Expect an uneven ride in the transportation market this quarter

AFS Logistics, a 3PL provider, and Cowen Research have released the October 2022 Cowen/AFS Freight Index for Q4, a snapshot of forward-looking pricing across multiple sectors of the freight industry. This latest release of the index forecasts a quarter-on-quarter (QoQ) decline in transportation costs for all reported modes of transportation except land parcels.

“While prices in the freight industry remain high year-on-year, certain sectors are seeing significant quarter-over-quarter declines and are now declining from historic highs,” said Tom Nightingale, CEO of AFS Logistics. “But while slowing demand and falling quarterly rates suggest market power is shifting away from carriers, shippers must remain vigilant as carriers undertake unprecedented across-the-board rate increases.”

The Cowen/AFS Freight Index is unique because of its dataset and forward-looking view. Expected rate levels are derived from data associated with AFS customers’ $11 billion in annual transportation spend across all modes of transportation and include actual net charges that account for incidentals such as fuel surcharges. Past performance and machine learning provide predictions for the remainder of the quarter, compared to a baseline of 2018 rates for each mode.

Important implications for ground and express packages

The peak season surcharges are now significantly longer than in the past and apply to more shippers. Peak surcharges for additional handling and oversized packages have been in effect since January for UPS and begin September 5th for FedEx. For comparison, the 2018 peak season lasted 34 days for UPS and 35 for FedEx.

Last year, peak-time delivery surcharges were imposed by both major carriers on customers who shipped more than 25,000 residential and agricultural packages per week. This year, that threshold has been lowered to 20,000 packages per week, so more shippers should expect to pay those surcharges. And year-on-year (YoY) price increases for various top surcharges go as high as 60%, providing a powerful tool for carriers to avoid unwanted packages.

In the fourth quarter, aggressive peak surcharge increases and additional surcharge costs resulting from the seasonally increased share of residential shipments will help increase the average price per package for ground packages. This takes the index forecast to a new high of 28.5% compared to base year 2018. Expected rate growth in Q4 contrasts with the previous quarter, where ground package rates were relatively flat due to lower fuel surcharges and a higher average discount.

While express parcel prices rose sharply in the second quarter of this year, lower fuel surcharges, a falling average invoice weight and a shift to fewer premium services led to a 5.1% decline in the third quarter. For the coming quarter, the Express Parcel Index is forecast to fall further to -1.8% compared to the base year 2018, although this figure still reflects a 4.3% year-on-year increase.

“Earlier this year, due to capacity issues during the pandemic and fuel prices running amok, shippers had a strong hand on pricing,” says Micheal McDonagh, President, Parcel, AFS Logistics. “But as the economy slows and shipment volume decreases, carriers need to develop a strategy to gain volume.”

GRIs – Worse Than They Look

Citing inflation, FedEx announced its highest-ever net list price increase of 6.9%, effective January 2023, for both express and land packages. But this published average increase can be misleading. Actual list price increases will vary based on package features, as will individual surcharge increases.

For example, the list price increase for a Zone 8 package with an invoice weight of 26 pounds could actually be 7.4% for priority two-day shipping, and along with accessories, calculations show the total cost of shipping a package after the General Price Increase (GRI) is in effect occurs could actually be an increase of 12.7% – almost double the announced GRI.

Annual GRIs also have a compounding effect that drives up costs significantly over time, and to a far greater extent than steady annual increases would suggest. Based on list price and accessory increases for the five-year period 2017-2022, a sample Zone 5 package of 54 pounds dimensional weight is 38.2% more expensive to ship overnight with priority.

“While FedEx’s record-high GRI announcement made headlines, shippers might still be surprised by the more costly reality lurking behind the annual increases they’ve become accustomed to,” says McDonagh. “The upcoming UPS GRI will likely be comparable to that of FedEx, which then leaves shippers with the task of testing how ‘sticky’ this latest GRI will really be.”

Important implications for LTL

Both weight and fuel surcharge per shipment decreased in Q3 2022 on a quarterly basis, contributing to a 2.4% quarter-on-quarter decrease in the LTL cost per shipment. However, the LTL index still showed a significant year-on-year increase of 20.3% in the third quarter. And while the average fuel surcharge fell 5.4% sequentially in the third quarter due to lower crude oil prices, the average incidental cost per shipment increased 8.4% sequentially.

Looking ahead to Q4 2022, the LTL Index is expected to fall again from 55.3% to 48.6% on a quarterly basis – still up 10.1% year-on-year compared to Q4 2021 .

“Shippers bore the brunt of supply chain bottlenecks and fuel price spikes in previous quarters,” Nightingale said. “We expect continued high fuel surcharges in the coming quarter and LTL GRIs are just around the corner. However, demand is fading and prudent shippers are already taking steps to cut costs, while carriers are taking steps to ensure their networks remain full as the economy cools.”

Important implications for truck loading

While truckload rates have declined sequentially, rates have declined less than volumes; suggesting surprising market resilience and the long shadow of contract truckload rates.

The Cowen/AFS Truckload Freight Index is forecast to return 17.9% in the fourth quarter compared to 18.3% in the third quarter. Linehaul cost per shipment decreased 0.8% sequentially in the third quarter but still increased 6.4% year over year. However, the year-over-year increase is 10% lower than the year-over-year growth rate in the second quarter, suggesting that the pace of truckload cost per shipment is decelerating.

Not only is the fourth quarter truckload index expected to defy typical seasonal trends and decline on a quarterly basis, it also indicates the first negative year-on-year change since the third quarter of 2020. This decline is largely due to the current macroeconomic environment, which is being driven by factors such as inflation remaining above 8% and expected rate hikes by the Federal Reserve. As a result, truckload hauliers will likely face challenges to sustain revenue growth over the next few quarters.

Leave a Comment