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 capacity. The upshot? Freight capacity shortages and service challenges likely will remain at some level.

LTL Market Bears Weight of Freight Volume Growth

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

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.

International Shipping Rates Challenge: New Year, Same Capacity Challenges

In the international shipping marketplace, that translates to equipment availability issues, ongoing capacity pressure and motivation for the major shipping alliances to maintain record-high rates.

Although the Chinese New Year February 11-26 offers promise of a breather for vessel, port and intermodal operations, events of 2020 created enough congestion and imbalance that volatility will continue to affect supply chains reliant on international transportation.

Let’s explore factors that will affect price, capacity and service in the first half of 2021 and continue to contribute to international shipping rates challenges.

No International Shipping Relief in Sight

Signs of a unique year are already emerging. Capacity demands are at levels unlike we’ve ever experienced for this season. Bookings are at capacity through January and into February.

As a result, international shipping rates are not going down any time soon. Since the 3 major shipping alliances control about 85 percent of international shipping capacity, operators leverage their power more than in the past. A General Rate Increase has not been announced since September, but we are not seeing the typical drop in costs that normally accompanies a loosening of capacity that follows peak season. That will keep rates elevated.

Additional loaders are being deployed to keep up with demand. Some of those come online to send empty containers back to Asia. There, ports wait for a hundreds of thousands of containers to move slowly back into the flow from the congested U.S. West Coast.

Optimism is high that the Chinese New Year will afford two weeks of breathing room for the international shipping industry to catch up. Unfortunately, 16 days will not likely be enough time to alleviate several months’ worth of challenges that continue to affect services and cost across your end-to-end network.

Ripples Across Transportation Spend Clogs International and Domestic Supply Chain

The ripple of demand, capacity and equipment availability is felt across all transportation modes. Congestion on the rail stalls movement of freight. Full inbound containers detained by the rail are being stored off-site, requiring additional moves. When there is disruption to intermodal, expect it to occur across truckload and LTL and pressure cost management and service times as a result.

In this environment, global distribution of COVID-19 vaccine creates additional demand spikes, especially for the Air Freight mode that will fill a key role in the transportation of temperature sensitive materials. Likewise, expect to see impact across other domestic modes as medical supplies are prioritized, and, in the process, pushing transportation pricing up and capacity down.

On the trade compliance front, a new administration in Washington, D.C., has promised to bring regulation changes that will likely develop more slowly. Efforts to rollback tariffs, like China 301, get a lot of attention, and while the policy changes of a new president may not move quickly, expect some ripple in the complex rules for importing and exporting goods into the United States.

Consumer Behaviors Drive “Forever Peak” with Overseas Shipping

Problems challenging the international supply chain emanate from ongoing shifts in consumer behavior. E-commerce continues to fill buying voids left open by vacations and visits to the mall. Disposable income drives the online purchase of goods and the volume of consumable goods moving through transportation networks is creating an extended peak season across all modes.

Buyers are quickly becoming accustomed to the immediate purchase satisfaction that comes from an online order, and that is not ever going to revert. Raw material, component and finished good sourcing strategies as well as inventory management practices become increasingly complicated when buyers know they can take their cart elsewhere if you do not have the desired quantity available to fill their online order.

To make sure you protect that experience and secure every sale, it is critical to understand how every piece of the end-to-end supply chain puzzle – from foreign production site and overseas shipping, to trade compliance, domestic transportation and last mile delivery – fits together into a total landed cost of goods.

An expert partner can help you assemble the big picture perspective so you can control your international and domestic spend and turn your focus toward achieving strategic goals for your business.

For more insight on multi-modal transportation trends that will affect your cost and service in 2021, download our Q1 Industry Forecast. It features a look at things to come for shippers relying on Truckload, LTL and Parcel transportation, as well as our international transportation forecasts.

Transportation Costs in 2021: Less-Than-Truckload

Carriers are reacting to market changes in other ways beyond transportation costs, as well. One example: early in 2020, one national carrier indicated it would match any volume LTL quote from another carrier. Six weeks later, that carrier wasn’t accepting any volume shipments due to the dramatic shift in the market.

