With only twelve days left until Black Friday, most of us remain assured that whatever gifts we plan on buying or items we will need to ship are safely ensconced in a US-based warehouse, and we remain confident that everything will arrive on time. That fortitude was not always warranted. Resilience of the supply chain, a stronger-than-expected economy, and smart planning can be credited with us being here now. You may recall last year at this time, suppliers were balancing overstocked inventories, uncertain demand, and the threat of stubborn inflation.
While we are confident there is enough supply to meet even the most overly optimistic predictions for demand this holiday season, the fact is most experts believe the freight recession will continue well into 2024. Uncertainty on freight rates for the next year is concerning both shippers and carriers as they consider committing to 12-month contracts, both in air and sea. One way of reducing risk is through index-linked agreements (ILAs), but carriers have concerns that rates could fall to unsustainable levels. Index-linked contracts allow shippers and transportation providers to peg their contracted rates to a market benchmark. This is a standard practice in many industries, from energy to agriculture and metals and mining. Midsize and large trucking carriers even do this for fuel, often buying diesel at a price based on wholesale or rack prices that move with the market. Market uncertainty is pausing even this hedging innovation.
This freight recession is unprecedented. It certainly does not match basic theories of supply and demand or basic economics. There is enough demand to keep prices steady or rising in the shipping sector. Inflation, while seemingly kept in check, is at a three-decade high. Those factors are tempered by more introspection as signs emerge that the market could remain subdued for a longer period. This new normal is less about the tumult of the past and more about steady adjustment to prolonged market softness. The second half of 2023 has so far brought with it several major bankruptcies, leaving in their wake a new awareness among carriers and brokers of how fragile market equilibrium really is. As the fourth financial quarter of 2023 unfolds, many freight executives seem to be adopting a more defensive stance, suggesting collective acceptance of a “lower for longer” market scenario.
Another factor is the proliferation of the freight broker market. In 2000, freight brokerage was a cottage industry, representing a small percentage of the trucking industry, just 6%. Fast forward to 2023, and freight brokers handle more than 20% of all trucking freight. As freight brokerages invested in technology and customer service, they began to offer a more compelling product than their asset-based competitors and took on a greater role in routing guides. Today, it is common for multiple freight brokerages to be in primary positions in shippers’ routing guides, often as the top choice, beating out their asset-based competitors.
Factors like these are causing financial experts to warn that it’s actually possible for the freight economy, which has been stuck in recession for 18 months, to get worse even though the economy produced robust 4.9% growth in the third quarter.
The container shipping industry faces a few years of headwinds as low freight rates, a weak European economy, and widening geopolitical turmoil cloud the outlook. Rates to transport goods in containers are hovering at very low levels, and it’s impossible to say when that will turn around. The air carrier sector is bracing for the same; DHL executives said the year-over-year declines were expected amid an environment of slowing demand, higher fuel prices, and unfavorable currency fluctuations.
Covid most certainly changed the paradigm of expectations in the shipping industry. We’ve gone from traffic backed up at the ports for weeks, heavy consumer demand, and a relatively calm geopolitical outlook to overstocked warehouses, weakening demand, and conflicts on multiple continents. Inflation is tamed, the Fed is likely to hold off raising interest rates, a recession at one point seemed inevitable, but with the US growth rate at 4.9%, it might only come in late 2024, or not at all. The freight sector, sea, air, rail, and trucking are trudging along behind the overall economy. One economic truth is sure to apply to freight at some point; the market always corrects itself. It might take a lot of evolution, but products need to get from the factory to your front door. Air, sea, rail, and road shipping aren’t going anywhere. What the sector will look like moving forward remains to be seen.
The Latest In Freight News
FedEx Express is so overstaffed with pilots that it is now trying to get some of them to apply for positions with a regional passenger airline, which is wholly owned by American Airlines. FedEx had struck a deal with PSA Airlines that would allow FedEx pilots to move over to the regional carrier through an expedited interview process and get them into the Captain seat. The regional carrier is sweetening the deal with a $250,000 signing bonus. Contract talks failed a few months ago, with FedEx pilots rejecting up to a 30% increase in their contract. Pilots at many commercial carriers in the US have recently signed new deals with huge increases.
