Brokers: Shippers price down contract freight more quickly

US truckload capacity eased further in November as bid rejection rates fall and spot rates find a new bottom.

Freight brokers told FreightWaves that shippers are cutting contract rates as the trucking industry enters the supply season. For a couple of weeks in September and October, it appeared contract rates were falling fast enough to close the contract-spot gap, but spot carriers are cutting rates again rather than a strong retail peak season ensuing.

The national average rejection rate for outbound bids fell to 4.28% on Tuesday, a new low for the cycle that reflects a broad shift among asset-based carriers and freight brokers alike from pricing strategies that maximize yield and margin to strategies to sustain asset utilization and volume.

(Graphic: FreightWaves SONAR. Percentage of contracted truckloads rejected by carriers. To learn more about FreightWaves SONAR, click here).

“We’ve seen an increase in the frequency of pricing, which we welcome,” said Jamie Teets, CEO of Transportation One, a Chicago-based freight brokerage firm. “This allows for fluid contract pricing that drives higher levels of primary tender acceptance (PTA), carrier performance, and therefore overall shipper satisfaction. We still participate in annual RFPs, but see the semi-annual or even quarterly model as more effective from an overall network management perspective.”

In Uber Freight’s Q4 Market Update and Outlook, the 3PL reported that contract rates continue to fall as a result of the RFP process, but spot rates have mostly stabilized, and Uber Freight sees “continued pressure on the prices of the… incumbent carriers as shippers look for cost savings. Accept first offer[ance] has improved significantly as demand falls.”

(Graphics: Uber Freight)

Most of the US truck market appears to be in relaxed capacity conditions, with little regional variation or problematic “hotspots” where trucks are difficult to source on a spot basis.

“There aren’t any regions that go against the grain overall,” a business analyst at a top 10 freight broker told FreightWaves, “maybe a little bit west, like the PNW, but it’s not notable, just a little harder than.” in other areas.”

In fact, of the top five truck markets by outbound volume – Los Angeles, Dallas, Atlanta, Chicago and Harrisburg, Pennsylvania – only Harrisburg has higher bid rejection rates than the national average.

(Graphic: FreightWave’s SONAR. Percentage of rejected outbound truckloads for Los Angeles (white), Dallas (blue), Atlanta (green), Chicago (orange), and Harrisburg (purple). To learn more about FreightWave’s SONAR, click here . )

It’s normal for Los Angeles to turn down fewer bids than the broader market in a down cycle as carriers tend to allocate their assets to the most reliable freight sources, thereby over-supplying those particular markets. But the fact that major markets, regardless of region, all perform below the national average is striking.

Spreads between spot and contract rates for truckloads are deeply negative, putting contract rates under pressure as reflected in recent bids. When spot rates are significantly below contract rates, shippers have pricing power and can shift their shipments in the spot market and reduce their costs by denying volume to their contracted carriers. Carriers use their volume leverage to pressure carriers to lower contract rates and compress distribution.

On the other hand, when spot prices are well above contract rates in a hot market, carriers reject their contracted freight and turn their assets into the spot market to achieve high rates per mile, using their capacity leverage to pressure shippers to bet, increase contract rates and compress the spread.

(Chart: FreightWaves SONAR. National Average Cash Rate per Mile minus Contract Rate. To learn more about FreightWaves SONAR, click here.)

Although contract rates are trending down, spot rates have fallen at the same pace, maintaining a heavily negative spot contract spread and putting further pressure on contract rates. This relatively wide range keeps freight brokers’ gross margin percentages healthy even as net earnings per load deteriorate. In other words, while the “take rate” may remain the same, the overall dollar margin generated per load goes down.

“We expect spot and contract pricing to overlap sometime in 2023,” Teets said. “Regardless of the market environment, we remain focused on strengthening our long-term partnerships across all sides of the show. We understand the cyclical nature of the North American full truck load market and the impact on our partners at all stages of a market cycle.”

During CH Robinson’s third-quarter earnings call, CEO Bob Biesterfeld pointed out that even Robinson’s traditionally aggressive pricing approach — particularly catching up on volume at low contract rates in soft markets — wasn’t enough to drive volume meaningfully.

“In our NAST Truckload business, we grew our volume year-over-year for the sixth straight quarter, albeit with modest shipment growth of 0.5%,” said Biesterfeld. “Volume growth in drop trailers, flatbed and temperature control was partially offset by a decrease in our dry truck volumes. Within the quarter, we saw mid-single-digit volume gains in July that turned into declines in August and September as freight demand weakened.”

By far the largest freight broker in North America, CH Robinson is finding it harder to gain market share than other non-asset players.

A business analyst at a top 10 freight brokerage firm told FreightWaves that on its boards so far, “volume is holding up for us, we’re just seeing more capacity ready to bring prices down. The retail peak usually starts in mid-November but there is no sign of it.”

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