Rates trending higher on dense lanes signal carrier maintain pricing power

The Pricing Power Index is based on the following indicators:

Tender volumes following closer to 2019, just at elevated levels

Tender volumes continue the post-Thanksgiving decline this week, falling to the lowest non-holiday affected level since early April. The Outbound Tender Volume Index (OTVI), which measures shippers’ requests for capacity, is below the 15,000 level for the third consecutive day.

Week-over-week (w/w) comparisons have returned closer to normal after holiday noise has affected comps during the past two weeks. Volumes are still 9% higher w/w but expect that to subside over the weekend. With OTVI falling below the 15,000 level, it’s likely that volumes will turn negative w/w in the coming days.

Volume levels have improved compared to 2020 levels though, now down just 2.8%. OTVI slid throughout December in 2020, so OTVI may actually turn positive on a y/y basis in the coming weeks.

While OTVI, which includes both accepted and rejected tenders, is still underperforming, accepted tender levels are actually widening the gap with year-ago levels. When OTVI is adjusted by the Outbound Tender Reject Index (OTRI), accepted volumes are running up over 3.5% y/y.

What does this mean?

The efforts of shippers to improve carrier compliance through higher contract rates have resulted in lower rejection rates, but shippers are still pushing freight into networks at a breakneck pace. It’s unlikely that slows down in the near term, but higher inflation rates and lower consumer sentiment pose risks for the future.

Volumes comps are still skewed to the upside, though that is diminishing as comps normalize. Of the 135 freight markets tracked by FreightWaves SONAR, 112 reported weekly increases, down from 129 in Wednesday’s update.

Ontario, California, the largest freight market in the country, reported a weekly increase of 3.4%, the smallest increase of the largest 10 freight markets. Over the past month, tender volumes in the market have decreased by 6%, but the pressure in the market remains.

By mode: Comps are normalizing in both the reefer and dry van market. The Reefer Outbound Tender Volume Index (ROTVI) increased by 3% over the past week. Even with the increase over the past week, ROTVI is still down nearly 8% over the past month. Markets like Phoenix and Spokane, Washington, have experienced pretty drastic increases in reefer volumes over the past month, up 72.1% and 91.7% m/m, respectively.

Dry van volumes, represented by the Van Outbound Tender Volume Index (VOTVI), are holding up better than reefer volumes. Over the last month, van volumes are down just 1.5%. There have been increased volumes in the U.S. and Mexico border markets: Laredo, El Paso and McAllen, Texas, all of which have reported double-digit volume increases m/m.

Tough conditions are keeping rejection rates near 20%

Rejection rates have been rising throughout the week but are still down on a w/w basis. Over the past week, OTRI has fallen by 32 basis points (bps) to 19.36%. OTRI did hit some resistance on Saturday and has since risen by 30 bps.

OTRI remains well below where it was a year ago, down 560 bps y/y. A lot of the improvement in the rejection rate has to do with contract rates driving improved carrier compliance across the country. Even with higher rates, securing capacity is quite difficult, and that is unlikely to change in the near future.

Numerous transportation companies are expecting to see another round of rate increases as shippers try to improve carrier compliance and limit supply chain constraints that have plagued networks for the last 18 months. 

November new Class 8 truck orders were one of the weakest in recent years, but with backlogs pushing builds into late 2022/early 2023, carriers are hitting the brakes on ordering new equipment for the time being. That will likely keep capacity quite tight for the foreseeable future, even though new capacity is being added to the market every month.

Relative capacity across the country did loosen as just 53 of the 135 markets experienced rejection rate increases the past week. Even though the majority of the country loosened, difficult capacity continues to sweep the nation.

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. A blue market is any market that is tightening faster, highlighting increased prices as well as markets that should take priority. Conversely, red markets are loosening faster relative to the size of the market, where shippers are gaining some pricing power.