Carriers also have grown more comfortable implementing LTL surcharges that further drive up transportation costs. Some are turning away freight that is more difficult to handle.

The LTL transactional market is seeing tight capacity and generally widespread delays, including with premium carriers. Driving this is a 10-12 percent growth in demand, several times the typical range. 

Capacity constraints in the LTL markets may seem out of step with some of the economic news, which continues to reflect the pandemic toll on many businesses. The September 2020 unemployment rate (7.9 percent) was more than double the rate a year earlier. And while the gross domestic product jumped by $1.64 trillion in the third quarter of 2020, that followed a drop of $2.04 trillion in the second quarter.

One reason for the disconnect is the drop in the consumption of services, which dwarfs the drop in the consumption of goods. Between the first and second quarters, consumption of services dropped 13.3 percent, according to the American Trucking Association. The consumption of goods dropped by a more modest 2.8 percent, also according to the ATA. 

Looking at LTL Transportation in 2021

Even as the economy slowly recovers, demand for goods likely will outpace demand for services, the ATA predicts. Until a vaccine has been broadly distributed and COVID cases drop drastically, consumers appear comfortable continuing to spend more time at home. As they do, newly formed online shopping habits probably will continue. Online purchases of furniture and appliances, apparel, and groceries, among other items, are likely to remain at least 10 percent higher post-pandemic, consulting firm McKinsey found. 

This shift is contributing to expected ongoing capacity tightness. In turn, that likely will contribute to a favorable carrier’s market next year. The rate increases some carriers are imposing in high-capacity lanes likely will continue into 2021, until capacity corrects itself.

The level of those rate increase can vary. LTL carriers develop market-specific rate bases so the impact of increases passed along in 2021 can be influenced by carriers’ operating needs and your shipping characteristics. 

Carrier mergers also appear poised to continue. Most take one of several approaches. Some companies join forces to pool resources and become more efficient. Others bring together companies in different sectors, allowing all to expand their range of services.

Shippers of bulky, low-density, non-dock-to-dock freight, along with shippers of over-dimensional freight that parcel carriers are trying to price out of the parcel network, may face additional obstacles. Some LTL carriers are trying to push these freight types to the truckload market and are raising rates accordingly. 

Surcharges appear likely to remain and even increase. If some states, as predicted, add taxes, other LTL surcharges may appear. 

Prior to the pandemic, some LTL carriers began investing in box trucks so they could more easily handle residential e-commerce deliveries. These efforts have slowed during the pandemic and capacity crunch. However, once demand and capacity rebalance, expect to see LTL carriers make another move into this market. 

Managing Transportation Costs Through Capacity Constraints

While shifting from one carrier to another might seem like a way to improve service and transportation cost, jumping may not help. In fact, it’s possible service will further decline. 

Several other steps tend to be more effective. One is to take a longer-term perspective, work with a carrier, and establish a partnership that benefits all involved. Another is to build lead time into processes and set realistic expectations with end customers. 

For more insight on the motor freight environment we expect to emerge in 2021, watch our webinar focused on Brokerage and Capacity Planning 2021. We take a deeper dive into the outlook for LTL, Truckload and International transportation in our Freight Rate Outlook 2021. Read it today for multi-modal rate forecasts and analysis from our Supply Chain Masters.

Freight Rates: 2021 Truckload Outlook

Even within the past six months, many 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 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 rate increases 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 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.

E-Commerce Logistics Demands, COVID-19 Empower Ocean Alliances

Although there is still a slim chance that the fourth quarter produces some rate compression – or a downturn in the need for e-commerce logistics. When freight levels are at an all-time high, there is little motivation for the three major shipping alliances to drop rates significantly during the remaining calendar year.

Shippers looking to 2021 would be wise to consider contingency budgeting – especially if you are a major importer competing in a supply chain environment that continues to be affected by ongoing growth in online sales and e-commerce logistics.

