Loaded and Rolling: Capacity crunch, transportation M&A, Cass Index spending records
Capacity crunch: Competition for carriers brings rising costs, new opportunities
Continued freight demand and limited truckload supply are allowing trucking companies to be selective with which loads to take, causing greater competition among shippers. Customer characteristics are playing a key role in contract and spot rate negotiations with carriers reevaluating their customer mix based on their experiences hauling for customers through pandemic-related disruptions.
In this environment, shippers will be forced to compete against each other for limited capacity from carriers, with high rates no longer being a guarantee for service.
Below are a few key factors carriers look at when determining a shipper of choice:
- Dwell or wait times at facilities: If a driver is spending two or more hours waiting to get a dock door, that limits both the driver’s time and the carrier’s ability to cover the next load.
- Trailer detention: Facilities that have a trailer pool and hoard trailers, or fail to unload trailers in a timely manner, can see decreased tender acceptance rates or service disruptions, as a lack of empty trailers impacts the entire carrier’s network.
- Delays in billing or invoicing of payment: If your customer normally pays in 25 days but now only pays every 90 days, this reduces the carrier’s operating cash flow and can cause a lower priority in service until the accounting delays are resolved.
- On-site parking for rest, 10-hour breaks or access to restroom facilities: This is very difficult due to COVID, with many facilities blocking drivers’ access to restrooms but also incurring high dwell times while waiting for a dock.
Relationships built between carriers and shippers before the pandemic, as well as customer characteristics, are playing a greater role due to the tight capacity environment. Executives interviewed said the tight capacity and high demand will extend into 2022 with expected increases in spot market rates. I predict inflationary pressures will remain until the shipping, warehousing and transportation bottlenecks are addressed or more capacity enters the market.
Record earnings and cash flows fuel mergers and acquisitions into 2022
Transportation companies are flush with cash after multiple record earnings quarters amid the backdrop of COVID-related supply chain disruptions. According to data from audit and consulting firm PwC, the aggregate value of transportation and logistics deals was up 84% year-over-year for the 12 months leading up to Nov. 15. Todd Maiden has a great article on a few major themes impacting this M&A growth:
- There are low interest rates and investors willing to invest in new shares, even if their valuation multiples are higher than average.
- E-commerce demand soared during the pandemic, and shippers and carriers are investing in technology and warehousing space to meet the challenge, with tech offerings in freight management, automation and order fulfillment.
- Strong consumer spending focused on physical goods instead of services continues to translate into surging freight volumes.
- Freight rates at record levels are improving trucking margins and creating a catalyst for share buybacks, capital investments in terminal, network and technology expansions or buying undervalued companies and creating profit through value arbitrage.
These themes are expected to persist into 2022 and expect accelerated growth in mergers and acquisitions in the coming year. Investor pressure to deploy excess capital to grow fleet size or optimize existing operations will be a major theme in the upcoming earnings calls as we move into Q1 2022. The challenge will be determining whether these investments will pay off or improve the business as the pandemic supply chain disruptions ease in the coming months.
Market update: Cass freight index reaches record highs
The Cass freight expenditures index measures the total dollars spent on freight transportation and covers both contract and spot market rates. Since this is an index, January 1990 is the base month and has a 1.0 index point, with data represented in the month that transaction invoices are processed by Cass.
Current data for November shows a record level of 4.275 basis points, which represents 44% year-over-year for November, and up 8% month-over-month. Cass predicts tougher comparisons to slightly lower year-over-year increases, but expects 2022 to be 18% to 20% higher than this current trend level.
What this means:
Inflationary pressures, higher rates and continued consumer demand will increase total freight spend into 2022.
FreightWaves TRAC lane spotlight: Pittsburgh to Dallas
Lane commentary courtesy of FreightWaves SONAR sightings
Overview: Capacity is likely to tighten and put significant upward pressure on spot rates.
- Pittsburgh outbound tender volumes are up 10% week-over-week, signaling that demand for capacity is increasing.
- The Headhaul Index in Pittsburgh is up 24% w/w, signaling that capacity is likely to tighten.
- Pittsburgh outbound tender rejections are already up 494 basis points w/w but are likely to move higher due to tightening conditions.
What does this mean for you?
Carriers: The Pittsburgh market’s pricing power is shifting back into your favor as outbound tender rejections indicate significant tightening in capacity in the days ahead. With shippers and brokers likely already feeling the pressure, try to stay firm on your rates and capitalize on your spot market opportunities as outbound volumes rise.
The routing guide: Links from around the web
Inflation Is Near a 40-Year High. Here’s What It Looks Like. (The Wall Street Journal)
China’s Growing Access to Global Shipping Data Worries U.S. (The Wall Street Journal)
Rush Enterprises pays $205M to add 16 more truck dealerships (FreightWaves)
Record-setting used truck prices no deterrent to spot rate-chasing buyers (FreightWaves)
Presentation on macro and strategic trends in the tech industry (Benedict Evans)
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21 December 2021, 23:03