Freight Forward - The Struggles of Coming to an Agreement

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week through?JOC.com ?articles and additional sources and also what to expect for the week ahead.

Just in case you’re wondering, I’m Cathy Roberson, a supply chain writer, and researcher. For this weekly series, I serve as a research analyst for the Journal of Commerce (JOC), for whom I identify trends, provide thoughts and input into stories and assist with parcel last-mile queries.

A happy rainy Monday from Atlanta! A busy week with labor agreements still in discussion, Maersk Air takes flight, softening in LTL, declines in domestic intermodal volumes, and another impressive Q3 from UPS.

Labor agreements drag on for many workers in the US and in Europe causing disruptions in supply chains.

• UK ports Felixstowe and Liverpool continue to witness off-and-on strikes as workers hold out for pay increases. Dockworkers at Liverpool walked out last Monday in another two-week strike, the third strike by members of Unite the Union since late August ?The delays created by the strike action have already prompted Maersk to temporarily freeze port charges on all containers arriving in Liverpool after Aug. 30.
• Contract negotiations between US West Coast dockworkers and marine terminal employers have been put on hold pending the resolution of a hearing to determine the jurisdiction of cold-ironing work at an SSA-run terminal at the Port of Seattle. The National Labor Relations Board hearing to determine jurisdiction over work associated with plugging in ships to run on shoreside electrical power is being fast-tracked and is expected to take place in early November.
• A broad coalition of more than 300 US industry groups urged President Joe Biden to directly engage again with Class I railroads and unions after a second union rejected the tentative contract agreement agreed to in September, stoking fears of a mid-November national strike. The groups, in a joint letter to Biden, expressed concern that only six of the nation’s 12 rail unions have ratified the tentative agreement the White House helped broker Sept. 15. Labor and management remain in a “status quo” period until Nov. 19. Without support from all unions, a strike could legally occur that day, shutting down the country’s entire freight rail system.

Tidbits from DSV and Kuehne + Nagel Q3 earnings last week:

• “Right now we would like to do some M&A but there is a big discrepancy between what the seller wants and what the buyer is prepared to pay,” DSV COO Jens Lund told JOC.com in an interview Tuesday. “The sellers want three times what we are prepared to pay so we can’t make these deals,” he added. “We have looked at a few companies but then gone home. We are not going to buy companies where we can’t make a return, so we would rather just keep the money instead.”
• “They [the carriers] had a certain advantage when it comes to the capacity and the price level during the pandemic when the capacity was very scarce,” Markus Blanka-Graff, CFO of Kuehne + Nagel, said during the company’s third-quarter earnings call. “What we see is now exactly the opposite,” he added. “Now it’s time for the 3PLs ... customers had a very difficult period with price levels in the last two years and now they come to us and to the marketplace to ensure they get a fair share of the advantage back.”
• Blanka-Graff said Kuehne + Nagel did not see any competition from the integrated services offered by some of the world’s largest container shipping lines and instead believes forwarders are well-positioned to grab market share. “The 3PL industry can gain market share now in the declining environment,” he said. “For us, this is good, and I do not see any effect coming from the vertical integration in some of our liner competitors at this point.”

Air

• ?Maersk announced the inaugural flight of Maersk Air Cargo′s new air freight service with scheduled flights between Greenville-Spartanburg, South Carolina, and Incheon, Korea. The scheduled transpacific operation begins today, Oct 31 with two weekly flights and will be operated by cargo airline Amerijet International.
• UPS’ agile network benefited the company as the global macro environment softened during Q3.??Lockdowns and disruptions to manufacturing output resulted in UPS canceling 75 China and Hong Kong origin flights and rerouting 27 of the flights to Europe to support exports from that region. As such, in Q3 total Europe export average daily volume grew by 0.6% YoY and transborder average daily volume increased by 2.6% YoY.?“At the beginning of the quarter, we expected the International average daily volume growth rate to improve compared to the first half of 2022, and it did,” UPS Chief Financial Officer Brian Newman said during the company’s Q3 earnings call. “However, it did not improve as much as anticipated due to continued macro softening.”??

LTL ditching paper while the pricing environment softens

• After two years of back-to-back double-digit rate increases, “the LTL pricing environment has softened significantly in the last 60 to 90 days,” Adam Blankenship, COO of BlueGrace Logistics, told JOC.com Thursday. “Historically, rates are still high and pricing discipline is still there, but for the first time in three years shippers are going to see some relief in the absolute prices they’re paying,” said Blankenship, who also is president of managed logistics at BlueGrace.
• “You'll see a pretty dismal rate increase environment for the LTL carriers,” he said. That doesn’t rule out increases, however. “I think the LTL carriers will announce modest GRIs [general rate increases]” for 2023, Blankenship said.

Nearly 30 LTL carriers, freight brokers, 3PLs, and technology firms are adopting a standardized electronic bill of lading (BOL) developed by the Digital LTL Council of the National Motor Freight Traffic Association (NMFTA). The electronic document is designed to replace paper BOLs and help LTL carriers plan freight flow more efficiently, reducing costs for carriers and shippers alike. It is the lynchpin of an effort to bring the LTL trucking sector and its many paper-based processes into the digital era.

“The electronic BOL standard will let shippers use one API to connect to multiple carriers and 3PLs,” Geoff Muessig, chief marketing officer of regional LTL carrier Pitt Ohio and chairman of the Digital LTL Council, told JOC.com. “Right now, you might need 20 APIs.”

