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COULD WE LOSE CARRIER CAPACITY….WITHOUT LOSING ACTUAL CAPACITY?

Certainly, this question could cause one to scratch his head. If we don’t have a decline in the number of operating authorities, or available trucks, then how could we lose capacity? 

Well, technically, the answer is you would not be physically losing trucks. However, an impact could be felt from recent events with regards to container shipping that would make it feel like less trucks are available. With recent geo-political events, and events at home, shipping to the West Coast has become more feasible than it was a year, certainly two years, ago. As ocean carriers are mindful of events in the Red Sea, combined with an easing of labor tensions at the West Coast ports, freight that in prior years was diverted to the East Coast is now heading back to the left coast of our country.  

As you can see in Figure 1.1, container costs from Asia to Los Angeles are over $1700 cheaper than freight bound for an East Coast port, such as New York. Figure 2.1 shows outbound freight volume for the last year in the Los Angeles market, currently seven percent higher than this time last year.  

So how could this impact capacity? When freight hits the East Coast ports, it’s typically consumed close to the port or at the very least, the coast itself. This means more regional runs. When freight hits the West Coast, typically that freight is destined for locations such as Dallas, TX or Chicago, IL, so taking freight up and down the East Coast may be a one-day run. Freight out of the Los Angeles market, heading to further destinations would take a day and a half, two days.  

Same freight, same one-truck move, but now it occupies that truck for twice as long. Additionally, this could necessitate a shifting of fleet resources from one coast to the other, potentially creating an over-capacity on one side of the U.S. while the other coast is more desperate for trucks.

SPRING IN 6 WEEKS?

Will that rodent in Pennsylvania be right this year, and will freight volumes accelerate quicker as a result? First of all, ‘ol Punxsutawney Phil is batting less than 50 percent for his career and the last 10 years he’s only been accurate three times.  

A better canary in the cave would be how the rejection rate index ebbs and flows. As you can see in Figure 3.1, van rejection rates have been pretty stagnant for the past year. Flatbed has remained relatively high and reefer rejection rates have trended up the last five months. If Phil is a soothsayer this year, we expect flatbed rejection rates to continue rising. If produce season also starts earlier than most, reefer rejection rates will then follow. 

As reminder, with increases in rejection rates, shippers typically see transportation costs increase on the spot market.  

Stay tuned for next month’s update to see if an early spring is a turning of the tide for the freight market.

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Imports on the Rebound?

For the past 14 months, much of the conversation around U.S. container import volume has been gloomy.  

Figure 1.1 shows the steady decline in import volume that began in August of 2022, and those volumes have remained lower when you compare them year-over-year (YoY) for most of 2023.  

September and October have begun to see that narrative change, with September of this year outpacing September of 2022. Comparing this year’s volume to 2021 and even 2022 is somewhat an “apples to oranges” comparison because of the frenzied consumer activity. A better comparison is how 2023 is stacking up versus pre-Covid years.

September 2019 saw approximately 2.05 million twenty-foot equivalent units (TEU’s) come through U.S. ports. September 2023 is seeing an increase of roughly seven percent in comparison. There are numerous efforts underway with U.S. retailers – like Walmart, Target and Amazon – to boost consumer sales with deals ahead of the traditional holiday buying season. This should continue to boost imports through the remainder of the year.  

It will be important for shippers, carriers, and brokers to keep an eye on activity around U.S. ports as rates will reflect the supply and demand. An example can be seen the Los Angeles market. As seen in Figure 1.2, in the past 90 days, outbound volume from this market has increased almost 23 percent and the rate of carrier rejections has also shown an upward trend by over 50 percent.

Capacity Declining

Six months ago, I would have taken a bet with anyone that the spread between contract and spot rates would not be greater than $0.50 per mile.  

With capacity exiting the market and shippers making more frequent use of rate tools like mini-bids, the prevailing thought was that spot rates would remain relatively stagnant, or possibly a slight uptick, but contract rates would show a sharp decline. Good thing I was nowhere near a betting window.  

