Bid rejection data on the FreightWaves SONAR data platform shows that the freight market bottomed out on May 14. Since then, conditions for carriers have been slowly improving.
SONAR’s Outbound Tender Rejection Index (OTRI) tracks the balance of supply and demand in trucking by measuring the percentage of cargo loads that are rejected. In trucking, supply equals the number of trucks available in a market for shipment, while demand is the number of loads offered in that market.
OTRI data is derived from the “contest” messages between shippers and motor carriers. Bid messages are requests for truckload capacity from shippers in the conventional freight market. A carrier rejection tells a shipper that the carrier has another option for that truck (or trucks). Higher rejection rates mean the supply/demand balance is swinging in favor of truck fleets.
Current bid rejection data marks a stronger year-over-year (y/y) quarter for car carriers. Bid rejections are on pace to surpass last year’s number and should do so by the end of the third quarter.
Bid rejections also signal that the current market is similar to 2019. (Orange on this chart is 2019.)
Who wins?
The freight cascade theory suggests that the largest carriers are the last to be affected by a slowdown and the first to see the market rebound. The Waterfall Theory of Freight is the fundamental theory that bid rejection data is designed to track.
As seen in the SONAR chart above, volumes continued to strengthen throughout the year. This suggests that the trucking market could see a decent peak period, providing some relief for motor carriers.
Although conditions are improving, there is still excess capacity in the market (too many trucks chasing too little cargo). This situation will continue to be corrected over the next several months.
The chart below shows the number of net additions of trucking companies to the market (meaning it measures revocations of operating authority compared to newly established trucking companies). The chart measures the market in weeks. green is expansion, red is contraction.
As capacity continues to correct, the fare cycle will begin to move at a faster pace (perhaps later this year, likely late Q1 2024). Rates will move higher. In general, this helps carriers and hurts shippers.
When capacity has fallen enough in the market while volumes have grown to more robust levels, spot prices will rise.
The difference between contract and spot rates
As the freight market pulls out of the slump, shippers may pay higher prices to ship their cargo in 2024. However, the next stage of the transportation cycle may be much more challenging for freight brokerages than shippers. Many shippers have begun to favor asset-based carriers in their routing guides, which means a loss of volume for brokers.
Lower volume means lower income for brokers. However, brokers also make their money on the “spread”. – that is, the delta between contract and spot rates.
Spread is another key metric that can be found in SONAR.
Currently, the spread is -$0.79, meaning it’s $0.79 cheaper per mile (excluding fuel) to move a truckload using a spot market carrier than via contract.
While the gap has narrowed, it is still near record levels.
The spread will tighten further as spot rates rise, while contract rates (many of which have been renegotiated to lower levels starting in spring 2022) will remain near the floor (although contract rates have likely fallen below).
Brokerage problems?
This means that freight forwarders with chartered charters will see their margins squeezed.
This could lead to the failure of some of the high growth brokers who funded their growth through debt in a near 0% interest rate environment.
These brokers tied their debt covenants to margins and will violate those covenants. That could cause some brokerages to fail, as Surge Transportation did earlier this year.
A digital commodities brokerage founded in 2016 by Omar Singh and based in Jacksonville, Florida, Surge Transportation has filed for Chapter 11 bankruptcy protection. Of its top 20 creditors, 16 are factoring companies that pay small carriers.
The outlook for 2024
Conditions for carriers could improve dramatically in the second quarter of 2024. and they may have the upper hand in negotiations with shippers at that time.
After more than 18+ difficult months for many carriers, they should prepare for higher volume and prices. They should continue to right-size their businesses, reduce costs where possible and be ready to offer volume and service to current and prospective shipper customers.
What can shippers do as the market starts to turn?
They should prepare now by benchmarking their fare costs against data, locking in contract prices or using index-linked contracts to manage fare/capacity risk.
FreightWaves is currently working with about two dozen shippers to index freight rates to help them prepare for a tighter bidding season in 2024.
All charts presented are available on SONAR, the high-frequency cargo market intelligence platform that empowers supply chain businesses.
FreightWaves SONAR price, demand and capacity data spans all modes of operation to enable logistics leaders to compare, analyze, monitor and forecast the global physical economy.
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