, which caused a market share shift of about 1.2 million parcels per day, UPS, FedEx and the U.S. Postal Service saw average daily volumes decline across their domestic services. Without the benefit of DHL's volume, the three competitors would have experienced a sharper decline of 12.4 percent in express volume and 5.6 percent in ground volume.

The LTL industry has 25 percent overcapacity based on terminals, dock doors and tonnage handled per door. Furthermore, the most recently released quarterly results of the publicly owned LTL carriers show a 10 percent decline in tonnage and 10.8 percent decline in shipment count, suggesting overcapacity could get worse in the coming months.

Yet some LTL carriers continue to add capacity in a bid to capture market share, benefiting from their competitors' financial woes. Such efforts are causing pricing problems for the industry, pushing rates even lower and healthier carriers into financial difficulty.

In the truckload segment, carriers have already reduced rates. Some large carriers have downsized their fleet, but there is still overcapacity.

Increasing reliance on brokerage may be contributing to the problem. Trucking executives may insist on the need to maintain a young fleet, but they accept other carriers' older trucks via their brokerage division. Although new trucks bought in 2009 will replace existing trucks and not add to the fleet size of a specific carrier, if used trucks aren't parked, they will add capacity through the brokerage market and thus create pricing and profitability problems for the entire industry.

With fourth-quarter 2008 GDP down 6.2 percent and frequent downward adjustment to GDP for the four quarters of 2009, all industry segments will face further decline in tonnage and shipment count for the foreseeable future. This means carriers of all stripes need to look at further cuts, especially in capital spending on assets. They need to think about the industry's capacity problems - not short-term opportunities.

This is not the year for carriers to buy new trucks, expand facilities, or invest in new services that add cost without hope of recovery via higher prices. With such an unfavorable outlook for demand, truck manufacturers should also consider their own capacity reduction.

The rush for new trucks in 2006 resulted from unrealistic growth projections, the expectation of higher engine costs in 2007, and the need to reduce driver turnover. Although engine costs will also increase in 2010 as new, cleaner diesels are rolled out, the additional growth and driver demand factors are not expected to change materially over the next two years.

The solution to industry profitability and carrier is in doing the basics: keeping capacity in balance with demand.