The Freight Recession & A Challenging Peak Season

The past three years have been anything but normal for the freight industry. Many transportation companies built strong foundations during and shortly after the pandemic, but the market has shifted significantly throughout 2023. Before 2023, the last industry downturn was in 2019 which happened, in part, due to excess truck capacity following a strong market in 2018 and an industry-wide ELD mandate that went into effect. At that time, many trucking companies went out of business and shut down permanently.

“The freight market is one of the most volatile markets on the planet,” Craig Fuller CEO at FreightWaves shared recently. “Hot markets can turn ice cold in a flash, particularly after the federal government and central bankers flooded our economy with so much liquidity and then proceeded to institute the fastest monetary tightening cycle in history.”

According to Fuller and many other sources, the current market is among the most challenging the industry has ever experienced. Currently, freight volumes are close to 2018 levels, which is much less than the volume the industry has seen over the past several years. But the rising costs of equipment, labor, fuel and insurance, paired with higher interest rates have put increased pressure on profitability.

The Challenges of this Year’s Peak Season

A typical peak shipping season begins mid-August and lasts until Thanksgiving in late November. It’s a busy retail time with students recently returning to school as well as a number of major holidays around the world, and is usually when freight rates are the highest and shipping is the busiest. 

Capacity is typically tight during these times and the demand is high, but transportation and shipping companies understand this happens every year. To ensure a smooth peak season, they plan ahead and consider all of their shipping options. They only work with reputable partners and keep the lines of communication open with both suppliers and customers. This period is largely a time in which carriers can find increased opportunities and generate additional revenue.

The 2022 peak season happened earlier than usual, in June and July, according to Port of Los Angeles Executive Director Gene Seroka. Companies chose to ship early because of fears of delivery delays with port congestion as well as potential West Coast labor unrest. Compared to 2022, however, holiday gifts and goods were shipped closer to the usual peak season time frame.

“My estimation on peak season [2023] based on purchase orders that have already gone out and discussions with retailers, manufacturers and automotive companies is that we’ll probably see a relatively short peak season between the months of September and October,” Seroka shared during a press conference earlier this year.

As a result, carriers are feeling far more strain than they have in recent years. This peak season has not resulted in the expected third and fourth quarter boom in earnings, with many dubbing it “a lackluster season.” 

Trimble’s Mike Hamill, sector vice president of strategy, agrees with Seroka’s assessment. “Last year, there was virtually no need for shippers to increase capacity within their network for peak. We’ve seen similar conditions this season and I unfortunately don’t see any indicators at this time that would project this changing in 2024 either.” When asked when the market might turn, Hamill adds, “due to the imbalance of supply and demand that remains in the market – it’s not until there’s more balance in the market that the industry will start to see a pre-pandemic normal take shape.”

The Future of the Freight Recession

There is no question the market is in a downturn, with several factors all hitting at once – and it’s been a bigger downturn than many experts had predicted. As we mentioned above, the cost of loans has increased significantly, and amid continued inflation, costs for equipment, personnel and insurance have risen as well. According to eCapital, an alternative lender specializing in the transportation industry, after freight companies announced their Q1 earnings, it became clear that the industry was in a recession. 

Further, demand for goods is down overall, which is leading to less domestic manufacturing, fewer imported goods and carriers being forced to bid on fewer loads, increasing competition. Less freight is coming from overseas, impacting both trucking and rail transportation. Supply and demand drives the market, and currently, there is excess capacity. These challenges combined result in already-thin margins being squeezed even further.

According to Talk Business & Politics, when a freight recession coincides with an overall economic downturn, the impact is stronger. And while the overall economy has done better than many expected, that hasn’t been the case for the freight industry, in large part due to slow retail sales and low factory demand.

Spot Rates and Contract Rates

A spot rate is a one-time fee that a shipper pays to move a load at current freight market pricing. A contract rate is usually set during an annual RFP process and is a long-term, stable price for the movement of freight. In a typical market, spot rates and contract rates are pretty similar (e.g. if spot rates go up, contract rates go up, and if spot rates go down, contract rates usually go down).

