Carriers headed to the large markets but reluctant to give up pricing power

The Pricing Power Index is based on the following indicators:

Freight demand picking up steam, widening the gap with 2021 levels

Tender volumes continue to outperform year-ago levels despite record-setting inflation rates hitting both manufacturing and consumers. Even though volumes flatlined for much of the past week, an uptick on Thursday brought the Outbound Tender Volume Index (OTVI) back above the 15,000 level.

Over the past week, OTVI increased by 1.5% with much of the increase occurring on Thursday when volumes increased 1.25% day-over-day (d/d). The increase widened the gap between year-ago levels to the widest it has been since August, currently up 10.23% year-over-year (y/y).

Volume levels have been driven by import levels on the West Coast as well as increased consumer spending throughout the past 19 months. The rapid rise of e-commerce as a percentage of total retail sales has led to shippers building back inventory levels so similar situations don’t arise in the future. With warehousing space effectively sold out in Southern California, freight is moving out of markets like Ontario and Los Angeles and into other interior markets closer to large consumption centers. 

Accepted tender volumes over the past week outperformed OTVI as the Outbound Tender Reject Index (OTRI) declined on a national level. Accepted volumes are 1.74% higher week-over-week (w/w) but are up 7.5% over the past month. Accepted tender volumes are still outperforming year-ago levels, currently running 11.4% higher than 2021 levels.

It was a strong volume week for the majority of the country despite the map above showing a lot of red. Of the 135 markets, 83 reported weekly increases. The effects of winter weather over the past couple of weeks have finally dissipated. 

The largest freight markets in the country, including Ontario, Dallas and Chicago, all had relatively strong weeks as tender volumes held up better than in the largest East Coast markets. Tender volumes in both Ontario and Dallas increased over 4%, vastly outperforming the overall index. In Chicago, tender volumes increased by 1.1% w/w.

The major markets in the Eastern third of the country — Atlanta and Harrisburg, Pennsylvania — both suffered hiccups this week. Tender volumes in Atlanta declined by 0.5% w/w, the first weekly decline in a month. In Harrisburg, the decline was more dramatic as tender volumes fell by 2.15% w/w, but the market as a whole has held up well since the beginning of the year.

By mode: The Van Outbound Tender Volume Index (VOTVIW) had a strong week, outperforming the overall volume index, increasing by 2.5% w/w. Winter weather had impacted van volumes in recent weeks. With limited winter weather during the past week, shippers increased the number of requests for dry van capacity. 

The Reefer Outbound Tender Volume Index (ROTVI) was comparatively stable, rising only 0.5% w/w. As the calendar continues to push through the winter weather months, reefer volumes will remain stable, barring any severe weather disruption, like the winter storm that affected most of the lower 48 in 2021. Ultimately, as produce season approaches, reefer demand should remain elevated compared to previous years, currently up 3.4% y/y.

Rejection rates remain around the 20% mark, despite contracts getting repriced higher

The capacity situation is largely unchanged as carriers are still reluctant to accept contract rates despite the 20% increase over the past year. OTRI has hovered around the 20% mark for much of the past six months, falling below that mark briefly.

Over the past week, OTRI, which measures relative capacity in the market, did dip below the 20% mark once again. OTRI fell by 55 basis points (bps) w/w, consistent with the ebbs and flows in the truckload market over the past two months. OTRI is currently 147 bps below year-ago levels, widening a gap that threatened to close earlier this month.

Rejection rates are likely to continue to trend down, but every time OTRI has dipped below 20% shippers have faced resistance from carriers. As contract rates continue to be repriced, carrier compliance will likely improve, leading to lower rejection rates. The truckload market is still extremely fragile, and threats of winter weather as well as external forces could send rejection rates higher again.

The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. The largest markets in the country continue to see capacity enter the markets as finding outbound loads is less strenuous.

Of the 135 markets, 58 reported higher rejection rates as carriers have returned to markets stricken by adverse weather conditions last week.