Likewise, there has never been a more important time to reassess your entire import supply chain to validate compliance with evolving trade regulations. Emerging pinch points in the international supply chain are elevating risk for shippers who must be prepared to address traditional risk areas that carry a financial impact.

As we have stated since early 2019, contingency planning must be the part of your monthly and sometimes weekly business plans. Diversification in foreign sourcing has never been more critical, particularly in an election season that has pushed global trade forward as individual candidates differentiating issue.  

Close review of the international transportation landscape can lay the groundwork for developing strategies that mitigate that risk heading into 2021.

Alliances Take Control Amid E-Commerce Boom

Consumer behaviors are shifting the traditional retail models, and the unchecked growth of e-commerce is keeping the global supply chain packed with product. 

Credit some of that international freight volume to the rapid production and movement of Personal Protective Equipment (PPE) in response to a global health crisis. At the same time, retail supply chains have been irreversibly impacted by the functional success of e-commerce. Until some of the demand cycles in both realms stabilize, predicting ocean shipping rates will be a challenge.

More importantly, the three major shipping alliances response to COVID-19 demands the attention of organizations that rely on global commerce and e-commerce logistics. Vessel operators have shown remarkable discipline by matching supply to demand volatility.

During the first half of the year, the three alliances (2M, Ocean Alliance and THE Alliance) constricted supply by canceling dozens of scheduled voyages with the intent to remove excess capacity. However the net effect was scarcity of space, i.e. rates were increased monthly or bi-weekly and started to build. Representing 21 ocean vessel operators and roughly 10 million 20-foot equivalent units (TEU), these alliances have maintained rate discipline as the retail supply chain began to open in July in August. 

In the past, increased demand for service and the prospect of rate increase motivated operators to add sailings. With a strategic approach that ensures vessels are filled before others are added, ocean carriers keep upward pressure on rates that are roughly 80 percent higher in a year-over-year comparison to 2019.

This strategy supports a more dependable service for international shippers as it creates more reliability for in-country logistics operators, but if the alliances maintain this discipline, plan for rates to stay elevated. Solid bookings will continue through October and contingency budgeting should be a focus for major importers.

Persisting Pinch Points Create Risk

As we approach what has traditionally been a calm period at the end of the e-commerce logistics peak season, the ports of Long Beach and Los Angeles are at capacity. Historically higher volume for this time of year will undoubtedly spur downstream challenges deep into Q4 and into 2021. 

Finding available chasses to support container movements will continue to be a problem into December. As these containers and chasses (to a lesser degree) move in country and on the rail, it is hard to balance the need for equipment during a disruption-filled year like we’ve had. Vessels hoping to expedite movement for the last wave of peak season freight to North America are now waiting for containers to come back to port so that have something to load and ship. 

We know there will be an end to this kind of imbalance, but we have not gotten there yet.

The timing has never been greater for organizations to assess their entire import and export supply chain. Look for places to increase efficiency. Identify pinch points that elevate risk that emerges in times of global volatility. At this point, organizations should have complete awareness of the supply chain challenges arising during COVID-19 and address their preparedness for the next global disruption, both economically and around traditional risk areas. 

Trade Regulations and Tariff Battles Require Eye on Compliance

Plaintiffs representing a diverse set of industries are suing the U.S. Trade Representative (USTR) for relief from China 301 tariffs. The argument: tariffs implemented without sufficient advanced notice caused unfair and improper financial harm to their organizations. Many shippers have been negatively impacted, some to a crippling point, and they are looking for any dollars they can get.

These organizations – including some of the world’s largest brands – will not likely get complete relief, but their actions demonstrate that businesses will not sit idle when trade laws are put in place, as they argue, without warning.

Meanwhile, implementation of the trade regulations intended to replace the North American Free Trade Agreement continues to carry some unexpected consequences.

The U.S.-Mexico-Canada Agreement (USMCA) is having the largest effect on businesses close to the automotive supply chain, but many companies were lulled into thinking there would be limited changes in the new agreement. Updated documentation is required to execute cross border entries. Make sure to review your international trade compliance processes to avoid this type of needless risk caused by what seems like a simple change in regulations.