North American Freight Market Insights

TOP STORY: Truckload carrier community is evaluating the market

Today's truckload spot and contract market insights have been well published. Some key insights were outlined in the opening section of this month's report. It is also important to understand how carriers are working to discern how much of the current freight volumes are the result of the normal January down cycle versus the unfolding economic environment.

As carriers work through this assessment, their response to the market will vary based on their client portfolio, shipment award and tender patterns, services they offer, company structure, and regions served. Keep the following carrier perspectives in mind in the coming months:

• Owner-operators are more dependent on the spot market than fleet carriers
  • Many are shifting to independent contractors or selling their truck to become an employee at a larger carrier.
  • Others plan to push through the cycle based on the foundation of awarded/planned freight and cash reserves from the past up-cycle.
  • Selling tractors and trailers to leave the industry is another option for these carriers, which effectively reduces market capacity. (This process tends to cascade with the oldest assets in the market being permanently removed from the market as scrapped equipment.)
• Fleet operators tend to have a portfolio of contract and spot volumes—contract award volume patterns are key to capacity strategies.
  • Many are replacing assets that aged during 2021 and 2022.
  • They continue to take on drivers as employees and/or independent contractors.
  • Growing fleet size is based on freight shifting from spot to contract awards.
  • They are holding off on fleet expansion if award volumes stall or contract.

As spot market pricing edges toward the estimated cost to operate a truck, the carrier market tends to slow investment. Owner-operators struggle financially since they drive more empty miles between loads, experiencing fewer revenue generating miles at lower pricing .This often leads to one of the three decisions above.

The response of fleet owners is shaped by the attributes of their business. As awarded volumes are under tendered, they too make investment decisions that halt capacity expansion and possibly cause contraction.

Watch for patterns in the decline in used truck pricing, net carrier operating authority figures, and trucking labor. Remember, trucking labor continued to expand in Q4 2022, suggesting ongoing labor is shifting from the smallest carriers to the fleet carriers. These are some indicators of the market's response to oversupply. These shifts in supply help better align with freight volumes and put upward pressure on spot market pricing.

The spot market for dry van truckload is in the early weeks of the annual cycle as capacity returns from year-end and religious holidays. Load to truck ratios (LTR) tend to spike at year end and settle in January against a full seated trucking market and a traditionally lower freight volume month.

The first set of figures below shows the current truckload spot market LTR with the five-year averages. Of late, today's market is trending below the five-year average, which is one indicator that suggests the market is oversupplied.

Dry van is the largest segment of the truck market. It is performing strongest against the five-year average in most markets across the country.

Last year ended in historical pattern and the C.H. Robinson forecast estimates an increase in LTR and cost per mile (CPM). The final weeks of 2022 and week one of 2023 are influenced by driver vacations and, in most years, some additional year-end volume.

The result is active capacity that’s effectively reduced due to vacations. It often takes until week two of the year to see the active fleet fully returned from holidays and LTR and CPM decline.

Shown here is the nationwide U.S. DAT LTR for dry van spot market for the years of 2018 through 2022 and the first two weeks of 2023 plotted in red. Week 1 LTR and the 5-year average were both 5.6:1. The weeks of January and into February are likely to settle into the 3:1 to 4:1 range as a national average.

Refrigerated truckload followed a similar year-end pattern to dry van. The second half of 2022 was a softer temperature controlled market. Seasonal and regional tension experiences were associated with fresh produce, holiday frozen goods, and protection from freezing goods. The first two weeks of 2023 are running five and six points below the five-year average and are expected to pattern similarly throughout January.

Today's flatbed spot market continues to offer plentiful capacity in most markets with LTRs well below historical averages and spot and contract pricing closely aligned..

National averages are helpful for aggregate perspectives of the market. But trucking is a very regional business. Week one of January displayed a notable experience of this regional variation. Shown below is week two, January 8–14, 2023.

When developing truckload strategies and evaluating performance, consider the broader market capability. Some markets are in balance while others may be over or undersupplied against meaningful volumes, while other markets may have little trade and freight. The freight experience in these markets should influence strategy and they will vary as the annual cycles are experienced.

Note how the colors indicate different ranges of LTR by each of the three truckload services. Some lanes from an origin may perform better or worse than the LTR might indicate. Our research and experience confirm that an origin-destination pair can have more or less attractive features to the capacity market than the regional average tension might indicate.

Dry van continues to display a yellow (3.4 to 6.9:1 LTR) broadly from Eastern Texas up through the Midwest with a national average of 4.3:1 against a 5-year average of 4.1.

