MODE Insight: January 2024

MODE INSIGHT

January 2024 – Transportation Market Overview

TRUCKLOAD INTERMODAL LTL PARCEL INTERNATIONAL

January 2024 MODE Insight ©2024 MODE Global, LLC MODE Public

TRUCKLOAD Historically Low Truckload Market The OTRI, which measures carrier tender rejections across some of the largest TMS providers in the transportation industry, is currently at a five-year low. Historically, the January OTRI starts off higher than the majority of Q1 as residuals from holiday peak season carry over. The low OTRI is a good indicator that Q1 will continue to be an extremely shipper-friendly market.

Source: sonar.surf

Another indicator on the current state of the truckload market is the DAT Spot National Rate Per Mile Linehaul Average. As illustrated, you can see there were multiple points of 2023 that reverted to 2019 levels, which was one of the lowest markets we’ve seen in the past decade. Considering inflation, it could be argued 2023 was the worst truckload market we’ve seen since 2008.

January 2024 MODE Insight

TRUCKLOAD UPDATE We are currently seeing the temporary National Spot Rate spike that is normal for January. Outside of this temporary spike, rates typically decrease or plateau until Q2.

The announcement of decreasing the Federal Interest Rate has created some recent excitement in the stock market. There has been an observed correlation between bull markets, consumer spending, imports and transportation rates. This could be an early sign of a step in the right direction of the market flipping post Q2. That being said, it would take multiple consecutive months of large market gains and consumer spending to make a macro-level impact on the OTR market.

Source: ftrintel.com

National Spot Rates The “quiet season” begins

$2.49

OCT

$2.44 $2.42 $2.45 JAN NOV DEC est.

$2.47 $2.49 $2.48 OCT NOV DEC

$2.56

JAN est.

$2.09 $2.08 $2.11 $2.14

OCT NOV

DEC

JAN est.

DRY VAN

FLATBED

REEFER

Source: DAT.com/trendlines

January 2024 MODE Insight

INTERMODAL Current Market In 2024, intermodal rail is likely to still face pressure from the trucking market; however, market conditions for the overall freight transportation market also appear to be returning to pre-pandemic patterns. Providing good rail service will be key in enabling intermodal rail to compete. “Ultimately, as we approach the second half of 2024 and beyond [and] as long as the U.S. economy can maintain its current trajectory to a soft landing, then the difference between truckload and intermodal rates will again widen and make those economics more attractive and bring more freight onto the rails,” according to Matt Muenster, chief economist for Breakthrough, a transportation management technology provider.

While 2024 may prove to be a stronger year for international intermodal, some adverse long-term fundamentals remain in place. U.S. importers’ disengagement from China continues, and sourcing continues to move away from North Asia toward locales that are better suited to East Coast routings. The potential for growth is higher on the domestic side of the intermodal house, but much depends on whether the significant share losses of recent years can be reversed. Since 2018, domestic intermodal’s share of the U.S. long-haul trucking market has declined from 6.7% down to a low of 5.6% in the first quarter of this year. Since then, intermodal’s share has risen to just 5.7% in the third quarter.

The Port of Long Beach will receive a $283 million federal grant from the U.S. Department of Transportation to fund the completion of the port's Pier B on-dock rail support facility. The project aims to complete the North Rail Yard and South Rail Yard expansions at the port. The North Rail Yard project calls for constructing two new mainline tracks, five new 10,000-foot receiving and departure tracks extending from west of the Dominguez Channel to the Pico Avenue rail corridor, and 26 new storage tracks north of the existing Pier B Yard.

January 2024 MODE Insight

LTL Yellow Asset Auctions Continue Following the December 4, 2023, auction that saw 130 Yellow terminals sell for a total purse of $1.88 billion, six LTL carriers continued the bidding action during a second auction held December 18-19. According to U.S. Bankruptcy Court Doc 1403 for the District of Delaware, 23 of the remaining leased properties were auctioned for a total price of $82,892,697. Estes won another five properties for $35.34 million, bring their total expenditure to just over $284 million on 29 properties. Saia gobbled up another 11 properties for $7.9 million, totaling 28 properties won via the first two auctions for $243.6 million, and FedEx Freight jumped in by winning one property in Nevada for $22.5 million. XPO, the big winner from the initial auction after spending a whopping $870 million, did not place a winning bid this go around.

The court document also states there are 164 properties remaining to be sold, of which 46 are owned and 118 are leased. There is currently a hearing scheduled for January 12, 2024, to approve the sale of leased properties. Below is a Successful Bidders Summary highlighting all winners of the second auction.

