2017 Transportation Outlook 

By Nick Binetti, 2016 KC SmartPort Summer Intern

Shipping is vital to the everyday life of the average consumer and in the ever changing world of commerce. As technology evolves at rapid rates, the transportation industry must change and adapt as well in order to meet increased demand for faster delivery times. eCommerce continues to grow as more and more people elect to shop online from the comfort of their own home or on mobile devices while they are on-the-go. This trend has led to the need for innovation by companies and shippers to ensure their supply chains are able to meet the time and place expectations of their customers.

2017 should prove to be an interesting year in the realm of transportation as technology continues to play an increasingly critical role in the day-to-day operations of companies all over the world. The Internet of Things (IoT) is on its way to providing the world with more connectivity than ever before, and the effects are being felt in the transportation industry with the increased usage of technologies like RFID tags. The importance of high quality and efficient inventory and communications systems continues to rise as companies seek to optimize supply chains and minimize lead times.

Looking ahead, 2017 has a great chance of being a prosperous year full of growth and innovation that will most likely set a new precedent for speed and quality in the transportation industry. The following sections take a look into the expectations for 2017 in the various modes of transportation in the industry on a national and global scale as well as a specific focus on the Kansas City region. 

Global

2016 has proven to be an interesting and eventful year economically, politically, and socially. Geopolitical tensions are high all over the world with a high concentration in the Middle East. The European Union has seen a shake up as the United Kingdom voted to leave the EU. World economies reacted immediately as a result of the uncertainty following the British exit (Brexit).

According to World Economic Outlook, growth in emerging markets slowed for the fifth consecutive year, but still accounts for more than 70 percent of global growth. Meanwhile, advanced economies have continued to modestly recover and financial conditions in those economies remain consistent. Despite political tension and economic uncertainties around the world in 2016, global growth is still projected at 3.6 percent for 2017, a .2 percent increase over the 2016 projection. Emerging markets will play a key role in this growth as they continue to develop higher quality infrastructure and can participate more actively on a global scale.

Global trade has been given a massive opportunity with the opening of the expanded Panama Canal.  As vessel size has increased a great deal in recent years and an enormous amount since the Canal opened in 1914, the expanded canal will revolutionize the speed and efficiency with which cargo can be moved from the Atlantic to the Pacific and offer new route options for the larger ships that have previously been unable to use the canal.

The World Trade Organization released a World Trade Outlook Indicator in July 2016 that was at a reading of 99.0, which signifies that the WTOI is slightly below trend and predicts sluggish growth in the coming months. Heading into 2017, the general growth trend can be expected to pick up as a new year often brings renewed optimism. Despite the slowdown in certain areas, the recovery in developed markets as well as the certainty in key emerging markets should bring an uptick in growth in 2017. 

 

Seaport

The Panama Canal Expansion will disrupt the container shipping industry in 2017 as shippers seek to innovate shipping lines and utilize the widened canal to provide the highest level of service to customers. In addition to the canal expansion, alliances among shipping companies have formed in the last 18 months in an attempt to stabilize the market and combat the still falling freight rates. Orders for the largest vessels the ocean has ever seen are being fulfilled, allowing larger companies that own these massive vessels to take advantage of economies of scale and scope. These factors are changing the landscape of ocean freight as smaller companies that are not diversified into other industries are struggling to keep up. Falling rates caused companies to scramble and saw some struggling to simply stay afloat driving these companies to form three major alliances.

According to Supply Chain 247, more than 100 neo-Panamax vessels had made reservations for commercial transit prior to the new set of locks opening on June 26, 2016. These larger vessels are creating issues for US ports that have previously not been required to handle vessels of this size and in some cases do not have the necessary infrastructure. According to JOC, the Port of Boston is getting close to having the capability to handle neo-Panamax vessels. Additionally, the Virginia Port, specifically the Norfolk International Terminal, is going to receive investment dollars to add much needed capacity to an overloaded port. This added capacity is vital as the volume of products passing through the expanded canal and reaches the East Coast of the US increases.

The most recent edition of the Port Tracker report released by the National Retail Federation states that growth is on the horizon as trends return to normal. The holiday season is typically a peak season and could potentially give the shipping industry the boost it needs to start 2017 on the right foot as shippers continue to regroup and find ways to remain competitive. The Port Tracker report stated that although the number of cargo containers is down, the state of the market is not as poor as statistics seem to indicate. The value of the items in the containers plays an important role, and the number of containers alone does not always accurately reflect retail sales or employment. The recovery and stabilization that is beginning to be seen are positive signs for a bounce back year in 2017. 

