The COVID-19 (coronavirus) pandemic has forced a priority shift among transportation providers (i.e., carriers). While carriers were previously consumed with moving people and goods to maximize efficiency, they are now preoccupied with maintaining the existence and integrity of transportation systems that run on as small a workforce as possible, using as few resources as possible.
Fuel taxes, vehicle sales taxes, vehicle registration fees and other mechanisms to raise funding for transportation are being tested by reduced road travel during the pandemic. Federal funding for transportation, which accounts for about one-third of total funding for transportation, grew 4.6% in 2020...but not enough to entirely subsidize the lost revenue from state taxes and fees. Carriers are thus contending with jarring shifts in funding that make it even harder to sustain baseline capacity.
In spite of more stringent and demanding operating requirements and unexpected budget shortfalls, carriers have prevailed over the pandemic’s challenges so far and are now gearing up to return to normal operations. Minimizing the time and costs associated with transporting goods, as well as the energy consumed during the process, remains a top priority for carriers in 2021. As the expanding economy induces carriers’ renewed devotion to maximizing efficiency, their recovery hinges on the imposition of rate increases to fortify their financial position.
Demand for surface transportation to distribute goods remains high, particularly as economic activity picks up. Trucking capacities are still relatively low, however. With many drivers still sitting out to avoid contracting or spreading the virus, there are less trucks on the road than there otherwise would be. This limited supply is pressuring road transport rates higher as shippers bid more for truckload contracts. Truckload carriers are expected to take advantage of the rising demand by steadily increasing rates through 2021. Meanwhile, widespread and ongoing fleet electrification initiatives will temporarily inflate truckload carriers’ operating costs. Though some carriers have pledged to absorb all of their electrification costs, others are expected to use the costs to justify further rate hikes.
Cargo aircrafts have been in tight supply due to the vast number of planes that were parked and immobilized at the onset of the pandemic. Moreover, because air travel has been hampered throughout the pandemic, there is less capacity to transport goods via empty belly space on passenger flights. As cargo and passenger planes are brought back to market en masse, especially during widespread efforts to transport and distribute vaccines, air cargo carriers will have to strategically manage capacity to balance mounting demand with the need to shield themselves from further losses due to less-than-optimal operational efficiency. This challenge is likely to yield steep price increases for airfreight in 2021, as well as higher carrier-imposed fees.
Shippers are also facing higher transport rates from ocean carriers. International trade has been significantly hampered during the past year, and ocean carriers have been making up for lost revenue by hiking up prices for essential and ad hoc transport services. This increased pricing power is expected to persist through 2021 as ocean carriers continue enforcing higher rates in order to guarantee prioritized and on-time deliveries for shippers. Some ocean carriers, such as Cosco Shipping, have been called on by foreign governments to accelerate freight ships’ return to market; should carriers comply, the sudden influx (however small) in ocean freight capacity may slow price growth.
As a result of shippers’ difficulties securing capacity on air routes (which are expedited), surface-level routes (which are practical over short distances) and ocean routes (which are typically least expensive), rail and intermodal transport volumes are above pre-pandemic levels. Sustained growth in imports to supplement domestic manufacturing capacity is also straining intermodal capacity to an extent, fostering modest price increases for rail transport. Nevertheless, demand growth for rail transport is likely to slow due to the relaxed pace of recovery in the rail-dependent heavy industrial sector, in addition to rapid strengthening of the trucking sector. As a result, rail transport rates are expected to rise, albeit minimally, in 2021.
In short, pre-pandemic, shippers had plenty of choice between different rates from different carriers; now, less so, and their leverage is not expected to recover any time soon. The limited number of transport vehicles in operation, in addition to carriers’ reluctance to bring back capacity, means that shippers are and will continue to be disadvantaged during contract negotiations, and will likely be stuck paying higher transport rates for the foreseeable future. Like most else, the pandemic’s final impacts on the transportation industry remain unclear. In the meantime, shippers should take care to cultivate existing relationships with carriers to develop incentives for carriers to keep price growth manageable.
By: Ayanna Leaphart
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