The Lukewarm Freight Economy Is In Search Of Its Peak Season

The current freight market can make a good case for both glass-half-full and glass-half-empty perspectives, showing both promise and uncertainty.

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It's the end of July, and if the market sticks to historical precedent, then we're looking at the start of the year's peak freight season. While the freight market today understandably isn't as 'exciting' as the preceding pandemic years, the first half of '23 has by no means been uneventful. 

The last few weeks have been a wild ride — the ILWU reached a tentative deal with the PMA, the Canadian ILWU came to an agreement and later reneged to continue the strike, LTL-major Yellow fiddling with liquidation, and UPS staring at a potential Teamsters strike that could send tremors down the US delivery ecosystem.

…looks like there's never a dull day at the supply chain office. 

On that note, it makes sense to check J.B. Hunt's guidance on what the firm thinks the health of the LTL segment would look like for the rest of the year (and considering LTL is a bellwether for the freight economy, this is interesting to the industry at-large). Darren Field, president of J.B. Hunt's intermodal division, was hesitant to be enthusiastic about the improved freight volume numbers in June (there's been a decline in the rate of y-o-y fall in LTL freight volumes) — "While we are hesitant to suggest the presence of any green shoots, we saw evidence from customers in June that the destocking trend has moderated."

J.B. Hunt's forecast can offer key signals on the trajectory of retail, manufacturing and industrial activity. Field's skepticism comes from the fact that even if volumes seem to hold on, rates are not seeing any significant, decisive uptick. This was reflected in J.B. Hunt's idling fleet strength, with the company keeping roughly 18% of its container fleet out of action in the first half of '23.  

The story carries over to the maritime market as well. Descartes reported that US container imports for June '23 were down 16.1% from June '22. However, TEU volumes in June '23 are 6% higher than in June '19. Considering the US retail economy is regressing to a pre-pandemic growth trajectory, the import TEUs handled this year are of no cause for alarm. 

That said, inventories are still a tad more stocked than not, which can result in a weaker-than-usual peak season. "Retailers have tried working their inventory levels down, right from last year," said Chris Jones, executive vice president of Industry and Services at Descartes. "Some of it was seasonal, which meant you put it away for another 9-12 months and bring it back out. This could also lead to a bit less demand for imports."

Another reason for a potentially dull peak season has to do with the shipping bottlenecks from the last two years that have largely dissipated. Firstly, with much freight stuck atop vessels and buried in yards during the pandemic, shippers had to order much more inventory than required due to lengthening lead times. As delays shrunk, so did the need for shippers to order in excess. This will have a role to play this year, reducing TEU volumes making it to the US. 

Secondly, the lack of bottlenecks would mean loosening logistics capacity as more vessel space and yard infrastructure became available, as they weren't bogged down by excessive freight. Unwinding freight capacity and reducing lead times led to the bullwhip effect, essentially curtailing order volumes this year, irrespective of the economy's strength.

"Retailers are buying in a more controlled fashion as they can gauge demand better than before and react accordingly. One of the key things companies are looking at this year is not to make big bets that could weigh them down in the future," said Jones. "They want to ensure they sell everything they stock, which again is harder to predict today than ever."

While there is not much to cheer for in the context of freight volumes, freight rates have continued to keep service providers on the edge. Though spot rates have increased over June on eastbound trans-Pacific rates, they are over 80% down from the peaks seen in '21, and about even with '19 rates. While these are not incendiary rates that kill service providers, when inflation and increased operational costs are factored in, current prices are hard to justify.

"Container lines are still doing blank sailings, but there's nothing out there that says the rates are not going to stay down," said Jones. Another challenge is that most carriers will have several vessels delivered this year and the next, thanks to them ordering fresh capacity on the back of the extravagant profits companies made during the pandemic. Many of these ships are ULCVs (ultra-large container vessels), making it harder for container lines to balance this increasing capacity with a not-so-strong demand. 

In the US maritime sector, the ILWU (International Longshore and Warehouse Union) getting its contract sorted out has meant significant progress for the West Coast ports, relieving shippers from the angst of having their freight stuck at the port in the event of a labor strike. Jones contended that while shippers and BCOs had reservations while signing freight contracts earlier this year, the question now is if the TEUs that switched to the East and the Gulf Coast ports would return to the West Coast. 

"We saw a million TEUs leaving the WC for other ports, and I doubt if all those transitioned freight will make their way back," said Jones. "Ports like Savannah and Charleston have also put a lot of effort into modernizing and automating their inland operations, and so the argument now extends to moving freight into the country and not just about reaching the port."

But the fact that the trans-Pacific route to the West Coast is shorter in distance puts the WC ports at a significant advantage. "Shippers can afford to wait longer to make decisions as the supply chain is shorter. Reaching the WC ports took five days of steaming time out of the equation," said Jones. "Regardless, shippers might trade speed for having a cheaper overall cost structure, like moving freight via Savannah. I think transitioning the TEUs back to WC would probably play out in the long run and won't be a quick flip like people anticipated."

The Week in Snippets

The Teamsters union withdrew its threat of a strike at trucker Yellow, saving the financially-ailing company from liquidation. The agreement with the Central States Health and Welfare Fund allowed the extension of health benefits to unionized workers and granted Yellow an additional 30 days to make a missed payment, providing a temporary lifeline for the company.

The rank-and-file members of the International Longshoremen and Warehouse Union (ILWU) Canada will vote on a tentative deal with port ownership today, which includes a compounded 19.2% wage increase over four years. The decision will determine the fate of operations at West Coast ports in Canada after a week of confusion and work stoppages, which followed the rejection of the initial deal by the union caucus.

Trans-Pacific carriers have successfully raised spot rates higher than contract rates after multiple rate increases and rising imports from Asia. Despite uncertainties surrounding the peak shipping season and potential capacity influx, carriers aim to keep spot rates above fixed rates by blanking sailings if needed, according to industry experts and non-vessel-operating common carriers (NVOs).

Knight-Swift Transportation, the largest North American truckload carrier, experienced a significant decline in profit during the second quarter as revenue dropped sharply across its trucking units due to diminished U.S. freight demand. The company's net profit fell to $63.3 million, compared to $219.5 million in the same period the previous year, leading to a lowered full-year earnings guidance.

Quotable 

“The last mile of e-comm is expensive. So having that curbside capability, where the vast majority of our orders get shipped from store or get fulfilled from store, that last-mile cost has come down significantly compared to where 2019 used to be.” 

- Navdeep Gupta, CFO of Dick’s Sporting Goods, commenting on the continued relevance of buy online, pick-up at store (BOPIS) beyond the pandemic, which is helping reduce last-mile e-commerce delivery costs

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