Air

JOC.com reports that 2016 has been a disappointing year for air freight as economic and political uncertainty have increased this year. Global trade has been fairly stagnant since 2014 and air cargo has followed suit. Growth has been minimal in recent years and 2016 was no different as demand for air freight slid in several markets all around the world. According to the International Air Transport Association, jet fuel prices in the last year have dropped 17.8 percent. While the jet fuel price drop is noticeable, many shippers have developed efficient practices utilizing other modes of transportation and may struggle to be convinced that the air cargo market will remain advantageous enough to justify increasing usage.

As eCommerce becomes more commonplace in developed economies, air cargo has an opportunity to resurface as a viable mode of transportation despite soft demand. A tough 2016 has stifled the optimism of many but airlines and manufacturers have been hard at work to find a way for air cargo to mirror the relatively robust growth in passenger traffic. Air cargo has proven to be a difficult market in 2016, but small improvements mid-year are giving groups in the industry a glimmer of hope for 2017 and beyond.

Trucking

Truckload carriers are experiencing a buyer’s market right now according to logisticsmgmt.com’s 2016 State of Logistics: Truckload report. The truckload sector is highly fragmented with the top 25 carriers currently making up approximately 8 percent of the $310 billion market. Comparatively, the top 25 carriers in the LTL industry control around 80 percent of their $36 billion market. This fragmentation creates a lack of pricing power for truckload companies when it is not the peak season. Data from SJ Consulting shows that shippers are in the drivers’ seat as truckload pricing has fallen due to lower load volumes. 

According to Kevin Abbott of C.H. Robinson, the truckload market is currently soft in terms of demand and capacity is plentiful. He believes the Third Party Logistics (3PL) market is growing faster than the overall marketplace and customers are enjoying the quality and flexibility offered by the highly fragmented contract carrier market. A trend being seen in the trucking industry is customers’ desire for near-time or real-time information and the better quality service that comes with it. When asked about the “Uberization” of truckload freight, Abbott stated that he believes “the shipper community needs more than just a truck showing up”, specifying that shippers want more of the administrative components and security that carriers offer and the viability is a long way off.

Diesel fuel prices have come down more than $0.38 per gallon between July 2015 and July 2016 according to the U.S. Energy Information Administration. Regulations continue to pose challenges to carriers as they need to ensure they can deliver their promise to customers while keeping up with new rules and practices. While several carriers are highly invested in IT resources, systems like ELDs are viewed as an added expense that does not equate to added value. A significant problem the trucking industry is experiencing a lack of drivers. The high level of capacity has carriers feeling the full effect of the driver shortage and carriers are seeking new ways to attract drivers.

Overall, 2017 should see growth in the trucking industry as carriers seek to maintain and improve relationships with shippers and to solve the driver shortage problem. 

 

 

Rail & Intermodal

While the railcar order backlog still sits near ninety thousand, the delivery statistics are slightly better than expected halfway through 2016. The backlog was down 6.2 percent in the second quarter but is still at a historical high. Locally-based Kansas City Southern (KCS) saw better than expected second quarter profit despite a 1.5 percent dip in intermodal traffic year-over-year. Net income for the quarter was up 10 percent year-over-year due to cost cutting initiatives and a rebound in service following slowed operations in the railroad’s cross-border network in early 2016. Overall freight volume for the company was flat according to joc.com which demonstrates the need for increasing efficiency when freight volumes are low. However, Kansas City Southern CEO and President Patrick Ottensmeyer stated that he was optimistic that business will rebound. He went on to say that it is a new optimism for KCS as it has previously been preceded by the word “cautious.” The outlook for KCS and the rail industry is very positive for the coming year as the impact of investment dollars takes place and current operations are improved.

According to a recent study conducted by Towson University, for every $1 invested in rail infrastructure, on average $10 in economic impact is generated. Investment in infrastructure is key for rail lines as technology, big data, and innovation play critical roles in the achievement of higher levels of safety and efficiency. According to the Association of American Railroads, rail accidents are at an all-time low and it is a direct result of investment in new technologies. The world’s first laser-based rail inspection system is currently being developed by the Transportation Technology Center. This is just one innovation that is seeking to improve the safety of rail lines along with other technologies that are allowing rail companies to monitor asset health while in transit, monitor wheels on rail cars and send alerts when they are in need of repair, maintain optimal track conditions, and much more.

The Rail and Intermodal sector should see improvements in 2017 as investments in technology for rail lines come to fruition. 

 

 

National

With abysmal approval ratings of Congress and a historic election on the horizion, there are several unknown factors that will have a large effect on the direction of 2017. Regulations in the industry as well as trade could see any number of changes based on election results in the U.S. Both trade and safety are hotly debated issues as a result of heightened geopolitical tensions.