The spread continues to hover around $0.80 per mile as seen in Figure 1.3, with contract rates being higher.  Annual bid season is fast approaching, and it will be interesting to see if recent upward volume trends combined with an increase in carrier revocations will continue to keep contract rates where they currently reside or if the “sharpen the pencil” adage will be more prevalent.

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Freight Volumes Stagnant

As the U.S. continues to pull the levers to throttle the over-heated economy we experienced over the past few years, freight volumes, which are largely driven by consumer activity, have seen the impact of less buying from John and Jane Doe. It’s expected that muted consumer activity will continue through the first half of the calendar year 2024. We still expect to see a seasonal increase in spending at the end of the year for holiday shopping, but with consumers being more dependent on credit for purchases, and the rate of savings on the decline, expenditures are expected to be less than in prior years.  

Combined with declines seen on the industrial production and manufacturing side, the hope for a rebound in freight volumes will not take place in 2023.  The prevailing thought at this point is a return to a more balanced supply and demand regarding freight transportation will be driven by carrier attrition.  

Nobody likes to see businesses fail, but we continue to see a market where oversupply has created trucking rates, particularly on the spot side, that are borderline if not less than what it costs a carrier to operate. Since the middle of 2022 and continuing this year, that decline in carriers for hire has continued as seen in Figure 1.1. Most of the attrition is carriers with five trucks or less, but as we’ve seen recently with Yellow Corporation closing its doors, no carrier is immune.

Capacity Declining

To further illustrate the impact of freight volumes on capacity, Figure 1.2 shows how capacity responds, almost in lockstep, with increases and decreases in freight volumes.  

As freight volumes were accelerating in the latter part of 2020 and through early 2022, trucking companies popped up at a rapid pace to meet the demands of shippers. Carrier compliance, to a small extent, took a backseat as shippers were eager to make new friends with those who could get their product off the docks and to the end user in a race to satisfy consumer demand.  

As freight volumes started to decline, as seen by the blue line in Figure 1.2, the need for capacity waned and began the downward trend (as shown by the white line) regarding carriers in the market.

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Length of Haul Does Impact Acceptance Rate

If you’ve been following the overall U.S. volume and shipment rejection rates this year, aside from the typical blips seen around the holidays, these have been relatively stagnant. The overall rejection rate has hovered very near the three percent range.  

However, if you break that down by the length of haul, it’s clear that carriers clamor for those short-haul shipments, anything less than 250 miles, as this typically will allow the drivers to be home at night. On the other end of the spectrum, those mid-range shipments (250-450 miles) are seeing the highest rejection rate, just below four percent as seen in Figure 1.1.  

There could be several reasons for this. Most likely it’s the fact that a driver can make a trip of that length in one day, but it’s not a full day’s worth of driving. So, if the driver is getting a per-mile rate and not driving for the full 11 hours that are eligible, this length of haul “loses” money when compared to longer shipments that allow the driver to hammer down for the full allotment of driving hours.  

Now, I realize four versus two-point-five percent doesn’t seem like a big gap, but that is a 60 percent variance. If the freight volumes and capacity begin to balance, and rejection rates by length of haul follow the same trends, you could see mid-range rejection rates in the 15 percent range while shorter hauls only see rejection rates in the six percent range. Certainly that will have an influence on future rates.

SPOT AND CONTRACT GETTING CLOSER

As expected in Figure 1.2, the variance between contract and spot rates continues to shrink. Since the widest gap this year, when contract rates were about $0.78 per mile higher than spot rates, the gap has shrunk by almost 30 percent in a three-month period. 

For the most part, spot rates have found a floor, and if anything, have seen a modest uptick. Contract rates have seen frequent requests for re-pricing. Carriers continue to refine their contracted rates balanced with the expectation of almost 100 percent compliance with freight tenders and excellent service.  

