Shippers’ ‘Empire Strikes Back’ moment
Recent declines in truckload contract rates raise concerns about a possible correction in contract truckload rates. Since July 2020, contracted rates had steadily increased, reaching a high of $2.98 per mile on June 3, 2022. The concern is the steady decline in reported contract rates beginning around July 10, and currently at $2.76 per mile, a drop of 7.3%.
Craig Fuller, CEO and founder of FreightWaves, wrote: “With shippers realizing that a repeat of the 2021 capacity crunch is unlikely, they will go out and try to claw back as much as possible of the rate increases that they offered carriers over the past year. Carriers will find it incredibly difficult to withstand this pressure, as rejecting a decrease in contract rates will likely mean that a competitor will haul the freight at the newly negotiated price.”
Some shippers are taking advantage of this market softness to push incumbents for rate reductions. FreightWaves strategic analyst J.P. Hampstead notes: “An executive at a publicly traded U.S. transportation provider told FreightWaves Wednesday morning that his team had engaged in multiple rate-reduction exercises with single customers and that about half of his firm’s top 25 customers had asked for rate reductions. After cutting revenue per load by 20% from its peak in February, the provider has managed to eke out 10% year-over-year volume growth, but the situation ‘feels like a typical race to the bottom.’”
Rate reductions potentially create a cascading chain reaction in which both trucking carriers and freight brokers seek to maintain or expand market share by undercutting one another for fewer lanes. The biggest risk for lane reductions involves live load lanes at both origin and destination. For carriers and brokers with large, established trailer pools, this may serve as a stop-gap measure, due to the complexities involved in reallocating another carrier’s equipment and the disruptions to both carrier and customer operations.
ATRI report: Trucking average length of haul declines
According to a report on Aug. 10 by the American Transportation Research Institute (ATRI), the average length of haul continued to decline, falling to below 80,000 miles per truck per year in 2021. In trucking, average length of haul per truck per week is an important measure of truckload profitability. For many fleets, the revenue mile is the unit of output that influences metrics like revenue per truck and empty miles (deadhead). Trucking profitability follows a straightforward formula: Drive as many loaded miles as possible, reduce wasted or empty miles, and reduce time wasted.
Reasons for the decline in overall loaded miles can be attributed to supply chain-related changes from the pandemic. For many shippers, their transportation costs can directly correlate to the distance required to haul goods from one node of their supply chain to another. Fewer miles per shipment equals higher linehaul rates but lower total transportation spend. For many, the opening of more distribution centers was spurred by greater e-commerce consumption from pandemic-related consumer behaviors.
For carriers, this presents various challenges, as most of their drivers are paid by miles driven. With a lower average length of haul, this will encourage timesaving strategies such as increases in trailer pools to reduce time wasted at origin and destination locations. Additionally, lower length of haul will put greater pressure on load volumes, as carriers increase their average loads per truck per week, leaving them more vulnerable to declines in total tendered load volumes.
A copy of the report can be found here.
Market update: Wolfe research finds truckload yields decline
The trucking business is often cyclical, and understanding the changes in profitability is a great barometer for the general macroeconomic outlook. This chart from Wolfe Research provides a great illustration of how trucking yields are impacted by the business cycle.
I argue trucking is a highly leveraged low-margin business and the current trends may indicate movement toward less profitability in the coming months. For trucking companies, the next few months will be challenging if consumer demand continues to decline and truckload volumes remain the same. Barring an event such as a hurricane, the supply of truckload capacity appears to have met truckload demand, and competition for fewer loads risks eroding their hard-won truckload contract rate gains.
FreightWaves SONAR spotlight: Spot market to contract rate spread remains high
Summary: The spread between contract and spot rates remains wide in spite of falling truckload demand. The RATES index “displays the difference between FreightWaves National Truckload Index (Linehaul Only — NTIL), which excludes estimated fuel costs, and the Van Contract Rate Per Mile Initial Report Index (VCRPM1) — based on over $80 billion of freight invoices. Since contract rates are reported on a 14-day lag, there is also a 14-day lag in RATES,” writes FreightWaves Market Expert Zach Strickland.
What to watch in the coming weeks will be if this spread moves closer to zero or if contract rates continue to outperform spot rates. Behaviors that would reduce contract rates include incumbent carriers providing rate reductions outside of an RFP; a shipper renegotiating or placing new lanes out to bid for lower prices; or carriers or brokers attempting to gain more business by offering ad hoc rate reductions for lanes past their initial contract commitments.
The Routing Guide: Links from around the web
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