The only market that is really tightening at a rapid pace at the moment is Nashville, Tennessee. The outbound rejection rate in the market has jumped over 750 bps since Saturday, now sitting at 32.08%. The increased rejection rate signals that more spot activity could be arising, placing pricing power into the carrier’s hands. 

Atlanta, the second-largest market in the country, did experience some loosening over the past week as the market’s rejection rate fell by 89 bps w/w. The rejection rate has been about 600 bps below a year ago, which is right in line with where it has been for the past two months.

By mode: The reefer market still has the highest rejection rate of the three equipment types within SONAR, currently 35.95%. The Reefer Outbound Tender Reject Index (ROTRI) has largely been trending sideways for the past two weeks. ROTRI is down 37 bps w/w, but on a two-week basis is up 19 bps. 

The Van Outbound Tender Reject Index (VOTRI) experienced a bump up over the past couple of days but is still down 42 bps w/w. VOTRI hasn’t experienced the violent swings that the other equipment types have during the past six months but is still down over 700 bps from the March high.

The flatbed market has been one of the most volatile equipment types over the past three months. Over the past week, the Flatbed Outbound Tender Reject Index (FOTRI) has fallen by 250 bps to 27.36%. Even with the pullback in FOTRI over the past week, the rejection rate is 1,350 bps higher than it was a year ago, signaling tremendous tightness in the flatbed space.

Spot rates move higher as holiday noise still disrupted the market

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

The Truckstop.com national spot rate increased another 9 cents per mile over the past week, jumping all the way to $3.56, including fuel surcharge and other accessorials. The increase in spot rates isn’t a huge surprise as post-Thanksgiving pressures were placed on the marketplace last week. The increase is significant though as Truckstop.com’s national spot rate is now just 4 cents per mile off the all-time high set in early September. The national spot rate is still more than 15% higher than it was a year ago, signaling that carriers still hold the upper hand when it comes to pricing power. However, those comps get much more difficult in the back half of 2022.

Of the 102 lanes from Truckstop.com’s load board, 68 reported increases last week. Outbound from Los Angeles took a step higher on six of the eight lanes, with the lanes of Los Angeles to Salt Lake City and Portland, Oregon, being the only two that decreased. The capacity situation has improved in Southern California over the past week as carriers have reentered the market, so expect that some of the increases experienced over the past couple of weeks to slow in next week’s release.

Contract rates have largely plateaued over the past couple of months. This is a trend that shows how freight repricing is taking place more on a quarterly basis than the annual RFP cycle. Looking back, contract rates took a step higher in June, ahead of the third quarter getting kicked off, before plateauing throughout July and August. We’ve seen a similar trend with rates jumping in September before plateauing in October and November. Expect that we see another move higher before the end of December and into January.

Contract rates, which are the base linehaul rate excluding fuel surcharges and other accessorials that are included in spot rates, have closed the gap with spot rates significantly over the past year. Contract rates are outperforming spot rates, continuing to run 20% higher than in 2020.

FreightWaves’ Trusted Rate Assessment Consortium (TRAC) spot rate from Los Angeles to Dallas fell as expected as relative capacity loosened in Southern California. The FreightWaves TRAC rate in this dense lane fell by 3 cents per mile to $4.07. Rates are still up 4% since the beginning of the quarter.

FreightWaves’ TRAC spot rate from Atlanta to Philadelphia took a significant step higher over the past week. The FreightWaves TRAC rate increased by 6 cents per mile to $3.79 over the past week, which is the highest the rate has been during the past three months.

Ultimately, some of the inflationary pressures on rates have alleviated themselves as capacity has returned to the market. Pressure remains on contract rates to move higher in 2022, due to the elevated rejection rates, but the move higher may not be as pronounced as it was in 2021. Either way, carriers still hold most of the pricing power in the market, though shippers are slowly clawing it back in their favor.

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

Check out the newest episodes of our podcast, Great Quarter, Guys, here.