Temperature controlled needs in the center of the United States are influenced by colder weather at this time of year. As displayed on the map in the warmer colors, items that need protection from freezing benefit from the insulated trailers.

Today's flatbed spot market LTR shows some regional tension in Louisiana, Alabama, and Mississippi. Broadly, the flatbed market offers plentiful capacity for spot and contract services nationwide.

Most (75%–85%) of the U.S. for-hire truck market is moved through commitments most often managed via hierarchical route guides and dedicated truckloads. Most analysts are now offering that a material shift from 75% (some analysts suggested an even smaller share) of freight in the contract market in 2021 and early 2022 back to roughly 85% (some suggest a bit more) of freight in the contract market currently.

Companies commonly use waterfall (or hierarchical) route guides to manage awarded freight on lanes with some level of demand pattern predictability. The following insights are derived from TMC, a division of C.H. Robinson, which offers a large portfolio of customers across diverse industries throughout the United States.

Two key metrics of route guide performance are first tender acceptance (FTA) and route guide depth (RGD). RGD refers to how far into a route guide a shipper must tender shipments before carriers accept loads, or the average number of tenders per load. FTA is a percentage of how often the first awarded transportation provider accepts their shipment tenders.

These insights are from the week of January 8–14, and also reflect on RGD from the month of December 2022.

The regional view continued to show the Northeast displaying the most challenging RGD, while also offering the greatest improvement. The December national average RGD increased by 4% month over month (M/M) but was much improved Y/Y with a 30% reduction in RGD.

The Northeast pattern continues with the highest RGD of 1.28 against the national average of 1.19 for the week of January 8–14, offering the greatest variability in RGD in the fourth quarter.

Broadly speaking, route guides are performing well, with primary service providers accepting loads at pre-pandemic levels and the first backup provider accepting rejected tenders most of the time.

The chart above from TMC, a division of C.H. Robinson, reflects weekly RGD regionally across the United States through the week of January 8–14.

This FTA is much improved from the lowest reading during the pandemic of 79% but does reflect the normal pressure of December over November by dropping one point.

Broadly speaking, today's market is flush with capacity. Load tenders from hierarchical route guides are typically accepted by the primary awarded supplier. When rejected, they tend to be those that are unattractive to carriers for one reason or another. Aside from load attribute issues such as unpredictable load tenders or short lead time, route guides continue to show the Northeast region is underperforming in comparison to the balance of the country..

Loads with length of haul under 400 miles continue to show higher FTA and lower RGD than other distance bands. Carriers are accepting all distance bands much more readily with a recent correction as seen in the image above.

For December, long-haul distance bands and the Northeast region were responsible for the 1% point loss in FTA.:

• Short haul (less than 400 miles) posted an improvement in RGD of 1% from November and 21% improvement Y/Y—about 1.1.
• Middle distance (400–600 miles) improved 1% from November at ~1.18. This is 21% improved from November last year.
• Long distance (over 600 miles) RGD eroded 4% from November to 1.20 and is the fourth highest RGD for December in the last five years but improved 3% Y/Y.

U.S. spot market dry van truckload rate per mile insights

Our latest dry van spot market cost per mile forecast is updated with the typical, year-end reduction of active capacity due to the holidays. Freight volume expectations from the three primary segments of retail, housing and manufacturing are broadly expected to produce single digit percent reduction year over year in freight volumes.

FTR Transportation Intelligence offers freight volume forecasts at the truckload sub mode level with dry van forecasted at a 1.3% increase in loadings for 2023 and refrigerated at 1.7%. Other sectors are mixed up and down in their January 2023 trucking update.

Other analysts offer an aggregate of blended volume modal forecasts that are single digit lower Y/Y. The latest release of the C.H. Robinson 2023 truckload dry van spot market forecast shows the end of year LTR a bit stronger than originally forecasted and latter half of 2023 holding closer to the estimated cost to operate a truck. The year end 2023 CPM forecast is similar to earlier releases

The anticipated Lunar New Year extension starting in late January and lasting for roughly three weeks in response to the slower economic conditions will likely result in a decline in ocean imports to North America with a suspected snap back in April and onwards.

Shown below is the C.H. Robinson 2022 and 2023 truckload dry van spot market cost per mile forecast without fuel. Like others, this forecast has been and will continue to be amended as economic forces shape freight volumes and the capacity community responds.

