Freight Rates: The Games Continue
This article originally appeared on FreightWaves.com.
Why Can’t Everyone Get Along?
We are in uncharted waters as a world, a country, and a freight economy. Networks have been disrupted, plants shuttered, trucks parked, and drivers unemployed. Carriers and brokers are doing what they can to get through the worst of the disruption while planning for the restart of the economy as North America emerges from the shutdown. Shippers are using the disruption to lower their shipping costs.
Almost exactly one year ago, our “Where’s My Freight” article called out shippers for channel-shifting freight from contracted carriers to freight brokers to take advantage of the declining rate environment. One year later, shippers are up to their old tricks and channel shifting contracted freight from carriers and brokers to the spot market; and on top of that, some shippers are re-bidding their freight before contract termination. The current freight environment is an even bigger mess, with all parties pointing accusatory fingers at each other.
President Trump has said that truckers are being “price gouged.” This term has also been widely used by carriers to describe the low rates that they are, in some cases, receiving from shippers and freight brokers. Price gouging occurs when the seller (in our case the carrier) charges an “unconscionable,” “excessive,” or “exorbitant” price during a “market emergency” or “declared emergency.” Are carriers charging shippers or brokers an “exorbitant” price? The short answer is no. What is actually occurring is “rate impairment” that is fueled by the shipper’s prime directive – minimize cost.
The hullaballoo that prompted the President’s remark has certainly been at the top of the freight news cycle, and has also appeared in the national news. Truckers, primarily from small fleets, descended on Washington in the “May Day” demonstration to protest low freight rates. The Transportation Intermediaries Association (TIA) president and CEO, Robert Voltmann, was quick to respond to the unfavorable chatter about freight brokers in a video where he stated, among other things, that TIA members average a 16% margin with the 84% balance going to the truckers. A favorite saying goes that “an average is the best of the worst and the worst of the best.” Yes, there are likely some unscrupulous players in the brokerage community that are leveraging the desperation of truckers with the dearth of freight in specific markets; carriers are making their list of these players. But, overall, the majority of brokers are honorable and operate with a written or implied code of ethics.
The real issue is the shippers who let the carriers and brokers skirmish while they continually work to minimize shipping costs. Shippers talk about partnership, driver issues, reasonable scheduling, consistent freight, and more when they need trucks. For some unscrupulous shippers, all this is out the window when the supply of trucks exceeds the demand for trucks. In today’s world, there are shippers that are taking advantage of the international health crisis and making it worse by:
- Breaking contracts and rebidding “contracted” volumes and rates. Then adding insult to injury and having three rounds with progressively lower target rates.
- Adjusting fuel surcharge tables. One recent example immediately reduced the effective FSC .10 per mile.
- Demanding an extension in payment terms up to 120 days. Carriers pay fuel at the pump and drivers weekly. Brokers pay carriers in 30 days or less. Nothing past 30 days works for a transportation provider.
Shippers are the wizard behind the freight curtain with an army of MBA’s, sophisticated modeling tools, and buckets of actual data about their pricing, service levels, lane volumes, loading and unloading times, claims, channels, etc. They use this knowledge to minimize their transportation spend across all market conditions and cycles. The only transparent lens is the shippers, as the shippers are the ones contracting for freight services and paying the actual freight bills.
Would Additional Government Regulation Help?
There is little transparency in the world of freight. Shippers play carriers against carriers, brokers against brokers, and carriers against brokers. It is, after all, the shippers’ freight. Recently there have been two ideas – primarily driven by the trucking community – to “resolve” the rate impairment issue. Both require government regulation and neither really solves the problem:
- Every load must exceed a (yet to be determined) minimum rate per mile – This does not have the backing of any industry affiliated organization, but is a popular topic in social media, XM Radio, and podcasts. This is not a feasible approach, as all carriers have a different price structure and most carriers do not know their true operating cost. Additionally, each carrier operates a different freight network; loads have different values to different carriers depending on their freight network. One nuance here is, what mileage engine will be used to calculate the miles? There should be a standard. KSM Transport Advisors’s clients routinely haul freight below their variable cost to fill in the gaps and optimize their overall freight network yield.
- Force freight brokers to disclose the revenues they are charging the shipper on each load – This concept was championed by the Owner-Operator Independent Drivers Association (OOIDA) in a recent letter to Congress. What is an acceptable margin? Disclosure will only reveal the margin. Who is going to interpret what is acceptable, and, more importantly, what action should the “aggrieved” party take? Mandating an acceptable broker margin screams in the face of free markets. The result will be an administrative nightmare and countless legal battles between carriers and brokers. Should shippers be required to report what they are paying other carriers for similar services?
A Possible Solution to Provide Transparency and Actionable Intelligence (Pandemic or No Pandemic)
Rather than regulate and legislate behaviors, what if the industry created an independent “Freight Rate Transparency Consortium (FRTC)” that provides verified actionable intelligence about shipper, broker, and carrier pricing? Specific pricing elements (linehaul dollars, fuel surcharge, other accessorial revenue, origin and destination zip codes, trailer type, etc.) would be provided on a transaction level to the FRTC by member shippers, brokers, and carriers. The FRTC would then aggregate and anonymize the pricing data it receives to provide its members feedback on lane-by-lane pricing by trailer type and member category (shipper, broker, carrier).
Obviously, detailed parameters for such an organization would need to be further developed. One thing is certain, to avoid conflict and contention, the FRTC would need to transcend the various industry trade groups, TMS providers, load boards, etc., and provide its membership a holistic view of the freight market to support fact-based strategic and tactical decisions.
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