After the winter storm disruptions, freight tender volumes have stabilized and moved horizontally this week. The Outbound Tender Volume Index is up ~16% yoy when adjusting for the high level of rejected tenders. Yearly comps will soon become tougher given the 30% volume surge last March on the backs of consumer panic buying and hoarding of grocery and household staples.
We are entering the seasonal second-gear freight markets find toward the end of Q1. Not only does the warm weather bring about elevated consumer demand, but retailers have quarterly results to report, and lagging inventories are not applauded by Wall Street.
In this week’s special topic report, the Passport Research team covered asset operators with a piece titled “It’s good to be a trucker” and highlighted that carrier key performance indicators (KPIs) are at the healthiest levels in years. The team wrote, “There was some seasonal giveback in operating ratios but this is to be expected. The bull market for freight is alive and well; the question is how long it will last. At this point, our answer is longer than we previously thought.”
Over the past week, there were a swath of stock upgrades in the transportation sector from various sell-side shops. As I wrote last week, since the market was already so tight and imbalanced, any event that removed trucks from the roads would have an outsized and lasting impact. Retailers and their transportation partners are finally working through the winter storm-induced glut just as the spring season heats up. To add fuel, President Biden said this week the U.S. will have enough vaccinations for every American by the end of May. It will take several months past that date to dole out the inoculations, but consumer behavior will change.
In this week’s “COVID and the Consumer” report from Bank of America, the team highlighted airline and lodging spending by generation to show the oldest cohort (the most likely to receive vaccines thus far) has begun spending much more on flying, but minimally more on lodging. The team suggests the eldest generations are flying to visit family rather than vacation. But vaccines are beginning to hit the younger generations, who will be more likely to vacation and spend on services than their elders did upon vaccination.
The generational pent-up demand for services is the only headwind to freight volumes in the short to midterm. The industrial economy is recovering at a solid clip, the housing market is soaring and consumers continue to do their part, aided by the hopes of further stimulus. So although year-over-year comps will tighten over the next few weeks, there is no sign of slowing down soon.
On a positive note, eight of the 15 major freight markets that we monitor as a broad, representative benchmark were positive on a week-over-week basis. This ratio weakened modestly from the stronger levels it has become accustomed to in recent months as the freight market rallies. The markets with the largest gains this week in OTVI.USA were Laredo, Texas (12.07%), Memphis, Tennessee (5.37%), and Cleveland (5.08%). The markets with the largest declines this week in OTVI.USA were Chicago (-5.83%), Seattle (-4.66%) and Miami (-4.26%).
Tender rejections hover near peak
The Outbound Tender Reject Index also moved horizontally this week, stable at a very high level of 27.6%. OTRI has ranged up toward 30% four times over the past year, but never quite touched the handle. I believe we are near the natural ceiling for tender rejections, and this is evidenced by surging spot rates.
Capacity remains scarce across many regions of the country, especially the Midwest and upper Midwest. Carriers have realigned more capacity to West Coast markets as rejection rates have fallen considerably in California while tender volumes have risen. This week, Old Dominion Freight Lines announced it would be hiring 800 drivers to expand its operations. This isn’t the first such announcement and Old Dominion won’t be the last carrier to do so. The length of this bull market seems to be extending with every passing week. Equipment orders are at multi-decade highs, so it’s a matter of time before some capacity is added to the market. However, bottlenecks at driver training schools have not been relieved and the Drug and Alcohol Clearinghouse has removed tens of thousands of drivers, so seats are difficult to fill.
It is unlikely that there will be a material change to capacity through the middle of the year. We may see some downward pressure on tender rejections as routing guides are recalibrated and contract rates market toward spot, but capacity will remain difficult to source.
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