Freight Capacity Shortages and Service Challenges Persist

Freight Capacity Shortages and Service Challenges Persist

The Logistics Manager’s Index (LMI) showed a December 2020 logistics growth rate of 66.7, or about 12.7 points ahead of the 2019 rate. While a small drop from November’s 70.8, this may be more of a breather than a shift. The decline in growth rates are reflected in slight declines across all of the metrics of the LMI (except for the two freight capacity metrics which have increased).

Consumers show no signs of halting online shopping activity. In addition, the ramp-up of vaccine distribution, while it will hasten a return to some sort of normalcy, it will consume freight capacity. The upshot? Service challenges likely will remain at some level.

LTL Capacity Bears Weight of Freight Volume Growth

LTL carriers struggle to keep pace with demands for freight capacity on docks and trucks.

Nearly all – 87.9 percent – survey respondents to a JOC survey in September and October 2020 indicated that longer transit times were a challenge. In addition, 47.2 percent experienced increased shipment loss or damages, and two-thirds had labor shortages.

The sustained growth in shipments across the logistics industry during 2020 contributed to these numbers. Tonnage in the LTL sector in November 2020 showed a 6 percent year-over-year increase in growth, according to the Cass Freight Index.

A few regions were especially hard hit. The Port of Los Angeles processed 889,748 twenty-foot equivalent units (TEUs) in November 2020, up 22 percent from a year earlier. During the same time, at least one carrier suspended financial guarantees for time-critical services in California and Portland, Oregon due to spiking COVID-19 cases among its drivers.

The increases in shipment volume also meant many distribution centers were taking longer to accept shipments. That led to backups with carriers. Detention and storage charges, formerly unheard of in the LTL market, have become more common.

Consolidation in the market continues among both larger and regional companies. Among these moves, Cross Country Freight Solutions announced in January the acquisition of Midwestern LTL carriers, Price Truck Lines and Mergenthaler Transportation. In September 2020, Forward Air Corporation, an asset-light freight and logistics company, announced its acquisition of the assets of CLW Delivery, Inc., a privately-held, final-mile provider with annual revenues of about $20 million.

Because capacity constraints show little sign of easing, service challenges likely will continue into early 2021. Expect corresponding impacts on rates in 2021

LTL Solidifies Residential Deliveries, Moves Toward Digitization

Many LTL carriers focused on effectively handling residential deliveries are exploring new methods, such as purchasing smaller trucks that can maneuver in neighborhoods and urban areas.

The LTL sector is steadily digitizing, with the formation in November 2020 of the Digital LTL Council, comprised of 20-plus transportation companies. Its goal is to establish a set of uniform standards that support the scalable automation and digitalization of LTL shipments.

Over the past year, some council members experimented with standards for electronic bill of lading (eBOL) solutions. Carriers that digitize could save up to 1.3 percent of costs. Digitization should also cut errors and allow all parties to quickly locate freight in transit.

Given ongoing tightness in the LTL market, carriers likely will be selective about the shippers with whom they partner. Shippers can make it easier for carriers by improving facilities where needed and facilitating efficient drop-offs and pickups.

Truckload Freight: Volume Up, Service Down

Truckload shippers face cost and service challenges as high volumes exceed capacity already limited by the number of trucks on the road.

As in the LTL market, the truckload (TL) market is experiencing both sustained growth and service challenges. The American Trucking Association’s For-Hire Truck Tonnage Index rose by 3.7 percent in November, driven in part by robust e-commerce orders and strong single-family housing starts. At the same time, languishing restaurant, manufacturing and energy sectors remained a drag, the ATA noted.

Data from DAT Freight & Analytics shows another bifurcation in the truckload market. Dry van contract volumes were down 10 percent year-over-year, while spot market volumes were up 107 percent. Similarly, refrigerated contract volumes were down 21 percent, while spot market volumes had spiked 116 percent.

About 41 percent of carriers responding to the 22nd COVID-19 survey by Morgan Stanley, published in December 2020, indicated COVID-19 has hampered their ability to operate smoothly. The driver shortage was the most commonly cited reason, with varying emergency restrictions coming in second.

Freight Capacity Constraints Drive Up Truckload Rates

Given ongoing capacity constraints, the truckload market likely will see rates continue to increase for at least the first half of 2021. Transportation Insight expects contract rates to increase 3-5 percent, and spot rates to rise by about 5-7 percent.

However, some good news appears further out on the horizon. A smaller percentage of carriers responding to the Morgan Stanley COVID-19 survey – 36 percent versus the previous 39 percent – indicated the impact of COVID-19 would remain negative a year out.

In addition, truck sales are up nearly 197 percent year-over-year. As these come online, they will boost capacity, helping moderate the upward pressure on rates.

Several unknowns could affect the truckload market. They include the potential for another wave of shutdowns. Transportation has been considered an essential business, which should mitigate any impact.

Potential changes from the new presidential administration, as well as from newly elected state and local officials, are additional unknowns. However, as of early January, no proposed regulations that would significantly impact the truckload market appeared on the horizon.

Challenges to Truckload Digitization

Many shippers in the truckload space are interested in digitization, including electronic bills of lading, which would cut the time required to load trucks and reduce exposure to illness. However, given the thousands of carriers across the country, ranging from national enterprises to operations with a handful of trucks, this shift likely would occur incrementally.

Even as the volatility of 2020 abates, most carriers will continue to focus on contractual rather than spot pricing as a way of gaining further stability.

