U.S. carriers are white-knuckling a brutal freight market. While data suggests the industry has finally reached the bottom of its freight rate bubble, a balanced market — and the relief it will deliver carriers — is likely a long way out.
Yet, forward-thinking shippers are moving away from bottom-of-the-barrel pricing and shifting to partners running more sustainable models.
Why? It’s the hard-learned COVID lesson: Operations laser-focused on driving down costs and hyper-efficiency aren’t resilient enough to weather disruption. Today, smart industry players recognize that strong, sustainable partners will buoy them when they’re, once again, on the wrong side of market forces.
Freight rates bottoming, not rebalancing
On July 8, FreightWaves reported that truckload spot rates, less estimated fuel costs, had risen about 13% since early May. This data suggests a stabilizing market, not one rebalancing. The Cass Freight Index provides additional support for a freight market cycle bottom.
“The main takeaways as we close the first half of 2023 are that the market has found a demand floor and there is no strong evidence that spot rates will sustain their trend beyond the typical summer seasonality bump,” said FreightWaves Market Expert and Market Analyst Zach Strickland.
Desperation in the freight market; capacity correction on the horizon
Carriers and 3PLs looking for promising news will find little from market analysts.
Experts predict the economy will remain soft for the next four to five quarters as consumers, whose savings were depleted by inflationary prices, now face headwinds from high interest rates.
According to FreightWaves’ head of ocean intelligence, Henry Byers, the import container market will be largely static for the remainder of 2023, following the 2018-2019 trend lines. The Christmas peak: Expect it to resemble more of a gentle bump given available U.S. inventory.
Contract rate corrections are also looming for some. Those that locked in elevated rates during the previous RFP season have been sustained through the soft market. As large shippers enter the new RFP season this fall, those contracts won’t be as favorable — falling in line with the spot market.
Of course, shrinking margins and break-even rates are only part of the story. Carrier costs are simultaneously increasing.
According to the American Transportation Research Institute’s June 2023 report, “An Analysis of the Operational Costs of Trucking,” carrier wages were up 15.5%, truck/trailer lease and purchase payments up 18.6%, and fuel costs up 53.7% in 2022 over the previous year.
Currently, it costs carriers $2.06 per mile to operate, less fuel costs — an untenable situation for many.
While Yellow’s bankruptcy filing could offer a semblance of relief to its competitors, most can expect a rocky road ahead.
Carriers and 3PLs chasing discount buyers will be forced from the market
For two years, shippers and importers got destroyed by sky-high freight rates. Some closed up shop. Now, the surviving shippers and importers are taking their pound of flesh — securing ridiculously low rates to make up for their previous two years of hardship.
Yellow aside, the big nationwide companies with deep pockets will weather the storm. But the 10-to-30-truck operations that make up the majority of the U.S. carrier base can’t sustain these perilously low rates for long. In fact, carrier bankruptcies are already a regular drumbeat in transportation media, with the Southwest region bearing the brunt: Carriers there operate at the highest cost in the country — a $2.303 average marginal cost per mile.
When these businesses go under, capacity will go down — not only impacting drayage but regular domestic over-the-road as well.
Strong partners are key to resilience, blunting extreme freight rate swings
Rate deals and spikes don’t last forever, and smart industry players know caring for the partners who will sustain them when the market inevitably shifts is mission-critical.
Shippers hold the upper hand today, and many are looking to pare down their vendors. But those who place a premium on resilience, not just price, focus on the carriers and brokers they’ll need when capacity gets extremely tight. They know trusted relationships take time to build, and that they’ll pay off when their partners are bombarded with 50 calls a day and prioritize their business.
In this current environment, it’s not difficult to find capacity, and shippers can vet sustainable partners with a small percentage of their existing freight — providing a good test of new providers without jeopardizing existing partner relationships.
As they do, they can look for signals that the partner is built to withstand market downturns including:
- Consistently high on-time pickup and delivery rates.
- Fair market freight rates (versus unsustainable pricing).
- Capabilities, technologies and high service levels that simplify their work.
Shippers working with 3PLs should also assess the carrier vetting and onboarding tools they have in place to protect their freight from rising fraud.
What they’ll discover is that sustainably priced carriers and 3PLs continue to invest in new processes and technologies, enabling them to better protect their business. Meanwhile, those running on fumes right now won’t be able to scale when the freight market booms.
On the flip side, shippers will need to keep in mind that sustainability-minded carriers are looking for partners that:
- Pay rates that are fair in the market rather than hammering them into the dust.
- Provide clear, accurate information.
- Keep the lines of communication open and flowing.
As always, the freight rate boom-and-bust cycle creates chaos in the market.
But for those who value the sustainability of their business partners, that chaos will breed opportunity.
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