Q1 Cowen/AFS Freight Index
Sees Surprising LTL Strength
January 23, 2023
Logistics and Cowen Research released the Cowen/AFS Freight Index for Q1
2023, a snapshot with predictive pricing across multiple sectors in the
freight industry. The latest release of the index reveals surprising
less-than-truckload (LTL) strength, indicates a continued downward trend
in truckload and illustrates the power of parcel general rate increases
(GRIs) and surcharges to prop up express rates and drive ground to
record highs in the quarter ahead.
“Predictions for truckload and parcel fall in line with conventional
wisdom, as truckload is typically sensitive to macroeconomic headwinds
and record GRIs join year-round demand surcharges to drive higher parcel
costs, particularly in ground,” says Tom Nightingale, CEO, AFS
Logistics. “But what the index says about LTL may surprise some. Unlike
truckload, LTL is expected to exhibit strength in the face of economic
headwinds, supported by higher accessorial charges and GRIs, even as
market conditions trend more favorably for shippers.
“Seven interest rate hikes since March of last year and continued
inflation have taken a significant bite out of economic demand,”
continues Nightingale. “While the index does not show a uniform decline
across all modes, looking deeper shows the effects of macroeconomic
conditions playing out, with carriers competing for more limited demand
while searching for ways to claw back revenue.”
Key implications for truckload
A continued decline in the truckload rate per mile index is projected to
erase almost all of the gains accumulated since Q2 2021. Compared to the
record-high 25.8% figure of just a year ago, the index is projected to
be 11.2% in Q1 2023 – an 11.6% year-over-year (YoY) decline.
Inflation-driven cost increases, relatively high fuel costs and shipper
pricing power are expected to threaten truckload carrier profitability
in 2023. Data from Q4 2022 indicated a falling cost per shipment, aided
in part by a higher percentage of short-haul shipments, with miles per
shipment declining 2.5% quarter-over-quarter (QoQ).
Key implications for LTL
While macroeconomic headwinds and flat weight per shipment often point
to loosening LTL capacity and falling rates, the data indicates
continued strength, with rates heading higher. In Q1 2023, the LTL rate
per pound index is projected to reach a new high of 66.5% above the
January 2018 baseline – a 1.1% QoQ increase and 20.4% YoY increase.
Looking at the previous quarter’s results provides insight on factors
that can prop up rates. While weight per shipment stayed flat in Q4
2022, a 4.9% increase in accessorial charges per shipment and a greater
percentage of shipments rated class 85 or higher powered a 1.3% increase
in cost per shipment over the previous quarter. Further upward pressure
on rates for Q1 2023 comes from LTL GRIs, which range from 4.9% to 7.9%
and took effect January 2023, and relatively high fuel surcharges.
“While current market conditions are more favorable to shippers looking
to renegotiate after extended rate hikes, capitalizing on that and
actually finding relief is no guarantee,” says Kevin Day, president, LTL,
AFS Logistics. “The nature of the LTL market means shippers must enlist
the help of an advocate and proactively seek out those opportunities,
considering the prevalence of individualized pricing and the need for
shippers big and small to stay vigilant in monitoring freight costs.”
Key implications for ground and express parcel
The record GRIs announced at the end of 2022 are now in effect,
resulting in minimal list rate differentials between FedEx and UPS
across services. Both carriers also announced similar changes to an
extensive list of surcharges, including levying surcharges for
deliveries to remote areas and applying peak demand surcharges on a
year-round basis, rather than just during the extended holiday season.
“Carriers are continuing to use accessorial charges and GRIs as
effective tools to capture revenue, but that success doesn’t make them
immune to macroeconomic conditions,” says Micheal McDonagh, president,
parcel, AFS Logistics. “Shippers had ample volume during the COVID era
which created capacity issues. Carriers now find themselves in an
environment with softening volume and need to change their strategy to
ground parcel index for Q4 2022 shows the strength of higher effective
accessorial charges. Despite a quarterly decline in average billed
weight per package, an 8% increase in average accessorial charge per
package drove overall quarterly growth in the cost per package. In Q1
2023, the rate per package index projects a record high of 34.9% above
the January 2018 baseline, compared to 27.7% the previous quarter. This
anticipated growth is fueled by continued accessorial charges, fuel
surcharges that will remain moderately high and record-high GRIs, which
are typically ‘stickier,’ or more resistant to the impact of shipper
negotiation and discounting, in ground than express parcel.
The express parcel rate per package index is expected to increase in Q1
2023 to 2.7% above the January 2018 baseline, up 1% QoQ and 5.9% YoY.
This comes after a higher-than-expected cost per package in Q4 2022,
attributed to a drastic increase in average billed weight per package of
12.5% in October 2022, which, together with a 1.1% QoQ increase in the
average zone, lifted the entire quarter.