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MODE INSIGHT

February 2024 – Transportation Market Overview

TRUCKLOAD INTERMODAL LTL PARCEL INTERNATIONAL

February 2024 MODE Insight

TRUCKLOAD Truckload Market Update The OTRI, which measures carrier tender rejections across some of the largest TMS providers in the transportation industry, got a much-needed shot in the arm with the extreme cold front that went across the U.S. in January. We are beginning to see a decline from that event, and the OTRI is expected to remain low, with the exception of cyclical seasonal upticks, until Q3-Q4 of 2024.

Source: sonar.surf

Another indicator on the current state of the TL market is the DAT Spot National Rate Per Mile Linehaul Average. As illustrated below, you can see that 2024 Dry Van Spot LH RPM is outpacing 2019 but is under performing 2023 levels. We did see a spike in January, with the extreme weather event that affected most of the country, but national rates have since declined to December levels since. Unfortunately, with national linehaul rates remaining slightly above 2019 levels, and the average overhead of assetbased operations increasing 20%+ since that time, we’re expecting to see more asset carriers exit the market until the market flips.

February 2024 MODE Insight

TRUCKLOAD UPDATE The rate outlook for the remainder of Q1, and all Q2, is still projected to underperform 2023 YoY. FTR currently has projections for the flip to occur at the end of Q3 in September. For carriers, there is a silver lining in some indicators that could drive the flip to occur more quickly. The DOW, NASDAQ and S&P 500 all continue to increase. Gains in those markets typically come with increased consumer spending, imports, industrial production and freight rates.

Source: ftrintel.com

National Spot Rates

January rates climbed as February falls

$2.08

NOV

$2.44 $2.43 $2.47 JAN NOV DEC

$2.48

$2.49 $2.48

FEB

NOV

est.

DEC

$2.57

JAN

$2.46

FEB est.

$2.11 $2.14 $2.10

DEC

JAN

FEB est.

DRY VAN

FLATBED

REEFER

Source: DAT.com/trendlines

February 2024 MODE Insight

INTERMODAL Current Market Union Pacific (UP) has officially opened their new Phoenix based Intermodal terminal on February 1. UP officials state this is a “first of its kind intermodal service” between the Los Angeles basin and Phoenix, sourcing international shipping containers from the Ports of Los Angeles and Long Beach and Union Pacific’s ICTF Intermodal Terminal. Additionally, this service provides a sustainable and efficient railroad option, which reduces emissions and removes trucks from congested highways in California and Arizona, noting that moving freight by train rather than trucks cuts down on greenhouse gas emissions by up to 75%. Norfolk Southern (NS) will eliminate domestic and international intermodal service to Birmingham, Alabama, and New Orleans, Louisiana, on February 19 amid low volumes moving through those cities. This is among a series of changes in the eastern U.S. that the railroad announced to its partners and customers last week. This service elimination will also include rerouting traffic between Allentown, Pennsylvania, and Memphis/Kansas City/St. Louis as well as between Elizabeth, New Jersey, and Toledo, Ohio. With ongoing challenges and persistent low water levels in the Panama Canal, railroad executives think there could be a shift in international intermodal volume, although it has yet to materialize. “We’ve spent a lot of time looking at the global supply chains and the canals. Right now, in the near term, we haven’t seen any significant shift,” Kenny Rocker, Union Pacific’s executive vice president of marketing and sales, said on the railroad’s earnings call last week. The railroad’s international partners have placed tariffs on shipments moving through the Panama Canal, so Rocker says UP has been working with customers on backhaul opportunities to give them more reasons to use West Coast ports instead of the canal. BNSF Railway is hearing from its customers that they will be shifting some volume to the West Coast, spokesman Zak Andersen says. Some shift has already started to occur, he says, based on how U.S. West Coast containerized imports began to gain market share in the fourth quarter of 2023.

