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Carrier confidence has impacted freight markets as much as capacity

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The 2017 freight market was like the scene in the action movie where the downtrodden hero discovers he has a special gift that gives him a marked advantage over his foes. After being beaten down for years they proceed to set the screen ablaze with a dominance yet unseen. Welcome to the fold, asset-based carrier.

In the 1999 film, “The Matrix,” Neo, aka Mr. Anderson, had lived a remarkably average existence. He went to a very normal corporate job where he suffered silently as he worked in a colorless bland environment, suffering the fate of the underemployed. He accepts the idea that he is not special nor valuable because that is what the environment is programmed to make him think. With a little nudging from his all-knowing mentor he becomes an all-powerful force that very few can challenge. 

Carriers have been the underdog in the American economy for many years now. Low barriers to entry and ultra-competitive marketplace has created a defeatist mentality where carriers have been trained to think they are not allowed to charge more for their services. The threat of customers pulling business is constant with service expectations being high and competitors prevalent. In transportation, lost business is not just revenue unrecognized but costly in terms of the network utilization.

The carrier has been living in fear for years, operating as if they have no leverage as customers hop from one carrier to another. Any savvy transportation manager will tell you that they do not wish to have a single source solution for their transportation needs. The main reason is so they do not lose pricing leverage. The freight brokers know this all too well.

In 2006 and 2007 the economy was booming. It was very similar to the market today with phrases like “tight capacity” and “driver shortage” being tossed around as reasons the carrier was underperforming on service. You hear the same phrases in today’s market, but instead of them being reasons the carrier is underperforming they are reasons the carrier is increasing rates. What happened that made the carriers and their customers have this change of perspective?

The answer is the underdog finally had enough, and with a nudge from some large-scale events was able to make it known. After the recessionary period of 2008-9 the economy experienced steady growth recovering to pre-recession levels by mid-2010 and never looked back. Carrier rates did not climb at the same pace as the economy suggested they should. Contract rates remained relatively flat moving only moderately. There were relatively few large-scale events as volatility was relatively low. The lack of movement in rates acted like a kink in the hose as pressure was building.

In 2017 there were dramatic capacity swings related to specific events. The delayed produce season kicked things off in May with hurricanes Harvey and Irma showing up in August and September. The produce delay was not a major public event, but it set the tone for the capacity shortage themed year.

The produce inspired contract market abandonment was the first shot across the bow from carriers as they jumped to the spot market to take inflated margins abandoning lower priced contracts, something the shippers were not accustomed to seeing.  Spot rates according to DAT jumped 7% in the month of June before falling back slightly in July and August. Shippers were able to breathe a little more easily but now the carriers who had been quietly compliant had a taste of what could be.

The two major hurricanes, Harvey and Irma, gave the carriers the last push they needed to realize they had enough leverage to increase rates in an ongoing manner. Carriers realized they could get away with jumping to the spot market in the same manner the shippers jumped carriers. With the economy growing and the idea of capacity tightening being widely accepted they fled to the spot market. Spot rates jumped 8% in September and then another 3% in October according to DAT.

The ELD regulation and holiday surge only compounded the carrier leverage as they approached their customer base with proposed rate increases prior to the bid season. These widely publicized events and ideas made it easy for sales reps to enter their customers transportation offices and be on the offensive for once. Some shippers who saw the increases coming proactively approached their carriers asking them to adjust their rates sooner, so they could go ahead and make budgets. The shippers realized their relationship with the carriers had changed.

The reality is shippers were aware that rates were overdue for adjustment, hence their willingness to concede to the carriers request in the first quarter. Carriers have been able to stand their ground as rates remain elevated over last year. The supply and demand curve is in balance for now. The underdogs have arrived. Their day is here.

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Zach Strickland, FW Market Expert & Market Analyst

Zach Strickland, the “Sultan of SONAR,” curates the weekly market update. Zach is also a one of FreightWaves’ Market Experts. With a degree in Finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. He has over 13 years of transportation experience, specializing in data, pricing, and analytics.