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MODE INSIGHT

October 2023 – Transportation Market Overview

TRUCKLOAD INTERMODAL LTL PARCEL INTERNATIONAL

October 2023 MODE Insight

TRUCKLOAD A Light Beginning to Peak Season Key indicators of the truckload (TL) market including FreightWaves Outbound Tender Rejection (OTRI), DAT National Spot Rates and Internet Truck Stop (ITS) National Spot Rates are all showing slow but steady increases. The OTRI, which measures carrier tender rejections across some of the largest TMS providers in the transportation industry, has been trending upward. We are close to 5% National OTRI for the first time since January 2023. OTRI isn’t showing enough of an increase to cause significant macro-market shifts that have meaningful impact across the entire TL market. These rejection increases could have more important implications in areas where consumer goods are being imported for the upcoming holiday seasons. These areas include major Ocean Port hubs, such as Los Angeles, and nearshoring crossing points, such as Laredo. Source: sonar.surf

DAT National Spot Rates and Internet Truck Stop (ITS) National Spot Rates are valuable macro-market indicators on pricing trends. We are not seeing much movement on either of them. If sustained, the upward trend in OTRI, as well as increases in National Diesel Fuel Averages, is a good indicator that we should see some small upward movement on National Spot Rates in the coming month. DAT is reporting stagnant National Dry Van Spot Rates in October from September. ITS is reporting a <1% decrease in National Dry Van Spot Rates in October from September.

October 2023 MODE Insight

TRUCKLOAD UPDATE Source: DAT.com/trendlines

National Spot Rates End of Q3 gives spot rates a lift $2.11

$2.11

SEP JUL AUG

OCT

$2.06 $2.08

$2.53 $2.50 $2.51 $2.52 JUL AUG SEP OCT est.

$2.50 $2.52 $2.47 $2.43 OCT AUG SEP JUL est.

est.

DRY VAN

FLATBED

REEFER

Source: sonar.surf

October 2023 MODE Insight

INTERMODAL Current Market Union Pacific (UP) has launched a new service linking Mexico and the Southeast U.S., which will cross the border at Eagle Pass then over Memphis to interchange with CSX and Norfolk Southern (NS) and will offer customers a needed solution for business in this key corridor. Canadian Pacific Kansas City has imposed an 8,500 train length restriction on the Meridian Speedway (the shortcut between the Southeast and Southwest that is a joint venture with NS). This impacts the eastbound train for Union Pacific (Shreveport, Louisiana to Meridian, Mississippi). Both UP and NS must now route this additional 2,500 feet of overflow to Memphis, Tennessee, which adds two days to the total transit time and has significantly increased available ingates in Shreveport. UP and NS are actively working on new solutions. On September 29, Norfolk Southern's data center experienced an outage that impacted rail operations including their dispatching system, train movements and functionality of their terminal operating system. Operations were halted until the issue was safely and successfully resolved by 1:30 a.m. the next day. Per reps from the NS, the impact from the outage could last a couple of weeks as they work through the congestion. In better Norfolk Southern news, they have announced an expansion with the FEC (Florida East Coast Railway) for customers moving freight in Florida. The NS will now be able to include FEC’s Fort Pierce and Fort Lauderdale intermodal terminals. This will expand direct access to and from multiple markets including Chicago, Illinois; Harrisburg, Pennslyvania; Lathrop and Southern California among others. The railroads plan to interchange in Jacksonville, Florida. Intermodal traffic has experienced a slight uptick in volumes for the month of September, but volumes have not reached traditional peak season levels of years past and are expected to remain flat.

October 2023 MODE Insight

LTL Spooky Season Starts with Estes Cyber Attack On October 2, 2023, Estes Express posted a statement on social media saying, “We are currently experiencing an outage in our core IT infrastructure, and it is impacting a number of our systems.” They went on to say, “Please reach out to your account manager, preferably by text, with any questions or concerns, including pickups.” A day later, Estes announced they had fallen victim to a cybersecurity attack. While it is still unclear as to exactly which systems were compromised, and to what extent, we do know company phone lines and emails were down, and electronic shipment visibility/tracking/tendering was gone. Estes put together a one-page website (https://go.estes-express.com/estes-landing) to communicate status updates and to allow customers to submit pickup requests. On October 6, the company posted a statement on their website stating, “We are excited to announce that we've made steady progress on bringing many parts of our IT systems back online after a thorough review and implementing additional rigorous security and safety protocols. Many of our core operations systems are back online to cut freight bills, update PROs, create manifests and effectively manage equipment. The LTL carrier also added, “Rest assured, your freight is continuing to move efficiently through our network.” Estes President and COO, Webb Estes, posted a video to provide a status on the recovery efforts and establishing normal EDI functionality is the priority as a next step. The questions on everyone’s minds remain, “Was my information compromised? How long until things are back to normal? And, how and/or do you intend on moving my freight and servicing my needs in the meantime? Only time will tell how Estes recovers from the cyberattack and if there are any lasting repercussions.

