Report: Transportation market in flux

Transportation costs are expected to decline in the fourth quarter, but shippers should remain vigilant as peak season surcharges and general rate increases (GRIs) take effect, according to the Q4 Cowen/AFS Logistics Freight Index, released this week.

The report shows an industry marked by softening demand and declining rates, but still battling inflation and other economic pressures.

“While the freight industry prices remain elevated on a year-over-year basis, specific sectors are seeing marked quarter-over-quarter decreases and are now receding from historic highs,” Tom Nightingale, AFS Logistics’ CEO, said in a press release announcing the Q4 findings. “But while flagging demand and falling quarterly rates indicate market power shifting away from carriers, shippers must remain vigilant as carriers inject unprecedented general rate increases.”

Transportation costs are projected to decline in Q4 for every mode except ground parcel, which is expected to reach an index record-high reading of 28.5%—which means the parcel rate per package average for the fourth quarter is expected to be 28.5% higher than it was in January 2018, the index baseline. Peak season surcharges and a higher share of residential deliveries during the holidays are driving the increase. Compounding matters, peak season surcharges for both ground and express parcel are in effect longer than in the past, apply to more shippers, and have risen as much as 60% year-over-year, according to the report. Looking ahead, Fed-Ex’s highest-ever GRI of 6.9% will take effect in January, and the researchers said UPS is likely to follow suit.

The report predicts declining rates in both the less-than-truckload (LTL) and truckload (TL) markets, although LTL rates will remain elevated compared to a year ago. According to the report:

Key implications for LTL: Weight and fuel surcharge per shipment both declined on a quarterly basis in Q3 2022, which helped drive a decline of 2.4% in LTL cost per shipment quarter-over-quarter. However, the LTL index still showed a significant year-over-year increase in Q3 of 20.3%. And while the average fuel surcharge fell by 5.4% quarter-over-quarter due to lower crude oil prices in Q3, average accessorial charges per shipment jumped 8.4% compared to the previous quarter. Looking ahead to Q4 2022, the LTL index is again expected to decrease on a quarterly basis, from 55.3% to 48.6%–still a 10.1% year-over-year increase compared to Q4 2021.

Key implications for TL: While truckload rates have fallen sequentially, the rates have fallen less than volumes, indicating surprising resilience in the market and the long shadow of truckload contract rates. The Cowen/AFS Truckload Freight Index is forecasted to be 17.9% in Q4 as compared to 18.3% in Q3. The linehaul cost per shipment showed a 0.8% decline in Q3 compared to the previous quarter, but still amounted to a 6.4% year-over-year increase. However, the year-over-year increase is 10% less than Q2’s year-over-year growth rate, indicating that the pace of truckload’s cost per shipment increase is declining.

“Not only is the Q4 truckload index expected to buck typical seasonal trends and decline on a quarterly basis, it also indicates the first negative year-over-year change since Q3 of 2020,” the researchers wrote. “This decline is largely due to the current macroeconomic environment, driven by factors like inflation remaining above 8% and expected rate hikes by the Federal Reserve. As a result, truckload carriers are likely to face challenges maintaining revenue growth over the next several quarters.”

The Cowen/AFS Freight Index is based on data associated with $11 billion of annual transportation spend by AFS customers across all modes of transportation; it uses past performance and machine-learning to generate predictions for the remainder of the quarter, set against a baseline of 2018 rates for each mode.