Source: Delaware Bankruptcy Court Docket 1403

January 2024 MODE Insight

LTL UPDATE LTL Market Update The less than truckload market to start 2024 looks much like it did to end 2023; volume and demand remain soft, pricing remains elevated, and carriers and shippers alike are focused on right-sizing their internal costs to serve.

Volume and Demand: The U.S. ISM Manufacturing PMI improved slightly in December 2023 to 47.4 from 46.7 in November; however, this marks the 14th consecutive month in contraction territory as we head into 2024, validating continued order softness within the manufacturing sector. U.S industrial production is still well below the historical average of 3.54% increase YoY and while December 2023 numbers have yet to be released, Aug-Nov 2023 months were all negative YoY. Should December’s figure come in negative, this would mark the 5th consecutive month of YoY declines and 6 of the last 7 months in negative territory.

United States Industrial Production:

Source: Federal Reserve and Trading Economics

January 2024 MODE Insight

LTL UPDATE Pricing: If you haven’t noticed the LTL carriers’ efforts toward pricing discipline and yield management, better check your pulse. We obviously had a major event take place in July of 2023 that contributed significantly to this trend, but LTL industry rates have increased significantly over the last decade. The Producer Price Index (PPI) for General Freight Trucking, Long Distance LTL, which measures the average change in the prices over time received by LTL carriers, has increased 27.9% or $88 over the last five years alone. Economic conditions, fuel price fluctuations, contract negotiations and industry happenings all factor into the selling price.

Most recently, and as Yellow started shutting down operations in July of 2023, rates have ticked up once more and have maintained increased levels of around 4% to 5%. With many carrier general rate increases already announced for Q1 2024, and in some cases even implemented, we expect pricing to be 4% to 7% higher to start 2024.

Fuel Down, down and down! U.S. highway diesel retail prices have continued to go down each month since October’s average cost per gallon was $4.507.

The December 2023 national average cost per gallon dropped $0.282 to $3.972 from November’s average of $4.254. We kick start 2024 with the first week of January at a National average of $3.828 per gallon.

January 2024 MODE Insight

PARCEL Parcel Updates FedEx Retains Diverted Volumes from UPS: FedEx successfully retains 400,000 daily packages diverted from UPS during Teamsters' negotiations.

Brie Carere, EVP of FedEx, notes the company hasn't lost any of the gained UPS accounts.

Antitrust Investigation in India: India's CCI investigates DHL, UPS and FedEx for alleged tariff collusion and discounts.

Inquiry initiated in October 2022 based on a complaint from the Federation of Indian Publishers.

Holiday On-Time Delivery Performance: UPS achieves 98%, FedEx 97.8% on-time delivery during Black Friday/Cyber Monday.

USPS records 95.2% on-time rate.

UPS and FedEx maintained high service levels during the holidays.

Rate Discounts and Pricing Power: FedEx and UPS are offering increased pricing discounts amid softening demand.

UPS continues winning in the lightweight SMB e-commerce (residential) space.

MODE is partnering with USPS to address FedEx disinterest in lightweight residential shipments.

Higher Labor Costs and Transit Times: UPS tackles higher labor costs by streamlining its package sortation process through RFID initiatives, automation, and leveraging AI and machine learning to adjust network capacity.

Despite challenges, both FedEx and UPS maintained strong service levels throughout 2023, with improvements in on-time delivery performance and transit times.

Companies moving inventories closer to consumers contributed to better delivery speeds.

January 2024 MODE Insight

INTERNATIONAL Key Trends Supply: Worsening conditions in Panama and Suez Canals causing substantial disruptions in capacity and transit times Demand: December import volumes higher than expected and better now compared to pre-COVID totals Operational: Operational disruptions pushing rates higher in Asia/U.S. trade but also all other trades

Panama Canal Drought Conditions Worsening; Carriers Scrambling As reported previously, the severe drought in Panama has significantly reduced the number of vessels transiting through the canal but also causing heavy delays and congestion last month.

Container vessels that traditionally use the Panama Canal to bring Asia imports to East and Gulf Coast ports have switched to routings through the Suez Canal. Carriers have scrambled to route ships to voyages through the Suez Canal but now also to longer voyages around the Cape of Good Hope.

