Pressures Rise amidst Tightening Capacity and Coronavirus Concerns

A number of general capacity concerns have left some carriers and shippers questioning where the industry is heading in 2020. New regulations and court proceedings have made for numerous challenges in the logistics industry, and the arrival of Coronavirus in the US may overshadow them all.
A number of general capacity concerns have left some carriers and shippers questioning where the industry is heading in 2020. New regulations and court proceedings have made for numerous challenges in the logistics industry, and the arrival of Coronavirus in the US may overshadow them all.

A number of general capacity concerns have left some carriers and shippers questioning where the industry is heading in 2020. New regulations and court proceedings have made for numerous challenges in the logistics industry, and the arrival of Coronavirus in the US may overshadow them all.

In a recent report to clients, Morgan Stanley suggested that rates in 2020 could reach 2018 levels, citing five supply-side factors that will cause truck rates to climb. Among the issues on their radar, they cite new ELD regulations, increasing insurance rates, the “Drug and Alcohol Clearinghouse”, the International Maritime Organization’s increasing sulphur restrictions, and increasing fuel costs.

In December of 2019, the final electronic logging device (ELD) rule required carriers to convert from automatic on-board recording devices (AOBRDs). These devices replace earlier version of ELDs that provided significantly less data and in some cases the capability to alter some data. This new mandate is intended to provide a “safer work environment for drivers,” making the flow of data more accessible and ensuring the data is not compromised according to the Federal Motor Carrier Safety Administration.

2020 also brings steep increases in insurance rates. Juries in lawsuits related to catastrophic accidents have begun to award “nuclear verdicts”. These verdicts, in the tens of millions of dollars, have seen insurance premiums spike up, increases from 50% to 100% have been reported.

Other complications arise from The Drug & Alcohol Clearinghouse, which has been designed to prevent drivers from failing a pre-employment screening with one carrier, then finding a job with another carrier before the positive test appears on their record. This clearinghouse, which aims to speed the reporting of drivers’ positive drug or alcohol tests, was cited as potentially drawing down capacity.

These changes, as well as an estimated 5-33% rise in diesel fuel, have created hardships for many in the logistics industry. The International Maritime Organizations 2020 regulation to significantly reduce sulphur emissions from a 3.5% mandate to a 0.5% sulfur restriction, compound these challenges even further.

Finally, the California Assembly Bill 5, which went into effect in January of this year, is designed to limit the definition of independent contractors. This requires many of the independent owner-operators with whom carriers contract to haul loads to be reclassified as company employees. Although this new bill is currently facing legal challenges, some carriers have already begun to modify their operations in California all together.

“Carriers are being squeezed from both sides, shippers are pushing rates lower to remain competitive with online merchants and others, yet costs of insurance, wages, and maintenance continue to push operating costs higher. Add in the disruption to supply chains from the Coronavirus, and the result is going to be major capacity constraints starting mid-year,” shared Jeff Gerson, CEO of Capital Logistics, a significant player in the temperature-controlled 3PL space.

The arrival of COVID-19 in the United States, and regional clusters being reported, is likely to result in travel restrictions, and upheaval in general for the logistics industry.

As these challenges continue to mount, shippers will have to cope with industry tightening and rely on providers with best of breed practices in place, to ensure reliability and to provide the same level of service in 2020 and beyond.