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May16, 2016

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SURFACE & DOMESTIC TRANSPORTATION TRUCKING | RAIL | INTERMODAL | AIR & EXPEDITED | DISTRIBUTION 20 THE JOURNAL OF COMMERCE www.joc.com MAY 16.2016 By William B. Cassidy U.S. SHIPPERS AND trucking companies are riding a pricing roller coaster with more stomach-punishing ups and downs than the Coney Island Cyclone. Derek Leathers, president and COO of Werner Enterprises, would like to shut the ride down. "I'm not casting blame. I'm question- ing why we do it," Leathers told the 2016 NA SSTR AC Sh ippers Conference in Orlando, Florida, in April. He referred to what he called "aggressive procurement behavior" on the part of shippers looking to drive truckload rates lower in a soft market. Leathers threw down a gauntlet in a room filled with customers and potential customers. Shippers, however, remember the rapid increase in truck spot and contract rates in 2014, price hikes that carriers said were necessary to pay higher driver wages and invest in new equipment. "We knowingly and willingly go into these cycle shifts with aggressive behav- ior, and there's a better way," Leathers said. That better way involves collaboration to keep long-term shipping costs low and still provide remunerative rates. There is still more capacity in the truck- load market than available freight, thanks to overly optimistic forecasts more than a year ago and a record-breaking round of new truck orders and sales in 2015. Pricing power has swung back to shippers, and they're not afraid to use it. Some would ask, why should they be? In an economy that expanded only 1.4 percent in the fourth quarter of 2015 and may barely have grown in the first quarter of this year, companies of all stripes are under increas- ing pressure to reduce costs, and transport costs are a target. Logistics managers have told The Jour- nal of Commerce they are being told by CEOs and CFOs to pursue double-digit savings from transportation providers, the kind of savings that can gut partnerships and imperil value- added services carefully developed through collaboration in recent years. "All it takes is one executive to ques- tion why rates have not dropped as fast as fuel prices," one shipper said. "You have to explain there's more to truck pricing than fuel costs." But that push for savings is harder to stave off when transportation is considered a cost center. The pressure on surface transport rates is evident in the Cass Freight Index, the Cass Truckload Linehaul Index and Intermodal Price Index, all measures of freight volume, shipper spending and pricing drawn from data from more than $25 billion in annual freight bills. The Cass Truckload Linehaul Index dropped 0.6 percent year-over-year in March, the pricing index's first negative reading since May 2010. The Cass Inter - modal Price Index slid 3 percent in March, following declines of 2.2 percent and 3.8 per- cent in January and February. The Truckload Linehaul Index peaked in January 2015, rising 7.9 percent year- over-year, before beginning its long slide into 2016. The 0.6 percent drop in the index doesn't indicate a slower growth rate, but an actual decline in truck rates that is pushing intermodal rates lower. Several truckload carriers, including Werner, are blaming soft pricing for a year- over-year drop in first-quarter revenue. "Our truckload services experienced pricing pressure throughout the 2016 first quarter, as industrywide truck capacity was more readily available compared to the 2015 first quarter," Jim Gattoni, president and CEO of Landstar System, said in a statement. The trucking companies are sending a not-too-subtle warning that customers seeking aggressive price cuts when capac- ity is plentiful may be punished when supply tightens again. They also see the pricing pendulum swinging back toward them in the not-too-distant future. "We're seeing massive truck order can- cellations," Leathers said at the NASSTRAC conference. Data from freight analyst FTR shows March 2016 North American Class 8 truck net orders declined for the third straight month to 15,800 units, the lowest net order level since September 2012. Net orders for Class 8s dropped 37 per- cent year-over-year in March, according to FTR. That's a real sign of capacity contrac- tion the market is ignoring, Leathers said. Knight Transportation President David Jackson said he expects truck capacity to contract even before the electronic logging device mandate takes effect in December 2017. "We're just looking at new orders, used equipment pricing and non-contract rates," Jackson said. "We think we've hit the bottom, in terms of supply being added to the market," he said. "We think supply is coming out of the market. We think we'll see a little bit of progress each month as time goes on. By the time we get to the fall, things are going to feel a little bit different." JOC Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy _joc. COLLABORATING ON COSTS It's time to for shippers and trucking operators to end the punishing boom-bust rate cycles, Werner chief says

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