This time last year, the economic outlook was bleak and getting bleaker. Presently, things are better and seem to be fairly steadily (albeit not rapidly) improving. What does this mean for buyers of transportation services now and over the longer term?
The cost of buying transportation capacity and shipping product in every mode will continue to increase, albeit with periodic "adjustments" along the way. In part this will be due to rising costs (notably labor and fuel), a reduction of excess capacity, and, simply, carriers' ability to bump up rates from the low points they reached during the past 18 to 24 months.
Article Figures
[Figure 1] Annual productivity index for the U.S. rail industryEnlarge this image
Within this general trend, railroads and their customers are facing a unique set of challenges related to capacity constraints. By gaining some historical perspective on these issues, shippers will not only better understand what's going on but also develop strategies to deal with market realities. Frankly, this is not nearly as simple as saying "Just regulate rail rates so they can't take advantage of us"—even though some seem to think it is.
From Staggers to the recession
Part of the challenge for buyers is dealing with the legacy of the Staggers Act in 1980, which deregulated certain commercial aspects of the railroad industry. Since the passage of that law, rail rates generally have fallen significantly—even as the carrier landscape consolidated to the "Big 6" we have in North America today. This also happened to rates in other modes that were deregulated. That means for 30 years, with few exceptions, capable supply chain managers at well-run organizations were able to cut their transportation costs in virtually all modes. From the railroads' perspective, that was okay because during that same period, productivity—driven by smaller crews, bigger locomotives and cars, longer trains, and more automation—reached its highest point in history. And, for the first time since the end of the World War II era, railroads' earnings approached and in some cases actually met their cost of capital. This improvement attracted a more robust infusion of capital and led to an unprecedented level of investment in infrastructure as well as in new locomotive technology and larger-capacity rolling stock.
This was all very good news until the productivity curves began flatlining in 2000 and then declining in 2006. (See Figure 1.) At the same time, the Class 1 railroads' networks began experiencing congestion, and service suffered.
In an effort to regain margin, railroads raised some rates (in general, only "slightly," according to the U.S. Government Accountability Office) beginning in about 2001.1 But the result was that shippers ended up paying more money for service that wasn't as good as what they'd received in the past. Meanwhile, railroads were faced with having to make much-needed and very large-scale investments, mostly in infrastructure improvement and capacity expansion.
But the long-term issues of capacity expansion and infrastructure improvement were shunted aside by the 2008-2009 recession. Because of the drop in economic activity, freight volumes declined, which led to more fluid networks and improvements in service quality. As a result, it became easier to forget the looming capacity problem. But this is only a temporary reprieve. As freight volumes return and continue to grow, the rail network will again become strained unless two things happen: the railroads expand capacity, and they continue to improve their operating efficiency.
A map prepared for the Association of American Railroads shows what the rail network would look like in 2035 if capacity has not been added, and it's not a pretty picture. Major portions of the network—particularly in the middle of the country—are predicted to have reached or exceeded capacity. If you combine that picture with what the highway infrastructure is predicted to look like at that point, the whole view becomes even more distressing for those who are tasked with moving product (or people).
The bottom line is that building and maintaining an effective national transportation network with sufficient capacity will require immense infusions of capital from both the public and private sectors. Best estimates put the rail capital shortfall (what's needed versus what the carriers expect to generate from earnings) at about US $39 billion. That figure, however, does not reflect the predicted $12?15 billion required to meet the federally mandated Positive Train Control initiative that's designed to prevent collisions.
Start now
As a shipper, why should you care about the future of railroad infrastructure? Because more money is needed, and it basically will have to come, in some ratio, from two places: increasing revenue (rates) and decreasing costs (making operations more efficient). The only other sources are investment capital, which is only attracted by strong growth and returns, and public funding, which comes from a well that already serves many other constituents.
The railroads are adept at minimizing cost and maximizing efficiency. But their ability to wring out sizeable additional productivity gains is diminishing because they have already made most of the easy-toachieve improvements. This does not mean that new ways to boost productivity won't be uncovered. New technology (such as electronic braking, flexible blocks, enterprise asset management for linear and rolling assets, and integrated information technology platforms) may open a new frontier in productivity, but timing will be a factor.
The sum of all this is that rates across all modes will rise, as will the total cost of shipping cargo (rates plus fuel and accessorial charges). The question is, how much and when? There will be some fluctuation, but the overall trend will inexorably be upward.
This may sound like it's too far in the future to be of practical use now. But I would argue that the best long-term strategies incorporate tactics for dealing with these broader, more complex issues, and achieving that takes time, strategic thinking, and discipline. Successfully serving customers while confronting some very challenging conditions in the future will require vision and planning that begins today.
You can take steps in the short run to begin this process by focusing proper and rigorous scrutiny on your existing and anticipated supply chain network, and then developing plans to execute an integrated, multimodal strategy that strives to account for the changes you foresee.
History can be instructive if we pay attention. In the 1960s a vice president of the then-bankrupt New Haven Railroad boldly stated, "We have vast problems and only 'half-vast' solutions." This approach will not suffice in the future. And procrastinating is not a good option.
Endnote: 1. "United States Government Accountability Office Report GAO-07-94," October 2006.
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.