February 2024 MODE Insight

LTL LTL Carrier Earnings: Q4 2023 As we approach the halfway point for Q1 2024 (Yes, already!), we get our first look at Q4 2023 publicly reported LTL carrier operating stats. Fuel clearly provided carrier headwinds for the QTR, negatively impacting overall yield and operating ratios, and weight per shipment continues to shrink in a challenging macro environment and post Yellow (lighter wgt/ship profile historically). Sequentially, the numbers affirm what we already know to be true: demand is still in contraction, volumes are soft, tonnage is down and shipment sizes are decreasing. From a year-over-year perspective: Saia continues to be an impressive story and the volumes they’ve secured post-Yellow seem to be sticking as shipments were up a whopping 18.1% and revenue buoyed up 14.5%. Considering their revenue per hundredweight excluding fuel also increased 11.7% YoY for the period, the carrier isn’t “buying” the business with lower pricing provisions by any means. XPO also produced nice yield improvement over Q4 2022 with revenue per hundredweight excluding fuel up 10.3%, operating ratio improved to 86.5% and gross revenue increase 8.6% to ~$1.18 billion for the period. Knight-Swift is continuing with the game plan – selling inter-regionally between MME and AACT direct service areas – and it's working! Not only did the carrier’s length of haul (LOH) increase 8%, their volume increased 11.9%, tonnage was up by 9.7% and gross revenue was up 9.5% to ~$276 million for the quarter. Old Dominion did what Old Dominion does, producing an industry-leading O.R. of 71.8%. ABF continues to leverage its dynamic pricing effectively to support business needs. FedEx persists with a focus on the quality of its revenue and produced an impressive 79.4% O.R. for the period. TFI is stating that the U.S. segment (TFORCE Freight) still has some work to do, citing a slight deterioration in O.R. While their program designed to increase weight/ship in the U.S. seems to be working – up 10.6% YoY – they will need to continue to focus on their service product to mitigate volumetric declines.

*FedEx Freight stats cover September-November 2023 *TFI includes U.S. LTL Operations Only

February 2024 MODE Insight

LTL UPDATE LTL Market Update After only one month, the 2024 LTL landscape is shaping up to potentially be another roller coaster of an experience. Shippers are looking for ways to mitigate cost and offset pricing increases against a challenging economy – leveraging technology and 3PLs as potential alternatives – Forward and Omni prepare for a future together, but without either of their former CEOs and several major LTL carriers plan on investing significant CAPEX dollars to increase door counts and volumetric throughput. Not to mention, it’s an election year. Buckle up folks, you’re in for a ride!

Volume and Demand: The United States ISM Purchasing Managers Index (PMI) for January came in at 49.1 and remains in contraction territory for a 15th consecutive month– but is an improvement over December. Order softness continues within the manufacturing industry with no meaningful recovery expected short term.

*The ISM PMI chart above reflects production demand within the U.S. While we continue to see contraction for 15 consecutive months, January 2024’s mark of 49.1 is the highest since October 2022 and above the forecast of 47.

The good news is U.S. Industrial production improved to +.98% in December. The bad news is this is still well below the historical average of 3.54% YoY, and we’ve essentially been negative since Q3 2023. With LTL carriers heavily reliant upon this sector from a demand perspective and considering the current trajectories of multiple sub-sectors of manufacturing – such as paper production down 10% from its high in 2022 or furniture production down 15% from 2022 high, we can expect volume and demand softness to persist short term.

February 2024 MODE Insight

LTL UPDATE United States Industrial Production:

Source: Federal Reserve and Trading Economics

Pricing: Pricing continues to be an area of focus for carriers and shippers alike through January. Shippers are looking for ways to reduce their internal cost against a challenging economic backdrop and decreased leverage and LTL carriers are on a seesaw whereby they are trying to balance rate and cost increases with share of wallet amongst their customer bases. Transactional prices are still holding at elevated levels of 5%-6%, although we are seeing some market or lane specific reductions based on network needs by carrier. We also maintain our position on contract rates and anticipate renewals between 4%-7%. We could see results on the higher end of the range as we get into Q2-Q3 2024.

February 2024 MODE Insight

LTL UPDATE Fuel: The U.S. national average cost per gallon for on highway diesel has dropped each month since October, and January was no exception as the U.S. average price came in at $3.854 per gallon, or $.118 lower than the December 2023 national average of $3.972 per gallon. That trend could now be changing, as we’ve observed increases to the national average for the first two weeks of February and are currently sitting at a national average cost per gallon of $4.109.

