Our trucking outlook for 2023: a new year, a new set of challenges

Our trucking outlook for 2023 is a decidedly mixed bag. As the pandemic becomes endemic, old hardships go away, yet different difficulties rear their ugly heads.

In the past few weeks, we’ve published our 2023 Modal Market Outlook Series offering a glimpse into what we can expect in the coming months from a budget, service or industry perspective across various transportation modes.

We started with John Westwood from Gemini Shippers discussing container ocean freight and the massive inflationary and then deflationary changes in that market. Next came Micheal McDonagh from AFS to help readers navigate the complex world of parcel freight. Today we wrap up this series with a focus on Truckload and less-than-truckload (LTL) freight in the continental United States. The intent of this series has been to share views on how various transportation modal markets in the U.S. will operate and what challenges they’ll face in the current calendar year.

What happens in truckload affects everything else

As the largest mode of freight transportation for many of our clients, what happens in truckload markets has an outsized impact on transportation and logistics budgets. We use the term “markets” because it is important to understand there are many different types of truckload transportation (dry van, temperature-control, flatbed, bulk, intermodal, national, regional, local and dedicated, to name a few). Pricing trends can move a bit differently and at different times in each of those markets. We won’t have time to dig into all of those modes individually, but we need to at least acknowledge the differences, and it’s necessary to repeat this caveat from past years.

One could use the analogies of “a long, strange trip” or a “rollercoaster ride” to describe how we got to the current state of the truckload environment. I prefer to go with the “circle of life” as my analogy. We’re once again reminded that truckload markets move cyclically. While we can’t always predict the amplitude or duration of those cycles, the fact is that the cycle will repeat itself. As we’ve written before on truckload pricing trends, it always boils down to supply and demand. That hasn’t changed.

And here’s yet another analogy: a bucking bronco

We started 2022 coming off the massive rate inflation of 2021. That rate of inflation drew investment into more capacity (drivers … especially owner-operators) and eventually (and predictably) that capacity overshot demand. The need for truckload services didn’t wither, but after shippers pulled volume forward (trying to avoid being burned by port and international transportation delays like in 2021), the economy began to cool and demand didn’t keep growing. Predictably, spot rates fell, and they continued to fall throughout 2022. To absolutely no one’s surprise, this eventually pulled contract rates down, especially in the latter half of the year. 2022’s bronco-busting ride ended with about 4–5% year-over-year (YOY) inflation in truckload on average (dry van was ≈2% YOY, but intermodal, temperature-control and flatbed were all in the high single digits and pulled the average up).

We begin 2023 in a very different place than 2022

The end of that ride wasn’t necessarily so different from other years when the truckload market was soft. It seems the most commonly espoused predictions are for another capacity crunch to hit mid-year that’ll quickly drive prices back up or for the soft environment to continue until at least mid-year (possibly into the summer) and then a more gradual rise as we all float off the proverbial bottom. Our prediction is for the latter.

We believe 2023 is going to be a “catch your breath” kind of year for shippers. The softening rate environment will allow shippers to claw back some of the rate inflation they have experienced over the past two years. Sourcing events in the fall and early 2023 are going to narrow the gap between contract and spot pricing once those contracts take full effect. Given the low level of tender rejections currently in the market, those prices should stick for a good part of the year as well. As is typical, intermodal pricing won’t drop as quickly as there’s often a lag of a few quarters until truck pricing pulls intermodal pricing down. From a year-over-year standpoint, we expect truckload rates to decrease by‌ 3–5%.

Shifting gears to LTL, the stabilization story will apply here as well

As we’ve discussed in the past, LTL has always been more predictable than the truckload markets. That’s not a real big surprise given the much smaller supply base in LTL (tens of carriers) versus TL (hundreds of thousands of carriers). LTL pricing doesn’t decrease anywhere near as quickly as TL does in down cycles, but it rarely increases at the dramatic levels that TL does in inflationary cycles (even in 2021).

Of course, we come back again to supply and demand. LTL carriers are still heavily tied to the industrial and manufacturing sectors of the economy. While demand and production in those sectors have started to slow, we’ve seen LTL demand and volume decline in 2022. However, LTL demand is coming off some pretty high “highs.” so it’s not like the bottom has or will fall out of the market.

On the supply side, it takes a lot more investment and infrastructure to operate an LTL carrier. It’s a big reason why there are far fewer of them and no recent new players of substantial size. This smaller supply base allows LTL carriers to continue investing in operational efficiencies and better business management. It’s why we’ve seen Knight-Swift dive into the LTL space in late 2021 and XPO turn its attention to being a pure-play LTL provider.

LTL carriers typically have more pricing discipline than TL carriers and we’re continuing to see that trait. Accessorial charges are one area where there’ve been steady pricing increases. LTL providers are seemingly taking a page from their parcel brethren’s playbook. The high price of fuel in 2022 was an accessorial pain point for many and that's likely to continue in 2023.

We don’t expect LTL carriers to push through multiple general rate increases (GRIs) like we saw in the pandemic years, but some portion of the 2023 GRIs will likely stick. While 2023 GRIs implemented in January were in the 5–6% range, we don’t expect overall LTL price inflation to be that high in 2023 given the demand headwinds we see. The overall impact of LTL rate increases will be muted, but still present. We expect a 2–4% rate increase to be where we end up for LTL rate inflation in 2023.

Where do you go from here?

What I wrote to end this piece last year is still the best advice I can give. Developing your transportation strategy so that your organization can succeed in a dynamic transportation market is important. Volatility in one phase of the cycle (2020–2021) will probably manifest into equal but opposite dynamics when capacity is more available (2022–2023). That’s exactly what we’re now experiencing.

We encourage shippers to approach their transportation provider strategy the same way one builds a diversified financial portfolio. Undertake efforts to make certain you have the right mix of Truckload, LTL and Intermodal providers while also ensuring you have the right mix of asset-based and non-asset-based providers. Make sure you have the right number of carriers and diversify your provider base. Work on strengthening relationships across all carrier partners, not just core carriers. Capacity in transportation will turn in the carriers’ favor again. It always does. Now isn’t the time to reduce your carrier base to a small group of carriers. We saw how that didn’t work during the pandemic. You need to give consistent business to a larger group of carriers. A larger pool of partners/friends provides more coverage for when some of your partners start to “tap out.”

Sensible, diversified sourcing and procurement approaches are important tools for achieving such a diversified provider portfolio. The big, annual network bid shouldn’t be the only arrow in the quiver any more than mini-bids or spot bids should be. An annual sourcing event has its place when used on the consistent lanes in your network (and many recent events are driving a lot of value here in 2023). Similarly, mini-bids and/or the spot market are often better approaches to low-volume or highly seasonal lanes. Using the appropriate sourcing approach for the economic environment and the lane network is essential for shippers as they diversify their portfolios and reset their networks after the volatility of the past few years.

Don’t overlook the inadequacies in your operation

Lastly, don’t table or ignore initiatives you started to address the inefficiencies in your own operations that delay your transportation partners. Initiatives to reduce the time carriers wait/waste at your facilities improve your current providers’ utilization and make your company more attractive to future transportation partners. Just because rate pressure is easing doesn’t mean shippers should allow their continuous improvement focus to wane.

The next cycle is never that far away!

— By Kevin Zweier