The freight market operates like a pendulum. When supply (capacity) outweighs demand (volume), it favors the carrier. When demand outweighs supply, it favors the shipper. This is how the freight cycle always has always been, especially when it mirrors the nation’s economic cycle.
Since the start of the pandemic and through early March of 2022, the pricing power was in the hands of the carriers. However, in recent months, the power has shifted to the shipper.
Both shippers and carriers should proceed carefully during this period in the freight cycle. The best decisions can only be made when one understands the challenges of their counterpart on the other side of the negotiation.
Shippers should know two things about carriers. The first is: When rates were at historic highs, carriers made significant investments in their drivers and fleets.
Yes, many carriers also realized record profits. But the main sentiment of carriers now is, “I just bought all this equipment and hired all these drivers. With rates now coming back down, how do I continue to operate my business?”
As of October, carriers are making, on average, more than a full dollar less per mile than they were at the start of the year. This is a problem for carriers as they need to navigate the additional expenses to operate their business.
The second item you should know is diesel prices are up about 50% versus a year ago; YoY driver wages are up; and used Class-8 trucks cost about 43% more YoY, plus the rising interest rates make financing large capital expenses even more difficult. Add up all these incremental costs, and carriers are faced with an enormous financial mountain to climb.
Carriers should know two things about shippers. Shippers also have a full workforce and are experiencing the same cost constraints you’re feeling. Unemployment has remained generally flat since April and job creation is high. Many employees are demanding higher wages. Additionally, the workforce is still fulfilling customer orders that persist regardless of rising inflation.
Shippers fear that if the economy doesn’t turn around, their customers will stop consuming. With GDP declining for two consecutive quarters, the ISM Manufacturing Index reading negative for 3 months and industrial production dipping negative in August, that concern is valid.
Many shippers’ futures rely on how consumers react in the 4th Quarter and into 2023. These concerns ultimately manifest into the same concern carriers face today: “How do I operate my business with all of these additional costs?” High on the list of cost-control initiatives for these shippers is the reduction of transportation spend either through transportation optimization or finding lower-cost providers.
We strongly caution both shippers and carriers that they should proceed carefully during this part of the freight cycle. A deliberate and durable strategic transportation plan balances the considerations of customers, stakeholders, employees and partners.
Both shippers and carriers are mutually dependent to bring revenue into their respective organizations. It would serve each party to take the long view and ensure the decisions they make in the next quarter are made with the knowledge of each other’s concerns and struggles.
In the end, both can ride the freight cycle successfully together, not just through this quarter but for years to come.