Capacity is loosening and spot rates have dropped steadily over the past few months, shifting the pricing power from carriers to shippers. This shift comes after two years of constricted capacity and soaring volumes that allowed carriers to benefit from sky-high spot rates.
A slight decrease in consumer demand has played a role in this market turn, but last year’s contract rate increases also have fueled it. FreightWaves research analyst Michael Rudolph recently explored how rising contract rates led to shrinking spot rates.
“Even without any external influences from the economy at large, these rising contract rates would have affected lower tender rejections,” Rudolph reported. “Lower tender rejections would have meant fewer loads falling to the spot market, which in turn would have caused spot rates to cool.”
As of July 2022, the spread between spot rates and contract rates is wider than it was during the coronavirus-fueled lockdowns of April 2020.
Shippers have already begun negotiating lower contract rates, and carriers should prepare for this trend to continue. This preparation will prove especially important for small and mid-size carriers who often do not have the profit margins to weather a storm.
“Shippers are going to be much more selective of their carrier providers,” Emerge Director of Client Solutions Jordan Brychell said. “They will look to utilize technology which provides access to a large vetted carrier base via a live marketplace, which in turn helps generate fair market rates being delivered at high levels of service. Carriers with access to this type of marketplace will see substantial value from the increased visibility and opportunity.”
Emerge provides fleets with the opportunity to participate in this type of marketplace, allowing them direct access to contractual freight from a portfolio of Fortune 500 shippers. Most small and mid-size carriers do not have existing access to enterprise shippers; the Emerge platform offers this access while also allowing carriers to search for the perfect lane to fit their network.
While technology will be an integral part of navigating a market shift, relationships will also prove crucial.
“One of the biggest challenges will be keeping their equipment moving consistently at rates that allow their business to continue to operate,” Brychell said. “These carriers will need to rely on the strength of their direct shipper relationships and the relationships they have with their broker partners in order to maintain and potentially expand their business.”
In softer markets, shippers are less concerned with locking down any available capacity and become more focused on service, raising their expectations of their carrier partners. This can be a challenge for carriers, but it can also serve as an opportunity to capture additional business and strengthen existing relationships.
Çarriers that boast a track record of fairness and reciprocity are likely to win biggest during a market downturn. Shippers will remember how carriers behaved when they had control of the market, rewarding the companies who adhered to contracted volumes and continued to provide high-quality service during the height of the latest capacity crunch.
“Those that are proactively engaging in conversations with their customer or broker partners are going to be a step ahead. Service is going to be key,” Brychell said. “Everyone has struggled in some capacity over the past few years, but shippers will remember who was there for them when they needed capacity the most.”
Ultimately, partnerships will continue to drive the success of both carriers and shippers. Technologies, like those provided by Emerge, will make those partnerships more sustainable and scalable.