In a press release from the American Trucking Associations, Chief Economist Bob Costello said, “Falling home construction, decreasing factory output and soft retail sales all hurt contract freight tonnage – which dominates ATA’s tonnage index – during the month. Despite the largest year-over-year drop since October 2020, contract freight remains more robust than the spot market, which continues to see prolonged weakness.”

eCapital reported that freight rates are down overall, but that spot rates have been hit the hardest. According to analysts, as of March spot rates are down as much as 70 percent compared to 2022.

Current Freight Market Conditions

Everywhere, there is an abundance of retail inventory, which means fewer trucks are delivering goods across the country. Many expect it’s going to be a tough rest of the year. Senior research analyst Garrett Holland and research analyst Joseph Higgins, both of Baird Trucking shared, “the next few quarters are likely to reflect an extended bottoming process as we grind through the trough of the cycle.”

The industry is crowded. Many trucking companies were established during the post-pandemic recovery, so there’s an oversaturation in the market. Unfortunately, experts are predicting a “purge in trucking” as the economy slows alongside rising interest rates and inflation.

An article on the Talk Business and Politics website reported, “freight demand remains soft, and capacity is loose. According to analysts, the weak market might be here to stay for the rest of the year.”

While experts have differed on the severity of the downturn, or recession, the timing and even where the bottom is, it’s widely agreed that it’s a tough market. For his part, Avery Vise, a leading trucking and transportation industry economist and vice president of trucking for FTR Transportation Intelligence, said in his recent Insight 2023 presentation, “The good news is that I don’t think there is any more room to go down. We are in a stable market at this point. It is not likely to get weaker, but there is no expectation it will get stronger soon.”

What Does This Mean for You?

Unfortunately, the length of this downturn is exceptional and people need to plan accordingly. To weather this cycle and thrive in 2024, savvy trucking companies need to work efficiently, prioritize key relationships and remain mindful of their unit economics.

When it comes to efficient operation, quality of service is a major differentiator in the market, especially in a commoditized industry like freight transport. Companies can only deliver high quality service and differentiate themselves from competitors by increasing efficiency. To do so, they will need to look inward and get creative: review internal processes, improve employee training, offer new value-added services beyond just more capacity, evaluate the technologies being used to operate and invigorate company culture. These are all important ways companies can set themselves apart.  

But no carrier operates in a vacuum. Relationships are more important than ever. As Trimble’s Mike Hamill put it, “Relationships are the foundation of the transportation industry. It’s critical that carriers, shippers, brokers and their customers lean on their best relationships amid a down market.” Challenging market conditions provide a great opportunity to evaluate existing partnerships and customers and consider ways to expand or reduce the relationship. Are there creative ways to improve relationships, perhaps with extended services, shared technologies or reduced operating costs?  What can be done to solidify existing relationships?

And with decreasing margins, it’s vital that carriers understand their true cost of doing business, how much revenue they can generate per asset, and how the suggestions above can combine to increase transactions and revenue overall. Moreover, this period presents an opportunity to prepare your business and business model for the eventual market upturn by making strategic investments, exploring creative financing options, or maybe cutting or prioritizing valuable customers and partners. In total, the priority is to lower costs while seeking higher rewards.

And while the current market is challenging, it always occurs within a cycle, according to Kelly Williams, network strategy product lead at Trimble: “Even if there is less freight, the dynamics of the freight market will always be in a state of change, whether it’s tweaks in raw material suppliers, adjustments in the mode of transportation and/or consumer behavior. This drives a constant need to match freight with capacity.”

However, Williams, who worked for decades at a top carrier prior to joining Trimble, is optimistic about carriers’ resilience in the face of adversity: “Carriers have ridden the market fluctuation waves before, and each has their own flotation device of choice to manage through it.”

Trimble understands the volatility of the freight market, and can help companies navigate a changing, and currently challenging, market with the right technology and solutions to remain competitive, create efficiencies and reduce operational costs.

Are you looking to optimize your operation and better adapt to market forces? Contact our team for a no pressure consultation and demo of how our solutions can help you find advantages among these challenges.