Industry Challenges: 2015January 22nd, 2015

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Fiscal Pressures across all service offerings

Driver shortage and retention

Regulations and hours of service

Capacity Railroad investment Equipment costs Productivity

Intermodal

Over the road

Brokerage

Dedicated Trucking

Driver Market Dynamics

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• Stagnant wages• Fewer qualified drivers

• Drivers are retiring/aging and are not being replaced at the same rate)• Alternative job market (construction, oil industry, ports, etc.)• Higher requirements for career entry (regulations, hair testing, ELDs)

• Fierce driver recruiting competition• Strong freight demand

Driver Landscape

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www.ccjdigital.com/driver-shortage-series-the-challenge-of-finding-good-drivers-its-impact-on-the-shortage/

Equivalent when adjusted for inflation

Stagnant Wages

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Source: FTR AssociatesDriver Shortage Worsening

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Driver Shortage WorseningThe industry needs to find roughly 96,000 new drivers annually to keep pace with demand. If freight demand grows as it is projected to, the driver shortage could balloon to nearly 240,000, according to ATA data.

Source: ATA

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Productivity•Driver and asset productivity decreasing•11 hour work day results in about 7 driving hours•34 hour restart reduces hours by 15% •ATRI survey revealed 80% of carriers had loss in productivity•Carriers have segmented freight into two groups

•Inefficient, unproductive freight•Not in carrier’s network•Time consuming- empty miles or over one hour loading/unloading•Dwell time on the load•Leads to higher rates

•Productive, favorable freight•Better pricing•Efficient loading/unloading or preloaded•Good payload miles•Within carrier’s network

Source: ATA

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Railroad Issues•Service recovery is happening slowly due to growth

•7.9% intermodal growth•5.6% carload growth•21.5% increase in grain movements

•All commodities use the same tracks, locomotives, crews, etc

•Service issues related to locomotive and crew capacity •Only one company (GE) producing new locomotives until 2017•Recruiting and hiring crews has become more difficult

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Railroad Investment•CAPEX spend

•Increase of 9% in 2014 across Class I railroads•Railroads will invest over 18% of annual revenues on capex- 3% in “average industrial company”

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Capacity•Likely to remain near tipping point with new regulations set for 2016

•Per FTR Forecast- shipping costs will rise in 2015•Consolidation, optimization, and mode conversion important•Due to increase in labor and purchased transport costs

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Pre-recession used as base (4Q-2006)Driver Market Heating Up

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Increasing Driver DemandEmployment in transportation and warehousing.Seasonally adjusted in thousands

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Alternative Job Market

$38,

000

$38,

000

$41,

600

$47,

200

$80,

000

+

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Competing Jobs ConstructionOver-the-month change, January 2011 – March 2014Seasonally adjusted in thousandsBureau of Labor Statistics, Current Employment Statistics survey, April 04, 2014

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Competing Jobs ManufacturingOver-the-month change, January 2011 – March 2014Seasonally adjusted in thousandsBureau of Labor Statistics, Current Employment Statistics survey, April 04, 2014

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• Generous unemployment benefits• Alternative job demand increasing with improving economy

• Construction, oil field, drayage, etc.

• Stricter qualifications• CSA, Hair Testing

• Technology• ELD’s- late 2015/2016

• Retirement• Private fleets

Factors Reducing Driver Supply

Source: National Transportation Institute; The Journal of Commerce

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Changing Hours of Service (HOS)

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a

Industry Turnover IncreasingQuarterly Truck Driver TurnoverSource: American Trucking Associations

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Aging Driver Demographic Source: National Transportation Institute

51% over 45

17% over 55

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4in % of workersover age 55

transportation industry ranks

TH

Aging Driver Demographic

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New Driver Deficit and Recruiting

66,500

115,000

Annual TrainingSchool Graduates

Annual Expected New Driving Jobs

Source: Commerical Driver Training Foundation; National Association of Publicly Funded Truck Driving Schools

Georgia Center of Innovation for Logistics

GAP48,500 drivers

Retention vs. Recruiting• Emphasis has to be on retention• Driver regard and in-truck specifications• Home every weekend and get consistent miles

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Driver Turnover %

Annual W2 (in thousands)

$40 $42 $44 $46 $48 $50 $52

50%

75%

100%

125%

150%

DedicatedIntermodal

TruckSource: J.B. Hunt CDP Report (3/21/2014)

$54

IBU Wage vs. Turnover

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Drayage Flashpoints

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Cost ofDelays

Freight Market Dynamics

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• Record increase in demand• Supply is constrained by demographics and regulations• Regional supply is seasonally inelastic• Mode optimization is increasing• Shippers seek comprehensive and value-added partnerships

Supply Chain Landscape

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• Driver recruiting and retention• Government regulations CSA Map21 HOS CARB

• Equipment age and higher cost basis• Cost of fuel and managing budgets• What if we experience 2.5-3% GDP growth?

Supply Chain Challenges (Over the next 2-5 Years)

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• CSA• HOS update• EPA and NHTSA- new engine standards- between 2015 and 2018

•reduce emissions by 29%•Cost of engine and maintenance unknown

• What if we experience 2.5-3% GDP growth?

Government Regulations(Over the next 2-5 Years)

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Strengthening Freight DemandFTR Truck loadings Index: Actual and Year/Year PercentageSource: FTR Associates; Index: 2000=100

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Pricing Moves with Demand

Dry Van Refrigerated FlatbedMDI

UPDATE COMING

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Truckload Rates IncreasingTruckload Spot Index vs. Contract PricingSpot Market Imbalances Tend to Lead Contract Pricing Directionally

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Truckload Rates IncreasingSource: Transport Fundamentals, FTR Associates’