Shippers of Choice

In both the truckload and LTL markets, capacity constraints appear likely to continue.

Shippers who continually switch carriers to improve service may find their efforts fruitless.

Instead, by taking steps internally to remain shippers of choice and working with logistics providers like Transportation Insight to address challenges, you can mitigate rate increases and strengthen the service your receive and your access to capacity.

Download our First Quarter ChainLink 2021 for more forecasts and cost impact analysis from our freight capacity experts. Read this quarterly industry forecast for a multi-modal look at the trends that will affect your business in the months ahead.

Freight Rates: 2021 Truckload Outlook

Even within the past six months, many freight rates have spiked. For instance, in May, national dry van rates averaged $1.60. By October, they had shot up to $2.42 – a jump of more than 50 percent in five months. Similarly, flatbed rates rose from an average of $1.90 in May to $2.46 by October. So, while many rates appear to be holding steady, they’re doing so at high levels. 

In addition, aside from a potential increase in demand for vans leading into the holidays, the typical seasonality in demand and rates appears to have taken a hiatus. Instead, pockets of higher demand are driving rates even higher in some areas, such as the Pacific Northwest and southern California. 

Demand for flatbed trucks remains strong across the country. Demand for refrigerated truckloads is loosening but remains high in the Pacific Northwest and the Midwest. 

Driving the Freight Rates Market

One reason for the rate increases is a drop in capacity. While overall shipping tonnage is down, the number of available drivers is as well. Many smaller trucking shops may have left the market, driven out by a challenging mix of COVID-19 and rising insurance premiums, some resulting from high jury verdicts awarded in the aftermath of accidents. And mid-sized carriers have been reluctant to add equipment and drivers in this turbulent time.

In some cases, drivers face prohibitions stemming from violations logged in the Federal Motor Carrier Safety Administration’s (FMCSA) Drug and Alcohol Clearinghouse. While the shipping and carrier community support safety in trucking, this does represent a significant decrease in available drivers. According to the American Trucking Associations (ATA) as of Oct. 1, As of Oct. 1, more than 34,000 drivers were prohibited from getting back on the road because they had registered a violation. Of those, close to 27,000 had not started the process required before returning to their jobs. 

In total, about 74,000 transportation industry jobs have been lost or furloughed, or about 5 percent of the base, between late 2019 and late 2020.

Moving Into 2021

It might appear that the rise in Class 8 truck sales would offset the drop in drivers. According to J.D. Power’s October 2020 Commercial Truck Guidelines Industry Review, sales of the three most common sleeper tractors – those three to seven years old – has been generally rising throughout 2020, and then spiked in July. However, new truck sales equipment may not be available until mid- to late-2021. Moreover, many of these sales are for replacement equipment, rather than expansion. As a result, they are unlikely to add significantly to capacity. 

The conclusion of the presidential and other elections, assuming they occur in a relatively straightforward manner, may spark consumer confidence. In turn, that might drive shipping volumes – a generally positive outcome, but one that may further constrain capacity.

The disruption in the small package market may mean some of those shipments move to the LTL market, and a percentage of those then head to the truckload market. Similarly, ongoing challenges and chaos in the international and intermodal market may lead to more shipments moving to truckload. All of these will, of course, further constrain capacity.

In light of the factors affecting the truckload market, Transportation Insight (TI) forecasts freight rates increase of 3-5 percent for our clients that contract with carriers. Rate increases in the spot market likely will be 5-7 percent. 

In working on behalf of our clients to negotiate rates, we take a lane-by-lane and market-by-market approach. This targets those carriers whose rates appear out of alignment with the market, focused on our goal of leveraging relationships to help bring them into alignment. Shippers gain some protection from the overall increases that might not be available without those relationships.

More Truckload Change Coming

A couple of changes in the truckload sector may have a positive impact on shipments. One is the shift from some national carriers growing their regional presence to rejuvenating their long-haul network. Regional focus is an attempt to entice drivers with more time at home, but with specific market disruptions caused by COVID-19, some carriers are looking to diversify their lane mix. The flipside: this could pull additional congestion off the rail to feed these long haul fleets and add pressure to over-the-road capacity.

Another shift is the increasing use of data, such as score-carding and monitoring, by both carriers and shippers. Early in this shift to monitoring and managing, some carriers worried that data would replace the relationships they cultivated with their customers. 

The opposite appears to be occurring. The data tends to allow for more dialogue and planning, helping to strengthen relationships. In addition, it allows quality carriers to quantitatively demonstrate they can provide the reliability and service shippers require. 

Navigating a Changed Market

In the current truckload market, shippers that have taken steps to become shippers of choice tend to benefit with greater commitment by the carriers with whom they partner. This can mean, for instance, shippers provide longer lead-times and some flexibility on pickup times. Both enable carriers to schedule their routes more efficiently.

It also helps to keep in mind that the rate increases happening now will not last forever. The truckload market tends to self-correct; as freight rates increase, more drivers enter the field and supply and demand start to balance out. In the meantime, however, it helps to expect some volatility to continue. 

To help you navigate that volatility across all transportation modes in your supply chain, we created the Rate Outlook 2021. It provides a forecast for transportation rates in Parcel, LTL and International, as well as truckload. Read it today for information that will help you mitigate risk and control cost across your network. Watch the webinar with our freight rate experts for more guidance on brokerage and carrier capacity planning in 2021.