The market still supports premium freight rates, based on tight capacity and high demand. Is this the new normal? How long will rates stay high? Let’s consider the current market and discuss possible shifts on the horizon as we round out fourth quarter and plan for 2019.
Freight Industry Right Now
As of October, freight industry executives still reported turning down record amounts of freight. However, the disparity between spot market rates and contract rates indicate we could see capacity and demand begin to balance. To understand what is happening currently, we also need to consider the national spot market rate though. Averages are a bit down in comparison to earlier in the year, but they are still up 20% annually. Experts do feel the market is stabilized for the remainder of fourth quarter and we could start to see some balance in capacity that extends into early 2019.
Note: Winter weather storms could impact capacity and rates, similar to Hurricanes Harvey and Irma, which caused a spike in spot market demand in 2017.
The Carrier Take on Freight Rates
Ask most carriers and they will tell you they have been on the short end of the stick when it comes to trucking rates for too long. Citing more than 10 years of profit margins around pennies on the dollar. They attribute the inability to reinvest in drivers and equipment to the lack of earnings. Many believe the higher rates are the new normal, and shippers should prepare their strategies with this in mind long term.
Some recent data points from DAT may not fully align with carrier thoughts. Van, flatbed and reefer average spot market rates were down in August. However, annually the average spot prices were still up per mile: van rates 35 cents; flatbed 46 cents; reefer 31 cents.
In a recent Logistics Management article, Mark Montague, DAT pricing analyst, reminds us that “demand peaks before rates peak, with rates tending to stay up, even as things start to cool off at times.”
Note: While there have been some dips, big picture spot market conditions support the rate increases we have seen for the last couple of years.
4th Quarter Rates
Present contract freight rates, fourth quarter 2018, were negotiated in late 2017 and early 2018, a time that was extremely favorable to carriers with capacity low and demand high. September 2018 found a wide disparity between the average spot rate and contract rates, with average spot rates favored by 23 cents per mile.
This could indicate an upcoming shift in the demand to capacity ratio. We may begin to see the freight industry balance for shippers. Tender turn-down by carriers have not been prevalent in recent weeks and there has been success in securing lanes for contract freight. If demand does indeed begin to indicate parity, spot market rates should only be a factor for one-off shipments and short-lived spikes in demand.
Note: Driver shortage still impacts rates due to the impact on capacity crunch, but the numbers are on the rise which could help to balance the market. The Bureau of Labor Statistics data shows driver numbers up by about 31,000.
2019 Freight Industry Outlook
The optimal state for the freight industry may very well be equality between supply and demand.
That balance seems like a thing of fairy tales. The winding path of the freight industry market is ongoing, impacted by carriers, shippers, consumers and the overall economy. It looks like 2019 will continue on the same curvy road. There are more than a few considerations as you prepare your strategy for the upcoming year:
- Though trade wars are top of mind with the full impact uncertain, the strong economy looks as though it will hold.
- There are strong indicators of freight rates continuing to rise. However the year-over-year percentage of increase should be below 2018 levels.
- Carriers are investing in new equipment, based on the increase in sales of Class 8 trucks. This is not an indicator of more drivers necessarily, more an affirmation of trucking companies need of technology upgrades to meet regulations. Added bonus: Cutting-edge equipment is attractive to new drivers.
- Consumers are driving changes in trucking industry operations. Shippers have shifted to more regional hubs in order to cut transit time. This has impacted the average haul distance — dropping nearly 300 miles per load since 2005.
- Owner operators are banking on the spot market continuing to pay off. Many leaving small and large carriers to go out on their own.
- The driver shortage is expected to remain at record levels but will taper off.
- Capacity should loosen up just a bit with a possible double-digit percentage decrease in the volume of freight tendered.
Note: The American Trucking Associations’ Freight Forecast projected freight volumes to increase more than 35% by 2029.
What Can Shippers Do to Prepare?
With so much in flux that can impact you and your business’s profits, how should you navigate the freight industry peaks and valleys? Here are a few ideas:
1. Don’t forget the basics
The freight industry is cyclical, often hand-in-hand with the national stage, driven by one of the most basic economic principles: supply and demand. When we have a capacity shortage, the freight rates will negatively impact bottom lines.
2. Invest in analysis
You have your shipment data; compare it to what is happening in the market. This can help you formulate a picture that leads to a greater understanding of trends to inform your longer-term strategies.
3. Work with a 3PL
3PLs are in the best position for industry knowledge. They set pricing with both carriers and shippers. A good alliance will help you to ride the freight waves gracefully, helping your business to succeed in protecting its bottom line.
Together, we can simplify logistics. Let’s partner and create solutions for your business. Give us a call at 877.367.2324 or email us at email@example.com.