Market Overview

Capacity Tightens Into The Holidays, But How Long Will It Last?

Capacity Tightens Into The Holidays, But How Long Will It Last?

Available trucking capacity has meaningfully tightened over the past few weeks as a combination of rising retail volumes, bad weather and truck drivers heading home for the Thanksgiving holiday and shifting the balance of freight markets. The question on freight brokers minds is how long will it last.

After a strong late summer and early fall when national contracted truckload volumes (OTVI.USA) were as much as 6% above year-ago levels, freight demand slipped in the back half of October. Volumes went negative on a year-over-year basis (OTVIY.USA) in the first week of November.

Year-over-year comparisons are noisy now because Thanksgiving this year is later than the 2018 holiday, but on an absolute basis, volumes have recovered. Severe weather in several regions of the country, from Colorado and the Upper Midwest to the Northeast, has removed capacity from the market and forced shippers to change their plans. Even the opening of deer season in Minnesota and Wisconsin has been cited by multiple freight brokers for taking drivers off the roads and sending them into the woods for a few weeks to hunt.

(Chart: FreightWaves SONAR)

The net effect of all that is that national outbound tender rejections (OTRI.USA) have risen from about 5% at the beginning of November to 7.2% today. That means that trucking carriers and freight brokers are rejecting 7.2% of the loads tendered to them by shippers. While freight markets are not nearly as hot as they were last year — tender rejections were north of 14% — capacity has tightened enough to have an effect on spot rates, especially in specific markets where rejections are higher than average.

(Chart: FreightWaves SONAR)

Harrisburg, Memphis, Little Rock, Quincy and Omaha have all tightened appreciably.

I spoke to JJ Lewis, vice president of national accounts at GlobalTranz, about how the top-10 freight is operating in current market conditions. Lewis previously served as executive vice president at Circle 8 Logistics, the Chicagoland 3PL acquired by GlobalTranz in April.

"This is supposed to be one of the largest holiday retail seasons with over $1 trillion of spending," Lewis said. "Unemployment is low, consumers are excited and buying, and we'll see if that helps bring sales and orders into e-commerce."

GlobalTranz doesn't anticipate the severe holiday capacity crunch that occurred in years past to happen this season though. Shippers have pulled forward so much freight to beat tariff deadlines that, for the most part, national distribution center networks are fairly well-stocked with inventory. 

"Typically it's a mad dash for capacity," Lewis said. "Over the past two weeks as we've been positioning drivers and equipment, it's been pretty quiet. Things will start tightening up [Tuesday] afternoon and [Wednesday] as drivers are dispatched directionally to get them home."

Lewis said that there's still plenty of capacity on the West Coast and he hasn't had a problem sourcing teams for cross-country moves from Southern California to the Northeast. "There's less urgency on cross-country lanes," he said.

GlobalTranz is anticipating inbound data flows from its customers on Saturday and Sunday, Nov. 30 and Dec. 1, as retailers assess Black Friday and determine how much product will need to be restocked and where it needs to go to meet consumer demand. 

One of the questions that remains unresolved is how quickly drivers will return to the highways after the Thanksgiving holiday. Typically, capacity comes back online quickly — one Chicago-based brokerage executive said that markets should soften again on Dec. 2 — but Lewis and I both discussed June 2019 as a possible parallel to this holiday season. This past June, drivers stayed off the roads even after Roadcheck Week was over, which created a paradoxical situation in which brokers faced low contract rates and tight capacity, greatly compressing their margins. 

Lewis speculated that if spot rates remain low and a significant winter weather event occurs, drivers may be reluctant to get back in their trucks after the holiday. That could result in some disruption to freight markets. Lewis said in several freight markets that experienced disruptive weather this fall, shippers held their freight back while drivers parked their trucks in a kind of standoff. Still, he said that he assures clients that their contacts at GlobalTranz will be available throughout the holidays in case any unforeseen problems arise. 

"We remind customers that we're not a transactional broker; that's not the relationship we want," Lewis said. "We're taking contract freight, we are transparent about loads covered or not covered, and we absorb challenging capacity because it's a larger relationship than just a couple months of struggling to cover freight."

In general, though, Lewis' read on the market corroborated our findings that pricing power is definitely still in the shippers' hands.

"Customers are going to win because rates aren't going to be as high," Lewis said.

We also discussed some recently released freight market forecasts that called for a melt up in spot rates in the first quarter of 2020, with a return to inflationary conditions early in the year. Lewis said that the idea of a Q1 turn up contradicted his experience of the first quarter being when the market "exhales," though he was open to the possibility of strong Q2 demand moving the needle on spot rates.

"The market is just going to make marginal moves up during the holiday with the influx of freight and drivers looking to get directionally dispatched home," Lewis said. "That leaves freight uncovered, but I don't believe it's going to change the overall market. Customers aren't nervous right now. They feel like they can find a few more points lower and that we have another three to six months in the cycle. [A change would be] more in the second quarter of 2020 in the hot summer months when we have to spend some money to get freight moving."

Image by Albert Dezetter from Pixabay

Posted-In: Freight Freightwaves Logistics Supply ChainNews Commodities Markets General


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