Freight volume will return. Warehousing beware.
What is happening?
It was reported on Wednesday that UPS is looking for a potential buyer of its brokerage unit, Coyote Logistics. Swings in an already volatile market have a particularly negative impact on brokerage units, and UPS wants to limit its exposure. Brokerages are reported to have begun experiencing struggles since the onset of 2022 because of prolonged slumps in freight volumes. In 2023, revenue at UPS’s supply chain solutions business unit, of which Coyote Logistics is a part, fell by more than 20% year-over-year. In 2015, when UPS bought Coyote Logistics for $1.8 billion, the brokerage unit was an industry leader. Using the latest technology, Coyote Logistics was sought after for its ability to fill trucks after dropping a load, increasing efficiency, and reducing waste.
Why it matters?
A freight brokerage company acts as an intermediary between shippers and carriers, facilitating the transportation of goods by connecting businesses that need to move freight with available trucking capacity. Unlike traditional carriers that own and operate their own fleet of trucks, freight brokers do not own any transportation assets. Instead, they leverage their industry expertise, technology, and a network of carriers to efficiently match shippers with suitable transportation solutions. Freight brokers play a crucial role in streamlining the logistics process. Shipper’s benefit from the broker's ability to find cost-effective and reliable carriers, while carriers benefit from access to a broader pool of potential clients. The broker manages the entire logistics chain, handling tasks such as negotiating rates, arranging transportation, tracking shipments, and ensuring compliance with regulations. Freight brokers make money through a commission-based model. They negotiate rates with both shippers and carriers, charging a percentage of the total transportation cost as their fee. This fee compensates them for their services in connecting parties, managing paperwork, and ensuring a smooth transportation process. The commission-based structure aligns the interests of the broker with the success of the shipment, as their revenue is directly tied to the value of the freight being transported. When freight volume plummets, so do the profits for a freight brokerage company. Freight brokerage activity soared during the first two years of the pandemic as demand for space in trailers outstripped supply; but last year this volume took a dramatic cut. Why is freight volume dropping?
Truck freight volume and spending in Q2, of 2023, declined by the highest levels since the early days of the COVID-19 pandemic. Spending by shippers dropped 10.9%, while shipment volume dropped 9%. “Trucking is in the midst of a significant slowdown,” according to Bob Costello, senior vice president and chief economist at the American Trucking Associations. Spending is down across industries, but production levels are still up.
The global shipping industry was mired in a freight recession throughout 2023, and the challenges are expected to continue. High inventories held by companies who dramatically overproduced market demand, combined with a pullback in consumer spending are the reasons behind the unpleasant outlook. Freight volume in trucking is not the only transit mode to take a hit from the downward trend in volume. Ocean freight prices for the first and second quarters will be unchanged or down — after a 2023 in which rates cratered by as much as 50%. Looking at air freight, the majority anticipate rates to be unchanged to down anywhere from 10% to 20%. FedEx recently told pilots to look for additional work with American Airlines as cargo demand slows. The low freight prices coupled with diminished cargo volumes were among the reasons behind global shipping bellwether Maersk’s announcement of 10,000 layoffs. “Our industry is facing a new normal with subdued demand, prices back in line with historical levels and inflationary pressure on our cost base,” CEO Vincent Clerc said in a statement. Interestingly, he added that overcapacity in most regions has driven down prices.
The good news is the dramatic reductions in freight volume are going to swing back for the same reason they happened. Overproduction. After the immediate impact of the pandemic was felt in supply chains around the world, companies adopted the time-tested technique (it is a disaster every time) of overproducing everything. Warehouse capacity (an industry that is going to be hit hardest after the overcapacity is reduced) plummeted as overproduction to market demand continued for more than two years. The good news is that volume will return to the trucking industry. The bad news is the pain felt by freight brokerage companies is going to visit the industrial warehouse sector next.