In 2021 and 2022, shippers were open to expanding their carrier and broker pool as capacity constraints and increased volume necessitated more choices. Now that the balance has shifted, shippers are looking to right-size their partners, with a mix of compliance, price, and service steering their decision-making process.

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Stagnant Freight volumes Continue to Push Carrier Compliance

2023 continues to see freight volumes showing little fluctuation. With freight volumes dipping more than 30 percent lower than the industry experienced over the past year, and little attrition at this point with carrier capacity, shippers are seeing freight tenders gobbled up almost exclusively as soon as they are offered.  

While there was a slight increase during the July 4^th holiday week, primarily due to drivers taking extended time off the road, rejection rates have returned to their normal place of three percent on the van and reefer side (Figure 1.1).  Flatbeds continue to see rejection rates almost three times what vans and reefers are experiencing, but the trend has been slightly downward over the past two months.  

With no major signs of a rebound in volume, carriers will continue to strive for 100 percent compliance with freight tendered to them, and push for impeccable service to show why they need to continue to be a mainstay for shippers.

Start Preparing for a Balanced Market

There seems to be a tightening of the gap between contract and spot rates (Figure 2.1).  This was helped a bit by spot rates seeing an increase at the start of July, but contracted rates being rebid over the last three months have been the primary driver. 

In a normal market, the spread between contract and spot rates is around $0.15 – $.20 per mile. Currently, contract rates are $0.65 per higher per mile.  

As shippers expanded their carrier network in 2021 and 2022, look for a trimming over the next six months as shippers look to honor their volume commitments to contracted partners but provide themselves an opportunity to realize savings with capacity in the spot market.  

We do expect the supply and demand cycle to balance as we head into 2024, so shippers need to ensure they are not creating hurt feelings with carriers that find themselves on the outside looking in. Remember, this industry is a three-legged stool, and everyone benefits when things are in balance.

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Why are Contract Rates Elevated in Comparison to Spot Rates?

If freight volumes are, by some accounts, 30 percent less than what we experienced in the over-heated freight market of ’21 and most of ’22; and rejection rates are almost nil, why is the gap between contract and spot rates so wide, currently at $0.62 per mile as seen in Figure 1.1?  

Typically, the gap between spot and contract in a “normal” freight market hovers around $0.15 per mile. During 2021 and most of 2022, spot rates were higher than contract rates for an extended period. For the majority of 2023, spot rates have fallen short of their contract rate counterparts. 

As rates were high, especially on the spot side the last few years, capacity, particularly single-truck or small fleet operations, flooded the market. When challenging consumer conditions presented themselves towards the end of 2022, that meant less freight was traveling on America’s roads. So, you had a situation where less freight was in the contract space, which meant contract carriers were less likely to say “no” to freight tenders. This meant less freight flowed downstream to the spot market. When it did hit the spot market, there was a glut of carriers just waiting to bid for it, oftentimes doing so at break-even or very skinny profit margins just to keep the wheels turning.  

We have seen in recent days the gap narrow. Part of that is due to continued pressure on contracted rates and another part of that is due to recent holiday and safety events that have stymied spot capacity. The gap will continue to narrow, mainly due to contract rates continuing to recede as spot rates, while maybe not at their floor, have very little room to move downward before they put carriers in a negative profit situation.

HO, HUM

On the topic of volumes and rejection rates, not much has changed since we last visited our trusty SONAR charts (Figure 2.1). 

There was a brief blip in volume around the Memorial Day holiday, but that was short-lived, and volumes are returning to the levels we have become accustomed to over the past several months. Additionally, rejection of freight briefly pushed past the three percent mark but has since fallen back into the mid-two percent range.  

Produce season will certainly give a boost to volumes, and drive rejections a tad higher. As well, depending on the situation with labor disputes at the west coast ports, that could potentially cause a brief halt to movement out of the west coast ports. When the labor disputes are resolved, it will give a burst to freight coming out of the ports of Los Angeles and Long Beach especially. But for now, things are a bit ho-hum.

