Historic Trucking Rate Disparity Could Cripple Service in Late ’24

 

The trucking industry is currently grappling with a significant disparity between spot and contract rates, which could lead to substantial service issues later in 2024. The gap between these rates is historically wide, with contract rates about 30% higher than spot rates, compared to about 12% in 2019. This unusual spread suggests that the market could leave many shippers without reliable truck access when conditions shift.

Contract vs. Spot Rates:

• Contract Rates:
  • Generally negotiated annually between shippers and transportation service providers.
  • Can be renegotiated mid-term in volatile capacity environments.
• Spot Rates:
  • Negotiated on a transactional basis, typically valid for only a few days.
  • Used by shippers when contract carriers are unavailable or to achieve cost savings.
  • Carriers use the spot market to fill network gaps or haul profitable freight.

Overcapacity in the Market:

• The truckload market remains oversupplied due to the pandemic-era consumption boom.
• The market has been in recession since early 2022 but is slowly moving toward balance.
• The current ratio of operating authority to tender is about 31:1, compared to a tighter market ratio below 24:1.

Implications of the Rate Disparity:

• The oversupply has driven rates to levels where carriers are operating at or below cost, particularly in the spot market.
• Shippers and brokers who secure long-term rates near spot market prices face increased service failure risks as the market tightens.
• Spot rates have been trending higher, signaling the floor for pricing is rising slowly.

Impact of International Roadcheck:

• The recent International Roadcheck inspection blitz led to a temporary reduction in capacity, causing spot rates to spike by 7%.
• Tender rejection rates increased from 3.1% to 4.1%, indicating heightened service failure risks for shippers with low-end rates.

Looking Ahead:

• The fourth quarter is expected to bring a much tighter market with unpredictable demand, especially during the retail peak.
• Carriers may prioritize hauling profitable freight, leading to service failures for shippers with the lowest rates.
• This situation could severely impact companies that relied on the lowest dollar rates or spot market-based long-term rates.

 

Source:

https://www.freightwaves.com/news/historic-trucking-rate-disparity-could-cripple-service-in-late-24