Nearly 200 senior pilots at UPS have accepted the company’s voluntary severance package, and regional passenger airline PSA Airlines is trying to recruit them to close a crew shortage. The headcount reduction at UPS Airlines is much more limited than one envisioned at rival FedEx Express, where management has acknowledged it has more than 700 excess pilots. Major U.S. passenger airlines are on a hiring spree that has left regional carriers like PSA desperate for aviators with enough experience to fill the captain’s seat in their cockpits. Cargo carriers, by contrast, are slowing down, unable to offer pilots more than the minimum level of flying or offering buyouts because of the slump in parcel volumes.
The general rate increase (GRI) announced by FedEx and UPS is 5.9%, and the two carriers’ charges mirror each other. But the 5.9% increase announced is only an average. The actual increases vary depending on a number of factors, including distance, weight, and service chosen. As we reported in this newsletter’s opening, consumer expenditure in the US is growing at a remarkable rate, yet the logistics service providers whose businesses are driven by consumer demand have yet to benefit from this upsurge. An example is UPS, which has just published third-quarter results that saw a 12.8% fall in revenue year-on-year. Adjusted operating profit fell by 48.7%. The main cause of this sharp fall was a fall in daily volumes of express packages of 11.5%, with business-to-consumer volumes falling harder than business-to-business. On the other side of things, UPS announced that it has completed the acquisition of MNX Global Logistics, a global time-critical logistics provider. The acquisition closed on Nov. 2, 2023, following all required regulatory approvals.
DHL is predicting a peak season increase from 6.9 million to 11 million packages delivered daily. DHL and AutoStore, a pioneering robotic technology company specializing in automated storage and retrieval systems, are expanding their partnership in a move set to further automated warehouse operations on a global scale. With the expansion, the partners are targeting the deployment of more than 1,000 robots at DHL’s fulfillment warehouses.
Wabtec Corp., a rail technology company, took what it says is a major step toward electrifying freight trains. Voters in Cincinnati approved the sale of Cincinnati Southern Railways to Norfolk Southern. J.B. Hunt Transport Services and BNSF Railway announced the launch of Quantum, a premium intermodal offering ensuring improved delivery times with consistent service. Industry observers are saying that despite one of the most unprecedented downfalls in transportation and logistics history, Convoy Inc.’s ultimate legacy is that it shook up the freight industry by bringing technology innovation and investments into the space.
Employment in the truck transportation sector in October recorded its fourth decline in the past five months, as total jobs in that classification are now down more than 30,000 since its most recent high. Citizens Bank of Sac City, Iowa, has failed, and it appears that its exposure to commercial trucking is the cause. Bipartisan lawmakers have introduced a bill that would give America’s 2.19 million truck drivers the right to overtime pay.
A work stoppage at Mack Trucks’ assembly sites in three states could be nearing its conclusion as United Auto Workers (UAW) informed Mack that it will hold a vote next week on the five-year agreement negotiated by both sides. Both sides in litigation over California’s Assembly Bill 5 (AB5) will be squaring off again in court. Recently, a judge put a temporary injunction on the bill, preventing the state from enforcing it. Technology advancements like transportation management systems (TMS) and LTL freight APIs (application programming interfaces) open doors to digitize the shipment lifecycle from quote to delivery. Yellow Corp. will liquidate its equipment with the help of Ritchie Bros. Auctioneers and Nations Capital. Congressional pressure is growing on the U.S. Treasury to help salvage trucking giant Yellow from bankruptcy.
The Mississippi River hit record low levels for the month of October, impacting navigation and drinking water supplies in parts of the Lower Mississippi. The drought affecting shipping through the Panama Canal is forcing some shipments to detour through the Suez Canal. Across every continent, shipping is having to contend with the fallout from this year’s El Niño, a weather phenomenon that has helped cut drafts along major waterways, slashed agricultural production in key export markets, and could herald a stormy Pacific for vessels to contend with in the coming months. Three major seaports across Texas will receive almost $38 million in federal funding aimed at speeding up supply chain operations and improving trucking capacity.