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READY FOR A REBOUND?

Given the sluggish flow of freight in 2023, seeing any signs of life is encouraging. The industry muddled through the first four months of the year with the volume index registering very little movement as seen in Figure 1.1. 

Heading into late April, and the early part of May, seeing upward movement was a welcome sight to carriers and intermediaries. Mid-spring typically brings a bounce from produce and seasonal freight, and this year we are seeing that lift, albeit not at an aggressive pace. Still, even with the slight upturn, freight opportunities continue to be gobbled up by carriers, particularly on the contract side. Historic low rejection rates of under three percent not only mean less freight heading to the spot market, but shippers continue to have the pendulum in their favor with regard to rates.

FLATBED SEES BALANCE

Speaking of tender rejection rates, the low rejection rate is not being felt across all types of equipment as we see in Figure 2.1.  

Vans and reefers are pretty much accepting anything that comes their way. These are two equipment types that saw increases in their number from mid-2020 through 2022, primarily in response to the overwhelming consumer goods demand which typically travels in these types of trailers. Now that demand for these items has cooled, vans and reefers find themselves in a situation where demand is still there, just nowhere near what it was the past few years.  

Flatbeds, on the other hand, did not experience the same demand. In the over-heated freight market, we experienced in the last few years, flatbeds felt the most normal with regard to freight patterns and demand. While they did not get the direct benefit of shippers clamoring for their services, flatbed carriers have also not experienced the same falling out. As a result, they enjoy a balanced market with rejection rates hovering in the mid-teens. This could be short-lived as downward trends in manufacturing and industrial production, combined with a cooling housing market, will lessen the demand for flatbed services.

the gap remains

Carrier rates continue to normalize.  

As seen in Figure 3.1, the spot rate on the van side seems to have found a bottom. Contract rates have contracted slightly, but the spread between carrier-published rates and those available with spot rate pricing continues to push past $0.70 per mile. An uptick in spot rates may relieve some of the pressure from shippers on the contracted side for carriers.  Ideally, a spread of $0.15-$0.20 would be more balanced.  

Could this modest uptick in volume shrink the rate gap even more?  Stay tuned to June’s update to find out.

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SIMPLE SUPPLY AND DEMAND

We probably all remember at some point in either our high school or college career hearing about supply and demand. A pretty simple concept that applies to goods, commodities, services, and yes, transportation. A great indicator of that is shown in Figure 1.1 which shows the growth in for-hire carriers (blue line) and the outbound tender volume index (green) since mid-2018. While this is not a 1:1 comparison, it clearly shows, especially in the past three years, how supply and demand have been the driver of transportation costs. 

From roughly mid-2020 until the early part of 2022, demand was high compared to prior years, and the supply side (carriers) was trying to catch up. As a result, carriers were able to dictate rates in the market. As the supply side began to accelerate, the over-heated freight market began to normalize in late 2021/early 2022, retreating to levels seen prior to the pandemic. The rate pendulum once again swings to the shipper’s side. Some have argued based on this over-capacity situation that it could take years before there is once again equilibrium. Agree, it will take, unfortunately, attrition on the carrier side, combined with a rebound on the freight activity side to find that balance. However, taking years to do so is a bit aggressive. Most likely, mid-2024 will see supply and demand as it relates to transportation reaching a better balance.

THE GAP

We looked at this last month, but the lag between spot and contract rates remains at historic levels. Typically, you will see a gap of maybe 10 cents or 15 cents per mile, but for the last five months, that gap has remained above the $0.50 per mile mark, currently trending at $0.86 per mile higher on the contract versus the spot side. 