• The dark blue solid line is DAT's broker cost per mile to carrier without fuel.
• The dark blue dotted line is the C.H. Robinson forecast for 2022.
• The light blue dotted line is the C.H. Robinson forecast for 2023.
• The forecast is bounded on the bottom by the estimated cost per mile to operate a truck.

When looking at previous market cycles, the cost per mile to operate a truck has been the bottom of the market. Then supply tends to contract, creating tension and pricing inflection.

The length of time a market is at the bottom varies by the economic conditions and the level of oversupply.

Average cost per mile change Y/Y for the dry van spot market:

• 2023 vs. 2022 C.H. Robinson forecast suggests a 16% decline in average cost per mile.

When viewing the 2023 decline in average cost per mile, consider that 2023 faces a 2022 comparable inflated by the Omicron COVID-19 wave seen in Q1 2022, which effectively decreased the active fleet due to illness, creating capacity scarcity, and driving up costs. Costs settled back quickly as drivers returned from illness and capacity aligned with decelerating freight volumes.

For 2023, the C.H. Robinson forecast shows normal seasonal downward movement of cost per mile in January and bottoms out at the estimated cost per mile to operate a truck.

• Consumer demand may continue to soften through the first half of 2023.
• Truck to rail interplay opportunity exists, but softer freight volumes could limit drift of freight volumes.
• Inventory levels are expected to be worked down, creating some freight in the first half of the year and new orders in the second..
• Industrials softened.

C.H. Robinson will continue to apply its broad market costs and market experience to the forecast and continue to present updates on a regular cadence.

DAT National dry van linehaul cost per mile is the broker to carrier cost, which excludes fuel surcharge. The C.H. Robinson forecast is an extension of that cost.

When reflecting on the average cost per mile to operate a truck, note that this is a national average across the carrier community. Accordingly, it aggregates carriers of all sizes—from owner-operators to the largest fleets.

Each carrier will have a different cost to operate per mile based on a host of variables with a key variable being the amount of empty (non-revenue generating) miles the carrier experiences.

The large portfolio of shipments C.H. Robinson handles is just one of the reasons carriers choose to haul for us. With so many load options, carriers can more easily find loads that decrease operating expenses. This in turn creates more capacity options for shippers that work with C.H. Robinson.

Diesel pricing: Short-term energy outlook

In its January 10th Short-Term Energy Outlook, the EIA reported on-highway diesel fuel prices in the U.S. were $4.61/gallon on January 15, $0.92 higher than one year ago and down 0.1% from the previous week. The report also forecasted:

• Brent crude oil price will average $83 per barrel (b) in 2023, down 18% from 2022, and will continue to fall to $78/b in 2024 as global oil inventories build, putting downward pressure on crude oil prices.
• Retail diesel prices will average about $4.20/gal in 2023, down 16% from 2022. In 2024, EIA expects prices to continue to fall, and average near $3.70/gal. For perspective, retail diesel on January 18, 2021, was $2.696/gal..

The "days of supply" figure provides an estimate should the U.S. not produce or import total distillate. Since the U.S. continues to produce and import, this figure is helpful to appreciate the inventory level, but it does not imply the USA will run short as was the concern presented in the news when the inventory hit 25 days in Q4, which was at the lower end of historical patterns.

The image below shows the historical days of supply and the improvement in December and January.

The most current statistic showing the week of January 1–6, 2023, was at 32.4 days. Visit the EIA website for the most current inventory level.

C.H. Robinson has two customer communities, shipper customers and carrier customers. What follows are insights from conversations with carriers of all sizes to offer perspective into their top concerns over the past month. Below is a summary of the reoccurring themes.

• Spot market is largely unprofitable with fleet carriers working to avoid it where possible.
• Impact of contract pricing is present, but much less than the spot market.
• Most carriers report the struggles that constrained fleet growth in 2022 is now a good thing.
• Focus on regional and short haul with disciplined attention to high yield from their networks.
• Service metrics are again a priority with shippers.

• Tractor and trailer availability is much improved over early to mid-2022.
• Costs for equipment remains high and has limited fleet expansion.
  • Asset purchases only where absolutely necessary.
  • High-cost equipment continues to strain profitability.
• Parts availability and high costs of maintenance and repairs remains a challenge.

• Most trucks are seated, and carriers can be more selective in the hiring process supported by owner-operator applications.
• Driver pay has stabilized at the higher levels, but is no longer supported by higher market rates, challenging profitability.
• Carriers continue to pay at 2022 levels to retain drivers.
• Starting to hear of owner-operators leaving the industry instead of driving for another carrier.