Under pressure: Contract rate cuts heat up based on Q1 bid feedback

Large truckload carriers look to spot market, multimodal to offset declines

Thomas Wasson

7 months ago

Under pressure: Contract rate cuts heat up based on Q1 bid feedback

A headwind for spot rates is coming from large carriers taking lower contracted volumes, in a strategic bid to cut losses and accept more freight during later RFPs this year. When juggling year-round bids, it’s a smart play to not lock in record-low contracted rates for one year, and roll the dice for the Q2 bid. For Knight-Swift and other large carriers, the current down market is a great time to evaluate their customer mix and identify the ones still asking for rate cuts. Reducing volumes with those less flexible shippers allows for more volumes from friendlier ones who may not ask for rate concessions.

Illustrating the extent of these challenges, Knight-Swift announced on Wednesday a downgrade to its earnings expectations for Q1 and Q2 2024. The announcement noted that in addition to January weather disruptions impacting the company’s volumes, “The early part of the bid season led to greater than expected pressure on freight rates as some shippers are still trying to push rates down further. In some cases, we have lost contractual volumes because we were not willing to commit to further concessions on what we view as unsustainable contractual rates. This resulted in more of our capacity being allocated to the spot market, which creates further pressure on revenue per mile and utilization.”

J.B. Hunt also saw surprises from bid-related challenges and pressure from competitors on truckload rates. Darren Field, president of intermodal at J.B. Hunt, said in the earnings call on Wednesday, “the pricing that we issued early in the bid season, we had some surprises with the results and it was really competitive. And we were surprised by the magnitude of some of the truckload rates from truckload competitors out there.”

Higher hours-of-service violations despite ELD mandate

A recent Scopelitis Transportation Law Seminar in Indianapolis highlighted data showing that despite the universal ELD mandate, meant to improve hours-of-service and log compliance, there is a growing trend of higher false log violations. FreightWaves’ John Kingston writes that data from P. Sean Garney, co-director of Scopelitis Transportation Consulting, “showed a 2.8% decrease between 2018 and 2023 in violations of the rule that allows only 14 hours of consecutive service after coming on duty and a 25% increase in violations of the HOS rule that allows only 11 hours of driving within that 14-hour period. But during that time, there’s also been a 137% increase in false log violations.”

For log violations, mistakes happen but some drivers are using loopholes to abuse the system. Garney said, “In order to be false it is that the accuracy must disguise that the driver went past 11 and 14 hours. … So the question is, where do our false log violations exist? One of the first places I like to look at are yard moves and personal conveyance.”

When looking at ways drivers are abusing personal conveyance loopholes, Garney recommends looking at whether on-duy status matches up with previous on-duty status locations, whether drivers are using the “safe haven” and “adverse conditions” exceptions, and whether the personal conveyance loophole may be advancing the load. “You just look at the log detail and you’re like, whoa, this guy claimed safe haven seven times this week,” said Garney.

Market update: Looming emissions regulations challenge Class 8 purchasing cycle

ACT Research recently released its April North American commercial vehicle forecast with retail expectations unchanged despite a large increase in Class 8 production in February compared to projections. Kenny Vieth, ACT president and senior analyst, notes that while preliminary March order numbers show demand may finally be cooling, Q2 through mid-Q3 is historically the weakest period in the year for orders.

Regarding the relative strength of Class 8 orders, Vieth said in a press release, “With spot rates still at sharp operating loss levels into early April, and carrier profitability halved in the past two years, we continue to pose the question, who’s buying Class 8 tractors at the bottom of the cycle?” He concludes that it’s private truckload fleets, not for-hire, that have grown truck count while taking load share away from for-hire carriers. Those same private fleets are making capex adjustments based on OEMs’ caution about rising costs for model year 2027 units and beyond due to recent rulemaking as part of the EPA’s Clean Truck mandate.

Part of these adjustments in orders stems from the higher costs associated with these newer models. Vieth adds, “Current estimates are putting the day one cost of the mandate, inclusive of taxes, at around $30K per Class 8 unit. Most of that added cost is tied to the warranty and useful life extensions. With around 40% of Class 8 buyers purchasing warranty extensions due to high-mileage operations (for-hire TL), not all carriers will feel the regulation’s bite equally.” Vieth predicts a run-up in Class 8 demand into 2026 as carriers buy cheaper units before the new rulemaking increases the cost for Class 8s beginning in model year 2027.

FreightWaves SONAR spotlight: Spot rate forecast — to dip or not to dip?

Summary: Spot market rates continued to outperform earlier forecasts as April reached the halfway point. Compared to this time last year, spot market rates are only up 4 cents per mile all-in from $2.23 on April 16, 2023, to $2.27 per mile. What remains to be seen is whether the spot market will further decline in the coming weeks as earlier National Truckload Index Forecast projections were two weeks earlier than the actual anticipated spot market decline that occurred in mid-May 2023. Remarkably for carriers exposed to the spot market, that May 2023 decline and rebound was the only time all-in spot market rates were consistently below $2.23 per mile, which appears to be an ad hoc pricing floor. Speaking of the $2.23-per-mile pricing floor, the FreightWaves National Truckload Index 28-Day Outlook (NTIF28) forecasts spot rates to fall from their current rate of $2.27 per mile to $2.23 by May 14.

When comparing year-over-year comps, there are two key factors to consider in determining spot market rate expectations. One is the state of the contract market, which can influence spot market rates if carriers are not receiving enough committed freight from customers and is characterized by lower outbound tender rejection rates. Outbound tender rejection rates this time last year were 2.91% on April 16, 104 basis points lower than the Outbound Tender Reject Index’s current level of 3.95%. The drop in spot market rates during May 2023 corresponds to OTRI falling to 2.53% and suggests part of the downward rate pressure came from contracted carriers increasing their spot market exposure to cover volume gaps.

For carriers exposed to the contracted market, April 2024 so far has seen higher tender volumes compared to last year. Outbound tender volumes are up 1,209.53 points, or 12%, from 10,063.43 points on April 16, 2023, to 11,272.96 points.

The second factor is the total number of carriers in the market. There are 24,250 fewer unique operating authorities active compared to this time last year. During this period in April 2023, there were 374,453 unique operating authorities compared to 350,203 as of the second week of April 2024.

These factors combined suggest that while the freight market is improving, surplus truckload capacity remains despite declines in operating authorities and an increase in contracted freight volumes.