February 2024 MODE Insight

PARCEL Parcel Updates Amazon is finally pushing its shipping services. Adding an additional carrier to the duopoly of FedEx and UPS will be good for the market for the following reasons: 1. Capitalizing on the Carrier Diversification Trend COVID added fuel to the growing trend of parcel carrier diversification. Shippers are adding multiple carriers into their mix – seeking risk reduction, improved transit times or cost savings. This trend won’t reverse. The timing is right for a new player with a national reach. Amazon technically launched Amazon Shipping in 2020 but put it on hiatus due to the pandemic. The relaunch was likely driven by the over-expansion of their network during COVID (the company has plenty of capacity to fill) and to capitalize on this trend. 2. Competitive Rates Amazon Shipping’s base rates appear to be very competitive. Ripley MacDonald, VP of Amazon Shipping, has shared that most customers pay 30% less than base rates with FedEx or UPS. The pricing structure itself appears to be simple compared to FedEx or UPS. Even if prices become more comparable, shippers might be attracted by the clarity in charges Amazon Shipping provides. Notably, there’s no residential delivery surcharge. This is a home run for e-commerce businesses. Residential delivery surcharges are typically in the top three fees we see for shippers. Residential final-mile delivery is by far the most inefficient segment of the supply chain. Amazon, however, has specialized in residential delivery, and does it with remarkable efficiency. Similarly, Amazon won’t charge extra fees for weekend deliveries. For e-commerce companies looking to satisfy their customers’ desire for the fastest delivery possible, this could be a significant source of savings. 3. Speedy Claims System Amazon touts a system that will resolve most claims within 24 hours. This is a far faster turnaround than the major carriers, or even other Amazon services, offer. The promise of fast, hassle-free claim resolution could be a welcome change from the auditing process most shippers are used to.

February 2024 MODE Insight

INTERNATIONAL Key Trends Rates: Surge in rates due to Panama Canal and Red Sea disruptions leveling off Supply: Carriers planning huge blank sailing slate in attempt to prop spot rate levels Demand: Peaked in late January; some shippers opting for post-Lunar New Year departures Operational: Status quo in the Red Sea; transpacific services still moderate disruptions New ocean carrier alliances are beginning to take shape

Rates Emergency surcharges have been levied by many ocean carriers to recoup their costs from diversions around Africa’s Cape of Good Hope. The industry has seen surcharges from $150 up to $2,700 for dry containers that are impacted by this trade. While the large volumes of container ship diversions around Africa have caused spot rates to surge, the so-called “Red Sea Effect” may have already reached its limit. With shipper complaints and FMC potentially looking into these costs, carriers will not likely add or increase much further unless another event exacerbates the issue. Upward momentum has certainly slowed. Rates in most lanes have leveled off. Several indexes for European lanes have also started dropping back. Overall, rates remain at their highest level in the U.S. import lanes, but the gains have slowed.

Source: Freightwaves

The rate environment now is certainly different than in the 2020-2022 pandemic boom, which was fully driven by increased demand as consumers bought more goods amid the pandemic. This current rate surge is driven by supply.

February 2024 MODE Insight

INTERNATIONAL UPDATE Ocean carrier diversions around the Cape of Good Hope are making for longer voyage times, tying up ship and container equipment supply. It is expected that carriers will adjust schedules for these longer routes and rates should most likely stop increasing, barring any additional demand increases.

Carrier Capacity In an effort to maintain rate levels coming out of the holiday on February 10, carriers are once again planning largescale blank sailings in February, with significant reductions coming mid-month.

Source: M+R Spedag Group

Near Future Outlook: Several ocean carriers are taking delivery of a record number of new ships in 2024, which should give them the added vessel supply to handle some of the current disruptions. Analysts are now reporting that previously estimated effective capacity could increase 9.3% in 2024 versus 2023 due to newbuilding arrivals with actual throughput/demand rising 2.3% — a major imbalance. Taking diversions into account, analysts feel that estimated effective capacity will grow by 5.3% and demand will rise only 2.4% — which again is a big imbalance. In the shorter term, the Chinese New Year holiday in early February will most likely temporarily limit vessel demand in the trans-Pacific trade lanes also providing for some slack in overall capacity.