One of the greatest challenges faced by shippers is how to optimize last mile delivery.  Silicon Valley is thriving as a test market for new last mile delivery techniques that seek to improve the speed with which consumers receive their online orders. According to supplychain247.com, Amazon has been testing same-day delivery service in San Francisco as well as using bike messengers in New York City, specifically in Manhattan. Another last mile delivery trend is the use of independent drivers competing with established courier firms. This follows the explosive popularity of people using services like Uber instead of taxis. As customers demand faster delivery times, shippers are taking a hard look at final delivery strategies and revamping strategies as far upstream as their distribution networks.

According to the U.S. Bureau of Labor Statistics, the U.S. unemployment rate halfway through 2016 was 4.9 percent, down 0.4 percent year over year. Both Kansas and Missouri have unemployment rates below the national average at 3.7 percent and 4.3 percent, respectively. While the national unemployment rate dropped, it has not been as a result of job creation which has been disappointing in 2016. Many people dropped out of the labor force because they chose to stop looking for work. Until June 2016, many were sure the Fed would raise interest rates because of generally positive job reports until a dismal 38,000 jobs were created in May 2016. However, the New York Times reported that worries were put at ease when jobs roared back in June with a gain of 287,000. The gains were widespread across sectors, although a significant portion were service related jobs. While there have been ups and downs during 2016 and a with new president to be inaugurated in 2017, the U.S. should be in store for continued job growth and economic recovery as most have agreed that there have been improvements since the 2008 crisis.

 

 

 

 

Kansas City Region

The Kansas City region has decidedly put itself on the map as a transportation and logistics hub for North America, and continues to see development that will allow it to sustain that distinction. Four major modes of transportation support the region in the form of four major interstate highways, five first class railways, an international airport, and a port on the Missouri River that is beginning to see investment for revitalization and growth.

Kansas City’s transportation advantage is a result of its access to this variety of transportation options as well as its geographic location.

Kansas City is home to the largest rail center in the United States by tonnage positioned at the crossroads of four major national highways (I-29, I-35, I-49, and I-70). Early discussions are taking place around the development of Kansas City International Airport stages that could increase the amount of air cargo that passes through Kansas City.

Woodswether Terminal at the Port of Kansas City on the Missouri River reopened in August 2015 and has had a stellar 2016 thus far. Currently perceived as an unreliable form of transportation, the Port of Kansas City has been working to change this mindset and increase the usage of the river. Port KC has stated that advantages such as environmental friendliness, lower cost than land shipping, and alleviation of traffic on rail lines and highways are just a few of the major ways that the Port can serve the region. Increased usage of the river and Port could lead to job creation and private investment in the coming years as well.

The advantages of Kansas City as a transportation hub give the region an extremely positive outlook for 2017 and the real estate market in the region has proven that Kansas City will continue to grow in the next year and beyond. In the past five years, the KC region has seen an average of 4 million sq. ft. of speculative space added annually with more than 5.8 million sq. ft. of industrial speculative space added in 2015. Additionally, there is currently 6.3 million sq. ft. of speculative space currently under construction. The Kansas City region is poised to be a national leader as a transportation hub in 2017 and for many years to come.

Amazon announced in July that it will open a third fulfillment center in the Kansas City Region with a new 855,000 sq. ft. building in Kansas City, Kansas and bring over 1,000 new jobs to the area. The footprint of the building is only part of the story as Amazon has plans calling for 2.3 million sq. ft. of usable space. Amazon is dominating traditional retailers in the ECommerce market. According to Fortune, Amazon has digital sales of $71,844,000,000. At second place, Wal-Mart is a seemingly insurmountable distance back at $13,188,000,000. Amazon has demonstrated through its investment in the region that it sees the value of locating its fulfillment centers in a region that can reach 85 percent of the United States in two days or less. According to a 2016 Q2 Market Report from Newmark Grubb Zimmer, Kansas City has an industrial vacancy rate of 6.3 percent which was an increase due to deliveries of 1.3 million of sq. ft. during the quarter. Kansas City has a great deal of activity currently in development for industrial real estate and is positioning itself to be an elite region in the transportation industry.

 

Conclusion

Generally, the transportation industry should continue to see growth in 2017. The U.S. economy is continuing to recover and add jobs. The inauguration of a new president could change the direction that the world is moving in entirely. Transportation is always necessary in commerce, so while the market may change, the industry will find a way to be successful. The Supply Chain industry is on the rise and the number of jobs in logistics is swelling.

Each sector of transportation has its own successes and shortcomings at any given time, but in 2017 there are multiple trends that indicate success. The implementation and integration of technology will improve efficiency and companies are investing in their workforce to gain a competitive advantage in an increasingly saturated market. Consolidation has begun to emerge as a possibility for struggling smaller and medium sized groups and this could play a major role in 2017.

Workforce development has revealed itself as a necessary component in the industry as there are not enough people to meet the demand of jobs. Across the U.S. and especially in transportation hubs like Kansas City, introducing the industry to high school and college students is essential to developing a talented workforce.

By and large, 2017 should continue trucking onward and upward.

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