Trucking capacity hit by slowdown with UPS strike, Yellow uncertainty two wild cards

Truck capacity across all modes is slowing because of slackening demand in both industry and retail freight, leading to “murky” forecasts for the rest of the year by leading freight analysts.

Top freight officials throughout the trucking industry are bracing for a slowdown the second half of the year. Truck demand, buoyed last year by the recovery following the COVID shutdown, returns to a more normal level, they predict.

“Both industrial and retail have slowed,” David Ross, chief strategy officer for Ascent Logistics, told LM. “Some is just natural expected giveback after an artificial surge in goods movement during the pandemic.”

Ross said the outlook for the rest of the year is a “little murky” – we could see growth slowing further due to inflation and higher interest rates, or we could be seeing a bottoming later this year.  

In any event, overcapacity is pretty much “across the board at this point,” Ross said. But it really depends on the mode.

Ocean capacity has had the wildest swing from tight to loose, Ross noted.  The truckload market has swung as it typically does in an overcapacity market. Some owner-operators are dropping out until the capacity situation eases.

Both less-than-truckload (LTL) and rail have loosened up.  Parcel is probably the only market where capacity is still a little tight, since it was overstretched for a period and now is running more normal again. 

“A potential strike at UPS is the big wild card of the summer,” Ross said.

But a new report by AFS Logistics (AFS), a third-party logistics (3PL) provider, and investment firm TD Cowen, concludes that the parcel market is different than it was in 1997 when the Teamsters last struck UPS for 15 days. The current Teamsters contract with UPS expires Aug. 1. The third quarter (Q3) 2023 release of the TD Cowen/AFS Freight Index is a snapshot with predictive pricing for truckload, less-than-truckload (LTL) and parcel transportation markets.

“While stagnation and rancor at the negotiating table shroud the parcel industry in uncertainty, UPS, the Teamsters and the current Democratic administration all have a vested interest in avoiding a strike,” the AFS-Cowen report says.

In 1997, UPS managed to retain the vast majority of its volume following a 15-day shutdown. But today’s parcel market is characterized by greater overall capacity and more carriers, the report says.

“A strike presents a greater risk that UPS could permanently lose volume—a long-term threat to Teamsters workers, too,” the report says. “In the near term though, shippers face high costs and limited options to shift volumes away from UPS in the event of a strike, as deadlines set by FedEx and regional carriers for shippers to secure capacity have long since passed.”

The latest release of the TD Cowen/AFS Freight Index projects the first quarter-over-quarter (QoQ) increase for truckload rates since Q1 2022, while competition among carriers for falling volumes is expected to drive continued declines in LTL and parcel rates in Q3.

“The COVID era made unanticipated shocks a near constant for logistics operations, and further risks lie ahead. The parcel market is reckoning with just how costly and chaotic a strike could be, while the potential bankruptcy of the nation’s third-largest LTL carrier could throw a supply-side shock in an otherwise soft market,” says Tom Nightingale, CEO of AFS. “But as the risk of turmoil generates headlines, market conditions still favor shippers, even with truckload finally sending signals of price resilience.”

The report contained some key implications for the $404 billion truckload market.

While truckload linehaul cost per shipment continued its deterioration in Q2 2023, the pace of its decrease slowed. In Q3 2023, the index projects the first QoQ increase since Q1 2022, with the truckload index going up from 6.4% in Q2 2023 to 6.6% in Q3 2023. The Q3 2023 projection represents a year-over-year (YoY) decline of 8.9%, but the truckload index remains elevated compared to pre-pandemic levels, the report said. It is significantly higher than the Q1 2020 number of 2.0% above the index’s January 2018 baseline.

“Just as the truckload market exhibited sensitivity to declining macroeconomic forces over the course of the last year, the index is now projected to increase slightly on the heels of stronger-than-expected U.S. GDP growth, receding inflation and a reprieve, at least temporarily, from interest rate hikes,” says Andy Dyer, President of Transportation Management for AFS.

“Although speculation points to additional interest rate hikes later this year with inflation still double the 2% target, the truckload index is unlikely to fall any lower than Q2 2023 levels, indicating that the market may have finally found its floor,” Dyer added.

As far as key implications for the $58 billion LTL market, the TD Cowen/AFS Freight Index shows the effect of falling fuel prices and softening demand. It shows the first negative YoY trend since 2020, declining to 53.2% in Q2 2023, down from 58.4% the year prior and 57.3% in the previous quarter this year.

Lower fuel surcharges resulted in an actual fuel cost per shipment that was down 14% compared to Q1 2023, the report said. Alongside lower fuel charges, the average length of haul per shipment declined 1.3% QoQ, exerting additional downward pressure on the cost per shipment.

Looking ahead to Q3, the TD Cowen/AFS Freight Index is projecting the LTL rate per pound index to decline of 1.3% QoQ and 7% YoY to 51.3% above the January 2018 baseline. While lower than the index’s Q4 2022 peak of 64.4%, LTL, like truckload, remains significantly higher than pre-pandemic levels.

“Sluggish demand pushes carriers to drop rates, but the move by FedEx to close 29 locations is indicative of the broader trend of LTL carriers removing excess capacity and cost to mitigate the extent of the decline,” says Kevin Day, president of LTL for AFS. “A major threat to the current favorable trend for shippers is a potential Yellow bankruptcy. That’s a wild card that could present an extraordinary opportunity for LTL carriers to push up rates in a way that’s inconsistent with current data.”

Meanwhile, Class 8 heavy truck orders came in above expectations at nearly 13,800 units in June, flat versus May and down just 7% y/y. The level of order activity continues to be below replacement demand, however. Total Class 8 orders for the previous 12 months have equaled 297,800 units, according to figures compiled by research firm FTR.

“FTR has been anticipating net Class 8 orders to drop over the last several months to below 10,000 units. This has not occurred, which is a positive sign that fleets still need equipment. However, with all the order slots filled for 2023 and 2024 slots yet to be fully opened, it is unclear when these ordered trucks will be built,” said FTR Chairman Eric Starks.

OEMs have hinted for months that they are willing to keep build activity elevated well into Q4. With the recent solid order totals, it is all but guaranteed that Q4 production will be strong. OEM build slots for 2024 are not expected to open until August at the earliest, Starks added.

There are signs the red-hot used truck market is cooling as well. The average retail sale price for a used Class 8 truck fell 30.9% in May to $68,411 from $99,054 in May 2022. Used truck sales fell 4.9% year over year to 19,300 units from 20,300, according to ACT Research.

Knight-Swift Transportation, the nation’s largest truckload carrier, lowered its operating performance outlook for the quarter. It is projecting consolidated operating margins will decrease 11 to 12 percentage points from what it expected for the quarter year over year

“This decline in operating performance is largely driven by the full truckload market, where persistently soft demand has caused volumes and pricing to be under greater pressure than originally anticipated, while costs remain stable on a sequential basis,” Knight-Swift said in a statement.

“The normally weaker orders due to a seasonal mid-year slowdown coupled with strong build activity will keep shrinking backlogs,” Starks added. “This will pull backlogs back into a normal range over the next several months as the backlog-to-build ratio is currently elevated and put pressure on OEMs to keep building equipment.”

Ross of Ascent Logistics says he worries about the unknown. “It’s always what we don’t see coming…what we don’t know, we don’t know” that keeps him awake at nights.