Shippers across North America are in the process of conducting their annual or mini freight bid exercises. What is in store for shippers and carriers this year?
This is a unique year. The supply/demand curve shifted during the early stages of Covid. Consumers transitioned to working from home, cut back on travel and dining out, spent their disposable dollars on durable goods and some moved away from their city residences. To meet the demand for increased freight transportation services, to move the increase in durable goods purchases, carriers boosted their purchases of fleet equipment. As this process was unfolding, governments sent out cheques to support citizens who lost their jobs during this period and kept interest rates low to stimulate the economy.
As Covid dissipated, consumers cut back on durable goods purchases and shifted some of their discretionary dollars back to travel, dining out, and entertainment. The net result of these market forces was surging inflation. Prices for food, gasoline, travel, dining out, mortgages and many other goods and services escalated. While the economy is not technically in a recession, rising prices created limitations on spending, as discretionary dollars were reduced. The bottom line for the Transportation Industry: There is now too much fleet capacity chasing too few shipments.
The so-called “freight recession” is manifesting itself in the financial results of publicly traded carriers and in the number of carrier failures. The demise of Yellow Freight, a major LTL carrier that has been in business for many decades and Convoy, a much talked about, digital freight broker, are among the thousands of companies that have left the industry this year.
North American manufacturers remain concerned that freight demand will stay muted until part way through 2024, as interest rates are not expected to decline in the foreseeable future. The October jobs report was also worrisome as high interest rates reduce the incentive to invest in equipment and people. The Market Sentiment Index published by Freightwaves states that “North American supply chains face the task of navigating a market that continues to downshift and has little hope of changing until Q2 2024 at the earliest”. Transportation pricing has declined “at the fastest rate of contraction ever recorded”.
What are Carriers doing to cope with the Freight Recession?
Motor carriers are trying to right size their fleets to bring them into alignment with freight volumes. Some carriers are hedging their bets by parking fleet equipment in their yards with a view to redeploying these assets when market demand becomes more positive.
Smart carriers have a good handle on their costs and how to manage their liquidity. Financially challenged carriers need to make the determination on what freight they can handle, and at what rates. They need to decide if they can tread water until the economy returns or cease operations. New market entrants continue to appear. The industry cleansing that is required could take another 12 to 18 months. Freight brokers that have gained market share over the past decade are also expected to be challenged as they deal with margin compression.
What are shippers doing to address this Freight Recession?
For manufacturers and distributors that have not conducted a freight bid in several years, or ever, now is the time to conduct one of these exercises. During the early stages of Covid, as demand for trucking services soared, carriers were not shy about visiting their customers with significant rate increases. As market conditions deteriorated, smart shippers reconnected with their carriers and renegotiated their freight rates. Companies that have not done this are likely paying above market rates.
Smart shippers also know that leveraging market forces to drive down freight rates to unsustainable levels, is not a successful strategy. We recommend to our clients that they procure market competitive rates. We also recommend that they utilize a freight bid exercise to upgrade the quality of the carriers that will be delivering their products to their customers. Shippers can do due diligence on their carriers by examining their publicly available financial statements. For privately run fleets, they can sign NDAs and request a copy of their most recent financial statements.
Recruiting a team of bottom feeding carriers will damage the image of a shipper and cause that company to redo a bid exercise if some fleets cannot provide the service or go out of business. Shippers that pay slightly above market rates will attract the highest quality and probably most loyal carriers and will likely provide the best service. It’s freight bid season again. Shippers and carriers need to create win/win strategies to navigate these turbulent times.
To stay up to date on Best Practices in Freight Management, follow me on X (formerly Twitter) @DanGoodwill and join the Freight Management Best Practices group on LinkedIn. If you need help with your freight bid, reach out to me at dan@dantranscon.com.