Supply Chain Scanner - Week of August 12, 2024
Weekly blog by Emily Atkins
Low Demand Playing into Shippers’ Hands in Q3
Parcel, LTL and truckload shippers are seeing a favourable market at the moment, thanks to declining demand.
A new freight index report from AFS Logistics and TD Cowen shows that the uneven effects of continued demand and capacity imbalances affect several modes. According to the third quarter 2024 edition of the index, which provides predictive pricing for truckload, less-than-truckload (LTL) and parcel transportation markets, LTL carriers are holding the line with pricing discipline. However, parcel rates are showing the effects of strong discounting and excess truckload capacity continues to prevent a recovery of prices there.
These market conditions are favourable for shippers, while carriers are ratcheting up the extras when they cannot increase rates outright. “The current state of freight markets empowers shippers to wield pricing power and re-evaluate how to best make use of logistics networks," said Tom Nightingale, CEO of AFS. "Carriers, on the other hand, continue to step up the sophistication and nuanced defences of their revenue streams, with subtle and frequent ancillary price increases."
In the truckload market, the index projects the rate per mile to drop slightly to 4.7% in Q3 2024, a 0.3% decline from the 5.0% mark of the previous quarter. In Q2 2024, the average linehaul cost per shipment also declined, down 2.7% quarter-over-quarter (QoQ), as the share of short-haul shipments remained relatively flat. Although the Q2 linehaul cost per shipment was down 14% year-over-year (YoY), it was still 11% higher than pre-pandemic levels.
Andy Dyer, president of transportation management for AFS, said there’s nothing on the horizon that looks to push rates up. "With truckload seemingly stuck at the bottom for over a year, speculation is rampant as the market looks for any sign of a recovery finally materializing. Recent increases on the spot market do provide a limited upward push, but with contract rates still slightly decreasing and no clear macroeconomic catalyst to spark increased demand, we're projecting rates to keep hovering where they've been since Q2 of last year," Dyer said.
In the parcel sector carriers are both discounting rates and hiking surcharges in competition for light volumes. Even as fuel prices have been dropping parcel carriers have jacked up the fuel surcharge, creating a growing divergence between surcharges and fuel prices.
According to AFS, the ground fuel surcharge would be 5.5% lower if FedEx and UPS allowed the ground fuel surcharge to purely follow market dynamics based on the U.S. Energy Information Agency (EIA) on-highway diesel price.
Micheal McDonagh, president of parcel for AFS, reported that carriers are applying discounts to pursue the highest-profit customers. Small- to medium-size shippers are seeing exceptional discounts that might typically be reserved for much larger customers."
Based on these circumstances, the index expects the parcel rate index to decline from 28.8% to 26.8% in Q2 2024, and that trend is expected to continue in Q3, dropping to 25.7%. The express parcel index is also expected to fall, from 4.7% in Q2 2024 to 2.8% in Q3 2024.
In LTL, lower weight per shipment along with a lesser average fuel surcharge caused a 2.6% QoQ drop in LTL cost per shipment in the second quarter of 2024, though rate per pound showed modest growth – a testament to carrier discipline and graduated pricing structures that make lighter shipments more expensive. In the third quarter, the index foresees the LTL rate per pound index reaching 63.2% - a slight 0.3% increase over the previous quarter as market conditions remain steady and carriers maintain discipline.
"Looking at shippers' efforts to capitalize on cost-saving opportunities in today's freight market provides a rationale for the decreasing weight per shipment we see in LTL," said Dean Jones, president of LTL for AFS. "Two examples show how inbound and outbound flows at both ends of the weight spectrum push this overall trend – seeking relief from the punitive charges of parcel carriers pushes lighter freight into LTL networks while pursuing the efficiency of consolidated, multi-stop truckload pushes heavier freight away from LTL carriers."
The TD Cowen/AFS Freight Index was launched in October 2021. Projected rates are derived from the companies’ visibility to over US$39 billion of annual transportation spend across all modes. It includes actual net charges that factor in accessory charges such as fuel surcharges. Past performance and machine learning produce predictions for the remainder of the quarter, set against a baseline of 2018 rates for each mode.
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Emily Atkins
President
Emily Atkins Group
Emily Atkins is president of Emily Atkins Group and was editor of Inside Logistics from 2002 to 2024. She has lived and worked around the world as a journalist and writer for hire, with experience in several sectors besides supply chain, including automotive, insurance and waste management. Based in Southern Ontario, when she’s not researching or writing a story she can be found on her bike, in a kayak, singing in the band or at the wheel of her race car. LinkedIn: https://www.linkedin.com/in/emilyatkinsgroup/