LTL Volume and Demand Several carriers including SAIA, XPO and ABF are seeing volumetric increases due to Yellow’s collapse, and freight has been changing hands lately; however, industry volumes overall are still down. There has been some slight recovery as of late with the ISM PMI and U.S. IP indexes; however, the outlook for October and beyond is soft.

October 2023 MODE Insight

LTL UPDATE The United States ISM Purchasing Managers Index has been trending in the right direction lately, and as of September, it improved to 49, up from 47.6 in August. Unfortunately, that still puts us at 11 months consecutively in contraction territory. Source: Trading Economics & Institute for Supply Management

There’s historically been, and there still is, a direct correlation between LTL demand and U.S. Industrial Production. Over the last two quarters of 2023, we’ve experienced U.S. IP at its lowest levels since the beginning of 2021. Source: Trading Economics & Federal Reserve

October 2023 MODE Insight

LTL UPDATE LTL Rates Not surprisingly, we saw transactional rates continue to increase throughout the month of September. With the recovery timeline for the Estes cyber-attack unknown, we could potentially see more of the same in October; most likely from the national and super-regional carriers who’ve gained temporary – or perhaps long-term – market share while Estes works to restore its operating systems. Contract rates are expected to renew with mid-single-digit increases in the month of October. We anticipate shippers with Over-length/Extra-length freight or shippers who heavily utilize accessorials such as liftgate, residential or limited access, will see slightly higher increases as carriers focus on freight with higher cost associations.

Fuel After seven straight months of declining U.S. highway diesel retail prices, July experienced a modest increase of $.08 over June’s average of $3.802/gal. Then, the average cost per gallon skyrocketed up $.488 to $4.37/gal in August, only to be followed by an increase of $.193 to $4.563/gal in September. We start the month of October off with the U.S. average cost per gallon sitting at $4.593 as of the first week.

October 2023 MODE Insight

PARCEL Get Ready for Peak/Demand Surcharges and Rate Adjustments Every year there’s a spike in deliveries during the holidays. As a result, the carriers make adjustments to their networks. And to ensure they’re as profitable as ever, both UPS and FedEx implement “Peak” (now referred to as “Demand”) surcharges, which means it’s going to cost you extra to ship packages through the holidays. Even the U.S. Postal Service has announced proposed temporary "rate adjustments" (read: increases) for the 2023 Peak Season. In the carriers’ words, the Peak surcharges are put in place to allow them to “continue providing our customers with the best possible service.” Keep in mind that the “best possible service” doesn’t include guaranteed deliveries, as we’ve learned over the past three years.

Peak vs. Demand Surcharges - What’s the difference? According to the UPS 2023 Service Guide, the term Demand Surcharges includes Peak/Demand Surcharges and Peak Surcharges, and the terms are used interchangeably. And according to FedEx, effective September 4, 2023, any reference to “peak” in a surcharge name will be replaced with and rebranded as “demand.” Why the name change? Could it be that either carrier is planning on assessing overlapping “Demand” AND “Peak” surcharges at the same time? While “Demand” could imply a temporary increase in volume unassociated with “Peak,” there is still a peak season.

Latest Announcements on FedEx and UPS Peak Surcharges On August 29th, 2023, FedEx quietly announced this holiday season’s Demand surcharges. They can rebrand it and call it whatever they want; however, this year is expected to be a mild peak season compared to the last three to four years. The average residential delivery averages 1.5 packages per stop and business deliveries average 3.5 packages. Peak shipping season coincides with the holidays and starts as early as October 2, 2023, for FedEx customers. Here is the link for all FedEx Demand Fees and all UPS Demand Charges.

October 2023 MODE Insight

INTERNATIONAL Key Market Themes in October Supply: Carriers set to blank over 400,000 TEU in early October (equal to about 48% of the total capacity). Service string disruptions. Demand: Pre-China National Day cargo rush falls flat as rates continue to decline. Little hope for significant increase in volumes or demand by end of year. Outlook: Most industry analysts are now predicting soft demand and declining rates in the trans-Pacific likely to extend through the end of the year and into March (Lunar New Year) — or even beyond.

The Old “Normal” Market In the historically normal market with China’s National Day holiday, which takes place on October 1, trans-Pacific load factors would be nearing (or exceeding) 100% utilization, with rates holding firm or increasing in midSeptember. Previously, in eight out of 10 years of the pre-holiday periods, spot-rates in the trans-Pacific trade increased on September 15 ahead of the holiday, which is usually the strongest two-week period of the year. Moving into October this year, rate levels are going in the opposite direction with rates to all three points – West Coast, East Coast, IPI.