To compound this problem, the Israel/Hamas conflict has also impacted the use of the Suez Canal. The risk at the Suez is that ships transiting the waterway had to pass through the Bab-el-Mandeb Strait off Yemen. Yemeni Rebel fighters began attacking ships in the strait, which has since led many carriers to opt for the longer transit around the Cape of Good Hope to avoid the risk of attack.

The graph below shows the dramatic drop-off in the number of larger Neopanamax vessels transiting through the Panama Canal for November and December compared to 2022. This shows the significant number of vessels that have been rerouted to avoid the delay and congestion in the Panama Canal.

Source: Freightwaves

January 2024 MODE Insight

INTERNATIONAL UPDATE Canal Surcharges Being Implemented All carriers have announced and implemented additional surcharges for the use of the canal. Vessel carriers now have the option to pay for a guaranteed transit reservation that puts them at the “head of the line.” The new surcharges are supposed to function as an offset to these and other increased operation costs due to the delays.

Also announced and implemented are additional Suez or Red Sea Diversion surcharges, ranging from $200 - $600.

Reservations Becoming an Important Part of Panama Issue Ship operators appear to have learned their lesson. Rather than heading to the Panama Canal without a reservation, they’re choosing alternate routes and avoiding the risk, reducing both the queue and wait time.

There were only 23 ships in the queue without reservations in mid-December. The total number of ships in the queue, including those with reservations, is down to 76, compared to a high of 163 on August 9, 2023, and an average during normal periods of around 90.

Source: Freightwaves

Average wait times for ships without reservations had started to fall back by mid-December, based on more and more vessel operators either acquiring a reservation or moving to the alternate routes (Suez or around Good Hope).

January 2024 MODE Insight

INTERNATIONAL UPDATE December Volume Shows Surprising Increase in Imports to the US Descartes reported that the U.S. imported 2,107,012 twenty-foot equivalent units of containerized goods in December, up 0.4% from November and up 9.2% YoY. This increase was unexpected due to the significant challenges being faced due to the issues with the Panama Canal and the resulting congestion being seen in the Suez Canal. December is typically a slower volume month.

2023 total U.S. import volumes actually ended strong, despite analyst predictions that the first half of 2024 would see much lower volumes. Total volumes are now above pre-COVID totals.

Full-year imports came in at 24,959,664 TEUs, according to Descartes. Compared to pre-COVID years, 2023 topped 2019 by 4.6%, 2018 by 3.8% and 2017 by 11.5%.

Source: Freightwaves

January 2024 MODE Insight

INTERNATIONAL UPDATE Rates are Surging Due to Surcharges and Canal Challenges Spot rates and surcharges are rising very fast, but also liner costs are increasing due to much higher fuel consumption from longer voyages, as well as other expenses (offset by savings on canal tolls).

The Shanghai Containerized Freight Index (SCFI) spiked 40% at the end of December, its highest level since October 2022. The SCFI has more than doubled since this October.

The graph below from the Platts Index shows the dramatic increase in rates in all the major trade routes.

Source: Freightwaves

Most Asia-U.S. East Coast services have been rerouted from the Panama Canal to the Suez, meaning that Red Sea attacks are affecting rates in this lane as well. And even though Asia-West Coast services are not directly affected, they too are feeling a knock-on effect, according to Platts’ data.

The Freightos Baltic Daily Index (FBX) also shows the extreme impact of Red Sea disruptions. Going into January, the FBX China-Mediterranean rate was up 80% in just a matter of days and 2.6 times higher than rates at the beginning of December.

Source: Freightwaves

January 2024 MODE Insight

INTERNATIONAL UPDATE With no significant improvement in the drought situation in the Panama Canal region, and the subsequent domino effect of the Suez situation, it is likely that rates will continue to be elevated for the foreseeable near future. This is also predicated on no other or new risks popping up in other parts of the global trade.

Market Outlook Rates from Asia to the U.S. West Coast may see some healthy future increases due to the shift away from U.S. East Coast ports with those shippers wanting to avoid either canal.

Overall, transit times and service reliability (delays) will likely worsen to the U.S. East Coast, and carriers may be required to blank some sailings/routings to bring services back into service equilibrium.

Another potential consequence of longer transit times to the U.S. East Coast and U.S. Gulf is the increase in import volumes to and through U.S. West Coast ports, which may coincide with the beginning of what we believe will be a strong pre-Chinese New Year (February 10) peak season.

According to some carriers, the Panama and Suez services shift will continue through the winter as there is no quick fix to the issues in Panama. Longer-term effects of the shift may include container shortages at origin in the coming months due to longer turn times of the re-routed services.

January 2024 MODE Insight

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