Atlanta, the second-largest market in the country by outbound volume, saw rejection rates decline by 241 bps w/w. Tender rejection rates in the market are now the lowest they have been since June 2020. As capacity has returned to the market, shippers have been able to claw back some pricing power in the markets as the rejection rate currently sits at 13.83%

Carriers aren’t just flooding East Coast markets this week, as rejection rates in Ontario continue to decline. Over the past week, the rejection rate in Ontario fell by 75 bps to 8%, the lowest level since May 2020.

By mode: The reefer market has cemented itself as the tightest of the equipment types within SONAR as reefer rejection rates took a small step higher this week. Over the past week, reefer rejection rates increased by 24 bps to 36.38%. Though the reefer market is remarkably tight, reefer rejection rates are more than 420 bps lower than year-ago levels.

The van market remains one of the most consistent as the Van Outbound Tender Reject Index (VOTRI) has been range-bound between 18% and 20% for the past three months. Van rejection rates erased all of last week’s increase after falling 74 bps over the past week, reaching 18.79%. 

The flatbed market remains the most volatile as rejection rates have had massive swings over the past several months. Over the past week, the Flatbed Outbound Tender Reject Index (FOTRI) fell by 160 bps to 32.39%. Even with the weekly decline, FOTRI is still nearly 1,800 bps higher than year-ago levels.

Rates are moderating as capacity conditions have improved slightly

The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.

Tender rejection rates have largely stayed around the 20% mark for the past month, even when the freight market is traditionally in the softest period of the year, holding upward pressure on spot rates. Truckstop.com’s national average spot rate broke a three-week decline this week, jumping 8 cents per mile w/w to $3.78 per mile. The increase erased the previous two weeks of declines and is now just 5 cents per mile off the all-time high set in early January. 

Of the 102 lanes reported by Truckstop.com’s load board, 65 reported increases over the past week. As carriers have flooded back into Southern California, outbound rates from Los Angeles have declined significantly. Over the past week, Los Angeles to Seattle suffered the most significant decline of the 102 lanes, falling 26 cents per mile to $3.64 a mile.

Contract rates are suffering a similar fate to spot rates over the previous three weeks. Over the past week, contract rates have fallen by 7 cents per mile to $2.75. Contract rates are reported on a two-week lag so the recent decline is associated with the decline in rejection rates immediately following the MLK holiday. 

Contract rates are 14 cents per mile off the all-time high set earlier this year; however, as carriers continue to reject one-in-five loads under contract rates, upward pressure on the rates remains firmly in place. Even with the decline in the most recent week, contract rates are still nearly 20% higher than they were a year ago.

FreightWaves’ Trusted Rate Assessment Consortium (TRAC) spot rate from Los Angeles to Dallas continues to erode as capacity has returned to Southern California, falling another 17 cents per mile to $3.40 a mile. Though capacity has started to tighten in Dallas, the freefall of this rate doesn’t seem to have an end in sight. Rates along this dense lane returning to $4-plus per mile seems unlikely given the rapid deterioration, but they could face upward pressure if capacity trends in the Los Angeles area reverse course.

Though capacity conditions in Atlanta have eased, the pressure on spot rates hasn’t dissipated. The FreightWaves TRAC spot rate from Atlanta to Philadelphia is off its recent highs but is still elevated compared to where it was during the fourth quarter. The rate from Atlanta to Philadelphia currently sits at $3.88 a mile, up 2 cents per mile from the previous week, but down 15 cents per mile over the past month.

Ultimately, capacity conditions should continue to ease, which should help moderate spot rates moving forward. Capacity is being added to the market, but not at the rate necessary to keep up with demand, yet. With build slots at truck manufacturers effectively sold out, look for any easing in the market to come from the demand side of the equation. Rate pressures, specifically on the contract side of the market, look firmly cemented, at least for the rest of the first quarter and likely continuing well into the second quarter.

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com or Tony Mulvey at tmulvey@freightwaves.com.