Trans-Pacific Spot Rates Fall Freightos Baltic Daily Index for the Asia-North America West Coast lane has fallen 16% over the past month, to $1,712 per forty-foot equivalent unit as of Thursday. The FBX Asia-North America East Coast level is down 13% over the past month. Source: Freightwaves SONAR

Asia-Europe Lanes Nearing Historic Lows Spot rates have also become problematic for ocean carriers in the Asia-Europe trade. The Drewry World Container Index for Shanghai to Rotterdam is down 34% since Aug. 17. To put this in historical context, this index has only been below this level for a sustained period once before (in the second half of 2015 and early 2016). During that period, container lines were in a price war when Hanjin went bankrupt.

October 2023 MODE Insight

INTERNATIONAL UPDATE Carriers Deploying Multiple Strategies to Curtail the Share Rate Erosion Blank Sailings The primary way ocean carriers can keep spot rates from sinking further is to reduce capacity, either by blanking sailings or canceling services. The graph below shows inbound container-ship capacity to the U.S. from all overseas destinations, measured in TEUs. This data shows that inbound capacity is now around half what it was at the peak of the supply chain crisis. Capacity reductions have been particularly steep over the past two months. Capacity is down by around 30% since early August alone. Source: Freightwaves SONAR

“Slow Steaming” - Reducing Speed of Vessels In another attempt to better manage or meter capacity, ocean carriers are also reducing vessel transit speeds from Asia to North America which helps avoid blanking whole service lanes of a specific sailing. Most carriers are reporting that this has been an ongoing and effective strategy. Slow-steaming is less disruptive for shippers on longer routes such as Asia to the U.S. East Coast, which involves adding a ship to a 10-vessel string, than on West Coast routings, which involves adding a ship to a five-vessel string. However, on shorter transit vessel strings this is not as effective.

Canceled or Suspended Services Carriers are also implementing more drastic measures to manage capacity by suspending or even canceling entire service lanes or vessel strings. Ocean carriers have announced plans to cut 59 sailings in the trans-Pacific through October and potentially longer. Importers will likely experience increased delays as these changes are implemented. Hapag-Lloyd said the Pacific Northwest 3 (PN3) service will be suspended following an Oct. 8 sailing from Hong Kong. THE Alliance carriers have already announced a series of service changes starting in September. Schedules from carriers in the Ocean Alliance show changes to sailing frequency or outright cancellations on 18 services through the end of October. Cosco Shipping and OOCL will offer fortnightly, in place of weekly, sailings on their Dahlia service to the Pacific Northwest through October. Evergreen will also offer biweekly sailings on its 12,000-TEU Southwest Express Service to Los Angeles through October in place of the previous weekly service.

October 2023 MODE Insight

INTERNATIONAL UPDATE Carriers Deploying Multiple Strategies (Cont’d) To Make Matters Worse - Carriers Adding More New Vessels and Capacity The industry is now taking delivery of a massive wave of new ship build orders. Many of the new ships being delivered by the end of this year are ultra-large vessels specifically built for the Asia-Europe market. The resulting capacity increase (30% of the total current capacity) will certainly not help with existing depressed rate levels.

October 2023 MODE Insight

INTERNATIONAL UPDATE Forward Market Outlook Given that rates are on a downcycle as we move into October and no hope for demand/volume improvements, it is likely that rates will continue to decline well into the month. Factories in China reopened from the national holiday on October 6. In some cases, a return to more robust production will not happen until the second week of October, potentially extending the post-holiday lull beyond the first two weeks of the month. Capacity management may help slow the pace of rate erosion in early October, but we estimate that market rates will lose at least another $200-$300 by mid-October. Blank sailings to the East coast are expected to extend deeper into October as softer demand prevails and certain carriers seek to redeploy some vessel rotations. Overall, we expect up to 40% of October’s operating capacity will be blanked/canceled. With more service strings being canceled/suspended, it is a safe prediction that importers will likely see significant delays in the ocean transportation process

Air Cargo News DHL Express Raises US Rates by 5.9% DHL Express, the international air delivery service of DHL, will impose a 5.9% general rate increase on its U.S.originating shipments in 2024. The rate increase takes effect January 1, 2024. The increase is 200 basis points below the 7.9% increase that DHL Express imposed on shipments tendered during 2023. The 2024 increase matches the 5.9% rate increases imposed by UPS Inc. (NYSE: UPS) and FedEx Corp. (NYSE: FDX). The increases by the carriers apply to customers not tendering parcels through contractual relationships. The general rate increases are seen as a rough barometer of what shippers could expect to pay. Rates that shippers actually pay will vary depending on shipment weight and distance. They also don’t include delivery surcharges that are tacked on to the cost of many shipments.

October 2023 MODE Insight