As you can see in Figure 1.2, that increase in the contract-to-spot gap has been in lockstep with the decreasing outbound tender rejection rate. As carriers with contract pricing are finding fewer freight opportunities versus 2021 and 2022, they are taking almost every shipment tendered their way. On average, for every 100 contracted shipments tendered to carriers, they accept 97 of those shipments. For shippers, it will be a balance between finding cost savings with spot capacity and fulfilling the requirements they have with higher-priced contracted carriers.

BLAH IMPORT CONDITIONS

On the international side, particularly imports, we continue to see declining volumes and blank sailings. While the ports were inundated in late 2020 through the first half of 2022, that volume has stalled. Stalled to the point where the largest U.S. port of LA/LB encountered almost 100 ships at one point waiting to offload to now having “plenty of good parking spots available.”  

Figure 1.3 clearly demonstrates the decline in consumer demand, along with near-shoring efforts, and the year-over-year impact. Expect, for lack of a better word, blah import conditions throughout 2023 with a rebound on the horizon for ’24 and ’25.

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WHEN WILL FREIGHT VOLUMES START TO IMPROVE?

That is the $64,000 question. Since the start of the year, freight volumes have been stable but certainly suppressed as compared to the last few years (Figure 1.1). In addition, the rate at which carriers reject shipment tenders is almost nil, with almost 97 percent of the freight tenders being nabbed by carriers with contract pricing.  

We will certainly see the seasonal freight patterns in 2023, with produce and outdoor products providing a boost in the coming weeks. And the end-of-year push for back-to-school and Christmas should also lend a boost, although that end-of-year buying seems to be more spread throughout the year. Many in the industry got accustomed to an over-heated, reactionary market over the past few years. With that as the backdrop, the one word I can think of to describe how the market will feel is “blah” in 2023.

Contract rates continue to outpace the spot market. While carriers with submitted contract rates are right-sizing rates in response to the market, expenses that have been exaggerated over the past few years, such as driver pay and benefits, maintenance costs, and insurance premiums, are keeping contract rates well above spot.  

As one can see in Figure 1.2, as rejection rates have declined, meaning less freight being pushed to the spot market, it has a mirror effect on the spread between contract and spot rates, currently sitting at $0.84 less per mile on the spot side. Shippers will continue to fulfill their contractual obligations with regards to tendered volume, but being able to utilize the spot market does bring cost savings to shippers.

Finally, activity at the ports continues to decline, especially on the import side. As seen in Figure 1.3, just a year ago, ports were handling 10-20 percent more inbound volume, that change today is a decrease from a year ago. Inventories have been replenished over the past year and a half, and consumer demand for goods is less. This trend is most likely to continue through the year, driving the spot container cost down and subduing activity around U.S. ports.

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SOMEWHAT HO-HUM

The current landscape for over-the-road freight looks like what it was a month ago. Freight volumes are lower year-over-year (YoY) but seem to have found a floor.  

If anything, the flat lining of volume (Figure 1.1) we are seeing is eerily like what we saw in the early part of 2020. And that is not just relative to freight volumes. 

Back in ’20, carriers were snatching up tenders as soon as they were offered, with rejection levels hovering in the five percent range. Right now, we are just below that five percent mark. It’s anticipated that freight flows will follow their seasonal patterns, albeit at reduced volumes compared to what we saw in 2021 and most of 2022. Spot rates continue to trend lower than contract rates, although that gap continues to shrink. It’s also anticipated that contract rates will continue to slide while spot rates should be pretty near their floor.  

DECLINING PORT ACTIVITY 

Imports will continue to weaken over the next several months. While some ports have seen slight increases in YoY volume, that increase is not indicative of an overall volume surge. It’s due to the shifting of where the freight is entering the U.S.  

So, while ports like Houston (up 5.2 percent) and Baltimore (up four percent) are robust with above-average activity, major entry points like Los Angeles (down 30 percent), Oakland (down 58 percent) and Seattle (down 41 percent) are feeling the lack of volume. An opportunity should be seen with export activity (Figure 1.2).  While the U.S. dollar losing value is not good for imports, it has the opposite effect on export activity.

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