Think strategically

• Contract truckload rates dropped 6% on average from their peak in June through September and have fallen further in October, with the average rate reaching $2.99 per mile, according to DAT. In rebids, truckload contract rates are now coming in 8% to 15% below their peak, DAT said.
• “Last year, you managed truckload spot for survival; this year, you manage spot for opportunity,” said Ben Cubitt, senior vice president of procurement and engineering at Transplace, now Uber Freight. “In the first 20 years of my career no one managed spot; you just used it when you needed to move freight in weird lanes like Alabama to Montana,” he said. “You didn’t use the spot market strategically.”
• “Instead of a necessary evil, the spot market is a cost opportunity, and every shipper looks at that a little bit differently,” Cubitt said. But shippers aren’t just grabbing lower spot rates. More shippers are using the spot market in a strategic way, rather than as a transactional safety valve.
• “As a logistics manager, my job is to have my cake and eat it too,” said Campbell Soup’s Orbin. “We’re leaning into the spot market, but we’re trying to be strategic and take a long-term view of what freight we’re sending to spot.” To do so, shippers must decide which freight and lanes are the most critical. “We’re looking to maintain relationships on the core book of business and put more fungible freight out into the spot market,” he said.

More trailers needed

The expanded use of drop-and-hook trailer pools by shippers, carriers, and third-party brokers is?driving demand?for the traditional dry-van 53-foot trailer . That rolling box is moving to the forefront of supply chain strategies, alongside?container chassis, instead of just being “trailing equipment.”

TL and LTL carriers are stocking up on trailers for use in trailer pools. With storage space tight across the US, trailers are also becoming an extension of the warehouse. And disruption that reduces trailer turns only increases demand for additional trailers.

“Despite the changing market, our customers still value trailer-pool capacity at scale and we see this demand in both our truckload and logistics segments,” Adam Miller, CFO of Knight-Swift Transportation Holdings, said during its Q3 earnings call.

Wabash National can’t build dry-van and refrigerated trailers fast enough to meet US demand, so the equipment manufacturer is expanding its plant in Lafayette, Indiana, to turn out more dry-van trailers starting in the first quarter and is expanding production of refrigerated trailers as well.

Wabash is confident it will grow, recession or not. “[With] demand coming from digital brokers, power-only solutions, and the growth of trailer pools more generally, we continue to feel very confident in our longer-term financial targets into 2025,” Brent Yeagy, president and CEO, said.

“Implied demand for our products is so far above industry capacity that even if implied demand is reduced by a macro event, we suspect that it will result in what we would consider a good year for the industry,” Yeagy told Wall Street analysts in an earnings call. He sees a strong order pipeline in 2023, 2024, and beyond.

Intermodal volumes weaken

• "Within intermodal, our expectation is for volume to be down slightly year over year, with opportunities from easing terminal congestion and equipment supply being offset by expectations for weaker demand and a softening truck market,” Ed Elkins, executive vice president, and chief marketing officer for Norfolk Southern?said, adding NS’ Q3 domestic intermodal volumes were down 4% year over year.
• “Domestic has been on a slide since March with very little interruption, including a pretty significant drop in August and September,” Larry Gross, an intermodal analyst with Gross Transportation Consulting and a JOC analyst said on an IANA webinar last Tuesday. “The message here is that domestic is going through a weakening phase. There has been no peak season … the conclusion here is to keep those seatbelts fastened, it could get bumpy.”
• Union Pacific reported that its domestic intermodal volume fell 3% year over year in Q3 due to a 16% decline in parcel shipments. Kenny Rocker, UP’s executive vice president of sales and marketing, said there are “a few more question marks” on domestic intermodal in the fourth quarter. “We are closely monitoring domestic intermodal demand as spot truck rates fall and inventories climb,” Rocker said during the company’s Oct. 20 earnings call. “We expect parcel and truckload demand to remain soft as consumer preferences have shifted more to [lifestyle] experiences versus goods.”

Parcel Corner

?Despite declines in average daily volumes across all UPS segments, UPS achieved its highest Q3 operating margin in 15 years.

The U.S. Domestic segment recorded $1.7 billion in operating profit, a 19.2% year-over-year increase, while the operating margin expanded 100 basis points to 11%.

In addition, UPS successfully grew one of its strategic markets – small and medium businesses (SMBs). SMB average daily volume, including platforms, increased by 1.9%, representing 28.3% of UPS’s total U.S. volume during Q3.

UPS expects volumes to peak later in December than last year as more consumers are likely to return to pre-pandemic shopping behaviors. While expecting lower Q4 volumes than last year, the company plans to use technology to match daily capacity with customer demand and optimize air and ground to “make room for new customers where we can add the most value.”

Economic Outlook

• Tuesday, Nov 1 - S&P Manufacturing PMI for Oct - Expectations are that it will hold at 49.4. Flash PMI for Oct.
• Friday, Nov 4 - US Unemployment for Oct - A tick upwards to 3.6% from 3.5% in Sept is expected.

That’s it for this week. Please be sure to hit the subscribe button to receive the latest updates.

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What did I miss? Have a question? Let me know in the comments. I’ll be checking back throughout the week to answer questions, address comments and share additional insights.

In the meantime, here’s hoping everyone has a good freight week ahead!

-Cathy