[Chart of the Week] Transportation costs keep rising as service deteriorates: Carrier trucking compliance levels drop below 75% while rates increase 6% in February

Zach StricklandChart of the Week, Freight Market Blog

Chart of the Week: Van Contract Base Rate per Mile Initial, Van Outbound Tender Reject Index, Truckstop Average Van Spot Rate per Mile – USA SONAR: VCRPM1.USA, VOTRI.USA, TSTOPVRPM.USA

Truckload carriers have continued to struggle to provide consistent coverage through the first quarter of 2021, and in return costs have increased. This relationship seems counterintuitive at a base level — why would you spend more to get less? — but it is a common result of demand exceeding supply in just about any industry. And the effects are becoming evident as trucking compliance with applicable routing guide requirements deteriorate.

National van truckload tender rejection rates — the percent of electronic requests for capacity declined by carriers — have exceeded 20% since early August outside of a single day in February. The truckload market appeared to be on a path toward stability with rejection rates sliding slowly through the first month of the year before winter storms disrupted trucking networks and shipper production cycles. The result has been rejection rates consistently above 25% since Feb. 18, implying a direct return to losses in routing guide trucking compliance.

With decreasing carrier or trucking compliance come increasing transportation rates, which was reiterated several years ago by Inbound Logistics. The average van truckload spot rate increased 20% from the beginning to the end of February. Spot rates are much more volatile and represent roughly 10%-20% of the for-hire truckload market freight volume. Most of the freight moves under a more consistent pricing structure or “contract” rates. 

The overall average cost of a dry van truckload move increased 6% over the same period, according to FreightWaves’ Van Contract Index, which measures the average median base rate per mile of truckload invoices on a daily basis. This index largely consists of long-term contracted freight rates and excludes loads under 250 miles. 

It should be noted that retail fuel costs also increased last month as well, , which influences the spot rates, but fuel surcharges have been removed from the contract rates. 

Contract or long-term rates do not change quickly compared with spot rates, but as shippers fall down their list of providers, looking for someone to move their freight, rates tend to increase and service expectations deteriorate. This is largely the increase shown here. A portion of the increase could also be due to rate increase implementations, but that is difficult to determine with precision in such a volatile space.

The big question is, just now what can shippers do about it? Looking at this week’s chart, it is apparent that most contract rates were underpriced for the market conditions for most of the past year. Compliance levels fell rapidly, leading to surging spot pricing. 

As mentioned, contract rates are slow to move and remain well below spot levels, especially as trucking compliance risks remain in the spot market. The further the contract rate is below spot, the lower the trucking compliance and service level shippers experience. 

Unlike previous years when the market was more stable, shippers will have a tough time finding the sweet spot that balances price and service/compliance levels. Optimizing this function with so many uncertainties makes budgeting transportation spend a nightmare. The traditional strategy of relying on leverage will probably not work as well this year. 

Price too low and risk paying spot market premiums of 30%-50%. Spend too much to guarantee higher trucking compliance and that is also a problem. With average invoiced rate levels 22% higher than the previous year, according to the Van Contract Index, there is less room to negotiate. 

Some mean reversion is imminent, but the national Outbound Tender Reject Index shot back over 28% this week, near its peak value around Thanksgiving of this past year. This indicates demand continues to outpace capacity and many of the recently implemented contracts have been unsuccessful. Transportation managers will have to be more nimble than ever if they want to keep from being the scapegoat on this year’s earnings calls.

Epilogue: Routing guide compliance will remain the focus for strategic shippers

Finding a balance between spot and contract freight has always been a strong area of focus for shippers. However, the issues presented with market instability and rising rates are evident of additional trucking compliance failures. And then, as noted, there’s the issue of knowing when to pay extra for compliance that may not necessarily be needed in the end, such as the recent reinstatement of UPS and FedEx service guarantees. There are many factors to consider, but regardless, the primary goal is to know how to capture data, apply it, and stay strategic with your contracts. Those needs are functions found within SONAR as a whole and SONAR SCI Lane Acuity too. Request a demo by clicking the buttons below.

(Epilogue by Jason Vanover)