February 2024 MODE Insight

INTERNATIONAL UPDATE Demand/Volume Demand is definitely elevated which is leaning toward a more traditional peak season - ahead of the Chinese New Year holiday - but cargo rollovers are still sporadic and not widespread. This may change as we move into the highest peak weeks in early February. This is typically where carriers will be looking to build roll pools to maintain acceptable load factors into the holiday week. This was also the behavior the carriers deployed during the pandemic years to inflate rates overall. The current situation is only partially comparable to the pandemic. During lockdowns, we saw a huge surge in demand for containerized goods, which, when coupled with disruptions across every link of the supply chain, sent shipping costs skyrocketing. China is currently sending the highest volume of ocean container freight to the United States since May 2022.

Source: Freightwaves

Part of this surge in shipments is due to the traditional pre-Chinese New Year, when factories in China move heavy volumes to the port before their workers depart for the long holiday. But this year’s peak is well above 2023’s Chinese New Year season. U.S. importers have seemingly worked thorough existing inventories and are predicting higher-than-expected retail sales in the first half of the year. In November 2023, U.S. inventory-to-sales ratios fell to 1.37 months, well below pre-pandemic baselines while U.S. retail sales grew 4.8% YoY. Analysts are predicting February and March to be relatively strong months for U.S. ports, particularly on the West Coast. The Port of Los Angeles is reporting that the first week of February, TEU volumes were up 38.6% compared to the same week in 2023.

February 2024 MODE Insight

INTERNATIONAL UPDATE Red Sea and Panama Canal disruptions Moderate For Now Carrier schedules, particularly to U.S. East Coast ports, are being moderately disrupted by longer transits around the Cape of Good Hope as well as delays at the Panama Canal; however, those delays are not going beyond seven and 10 days on average. Nevertheless, the increase in blank sailings will be an opportunity for carriers to reposition their respective fleets and adjust to what has been a rough last two months. Some analysts believe that because the market globally is so heavily oversupplied that there is ample capacity to cover for disruptions such as this. While having too many ships is generally a bad thing for ocean carriers, it is actually providing for greater flexibility to weather these very disruptive events.

Forward Outlook Although FAK and spot rates are now at their highest levels since 2022, the balance of February will likely see a plateau of current rates (some of which are already softening), followed by a slow but steady correction back toward pre-peak season levels. The widespread disruption to service schedules caused by Red Sea diversions around the Cape of Good Hope will likely continue but mainly on the Asia-Europe corridor. Asia-U.S. services should not be significantly impacted. As of the first week of February, at least two more services that were re-routed to the Suez/Cape from Panama in December have reverted to a Panama routing. Carriers are not suffering transit delays through the Panama Canal substantial enough to make changes and thus will stick to their original routings despite sub-optimal operating conditions in Panama. It is still possible that there may be delayed-onset equipment shortages in Asia caused by lengthened voyages around the Cape of Good Hope, but weaker volumes from Asia in February may allow the carriers to replenish stocks and rebalance.

Maersk and Hapag Lloyd announce new Gemini Alliance With the three carrier alliances agreements coming to an end in the next two years, carriers are engaging in discussions to find new partnerships. In late January, Maersk and Hapag-Lloyd became the first to announce their new alliance, Gemini Cooperation, set to roll out in February of 2025. They have aligned in their goals of increased service reliability by using a hub and spoke network to differentiate themselves from the market. This is the first big move as the other global carriers begin to scramble to figure out the right partnerships for years to come. As they look to calibrate and understand capacity management between potential suitors, the fear of being left out will begin to linger for some of the smaller global carriers. As the situations unfolds, it will be interesting to see how the other alliances shake out to form the new landscape in the ocean market. The beginning of 2025 will be a significant adjustment for the industry as vessel strings are restructured, and shipper deal with changes in the service offerings.

February 2024 MODE Insight