A U.S. foreign development agency announced it would lend $553 million to establish a deepwater shipping container terminal at the Port of Colombo in Sri Lanka, expanding America’s effort to finance infrastructure around strategic parts of Asia. After the labor problems in the US West Coast ports in the first half of the year, there is now a threat of strikes affecting the East Coast ports. The International Longshoreman’s Association, which represents dock workers on the US East Coast and Gulf Coast, is engaged in renegotiating the ‘Master Contract’ that governs employment and pay with the ‘United States Maritime Alliance,’ which is the employers association for these ports.
Logistics, Supply Chain, Warehouse, And Related News
Accenture continues to expand its supply chain capabilities, announcing the acquisition of two firms in the managed services and procurement spaces. One is The Shelby Group, and the other is OnProcess Technology, a provider of supply chain managed services. Logistics visibility platform Slync, which is winding down operations, is having its intellectual property auctioned off. The armies of people who make clothes for Western brands, some of the lowest-paid factory workers in the world, in places like Bangladesh, are protesting for better wages, a fresh sign that the era of ultracheap labor and ultracheap clothes, on which many companies rely is increasingly under strain. Bangladesh experienced violent protests from workers seeking a higher minimum wage, but the government has yet to make a decision.
Companies around the globe are accelerating their efforts to diversify and localize their supply networks, as the topics of risk and resilience still dominate the supply chain agenda four years on from the start of the pandemic. For years, foreign companies plowed the profits they made in China back into China, using the cash to finance new hiring and investment as its giant economy expanded rapidly. Now, as growth slows and tensions between Beijing and Washington rise, they are pulling those profits out. Global logistics difficulties are at the lowest in 26 years as transportation costs keep declining, according to the Federal Reserve Bank of New York.
Supplier relationships played a key role in the decision to transition Overstock to the Bed Bath & Beyond brand, according to company executives. Overstock relaunched its e-commerce site under the Bed Bath & Beyond banner at the beginning of August after buying the intellectual property from the bankrupt store chain of the same name for $21.5 million in June. Walmart is increasing its reliability on India as a manufacturing resource, moving more investment away from China. Mexico has replaced China as the US largest trading partner. The National Retail Federation (NRF) has been tracking imports and reports a decline but notes that consumer demand is keeping the supply chain afloat.
Logistics real estate remains tight in most markets around the U.S., and companies could see “significant rental rate increases” when they renew leases in coming months, according to a report from Prologis. The Dodge Momentum Index, a benchmark that measures nonresidential building planning, inched up 1% in October, driven largely by warehouse activity, according to the Dodge Construction Network. It’s the second consecutive month of positive gains. The City Planning Commissioners in Victorville, California, will soon make a decision on whether to approve a Site Plan to allow for the development of a massive warehouse distribution building spanning approximately 1.1 million square feet. The logistics/warehouse automation sector is expected to continue its growth trajectory over the next few years.
Spot, a leading logistics company in North America, announced the official opening of its Chicago office. There is a new app that helps citizens concerned about the growth of warehouse construction in their backyards track industrial construction. Amazon sellers can now use the U.S. Postal Service’s new shipping service, Ground Advantage, through Amazon Buy Shipping. Amazon workers in the UK are striking again. The retail giant is redefining fast shipping with same-day delivery in multiple markets.
TikTok, the viral video-sharing platform, is betting heavily on logistics as it tries to turn its outsize streaming audience into a big share of the U.S. e-commerce market. The social media app is setting up a network of warehouses and fulfillment operations, taking on nuts-and-bolts tasks such as managing inventory and delivery from the array of independent merchants that are selling goods to TikTok’s legions of followers. Research shows more and more people are purchasing products while on social media networks. Consumers still prefer to make purchases on platforms that offer free shipping and free returns.
Working from home has reshaped the way people shop and what they are buying. TJ Maxx and Marshalls are reducing their retail presence in the new year. TJ Maxx and Marshalls are reducing their retail presence in the new year. Both discounted retailers, which are owned by TJX Companies, will close several stores in New York and Chicago beginning in January 2024 due to an evaluation of their retail presence.
