Shippers back in the driver’s seat as parcel market growth softens
A number of factors are conspiring to tap the brakes on two years of accelerated, pandemic-driven growth in parcel volumes. That means that unlike last year, shippers in 2022 are finding ample capacity and competition for their parcels.
Gary Frantz is a contributing editor for DC Velocity and its sister publication CSCMP's Supply Chain Quarterly, and a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.
For those who remember the original Monday Night Football broadcast crew of Frank Gifford, Howard Cosell, and Don Meredith, when one team got so far ahead there was no doubt they’d win the game, Meredith would break into that old Willie Nelson favorite “Turn out the lights … the party’s over.”
Well, for the parcel express market, as pandemic-driven demand wanes, the 2022 peak season staggers to a close, and an uncertain 2023 looms on the horizon, that classic lyric seems to have found a new home.
Led by FedEx reporting an unexpectedly large miss in its September earnings call, the nation’s parcel express carriers are adjusting to a new post-pandemic reality. They’re dealing with an uncertain economy, persistent inflation, higher energy costs, shifting consumer spending priorities, and weaker-than-expected e-commerce traffic—all of which are driving slower growth and creating excess capacity.
THE TABLES HAVE TURNED
As the upshot of all that, “this year’s peak season put the shipper back in the driver’s seat,” says Satish Jindel, president of consulting and parcel data analytics firm ShipMatrix. Using ShipMatrix’s demand-supply model, Jindel predicted in September that this year’s peak season demand would hit 92 million parcels per day. Yet as peak season moves along, he’s scaling back those projections, noting that it now appears the market would be hard pressed to reach 90 million.
Some carriers continued to add capacity going into the peak, including the U.S. Postal Service (USPS), which upped its capacity to 60 million parcels per day from 53 million. Collectively, Jindel’s analysis estimated that the industry had excess capacity for this peak season of some 18 million parcels per day, leading to financial challenges for carriers—and a potential windfall for savvy shippers.
“The tables have turned,” Jindel notes, adding that the new status quo will require some adjustment on the part of shippers. “Because shippers have not been in the driver’s seat for two-plus years, they will face new challenges driving a new car, because the car is different now in numerous ways.”
By different, he means market practices and other changes that shippers need to consider. Among those: the impact of carriers assessing multiple additional surcharges; the shifting of some fuel surcharge amounts into base pricing; the rise of alternative parcel carrier options to the “Big Two”; and an aggressive Postal Service working to rationalize its operations and capture more parcel market share.
Jindel cites one other factor that has influenced peak volumes, especially late in the season: Amazon Prime Day.
“Amazon already had a Prime Day in October,” he notes. “That pulled forward retail sales into October from the normal peak. Consumers will already have spent that money,” partly because they are ordering earlier to avoid late-season missed deliveries like last year’s, he says.
“Those orders, along with other retailers who have advanced holiday sales offerings even earlier in response, will blunt retail sales later in the year,” Jindel believes. “And with most of those packages moving in Amazon’s network, that will further impact peak volumes for FedEx, UPS, and USPS’s door-to-door services. So they will feel the pain from those e-commerce sales being sucked into October instead of happening later in the year.”
ONE TREADMILL IS ENOUGH
Helane Becker, a long-time industry analyst for Cowen & Co. who covers the airlines and parcel carriers, recalls how in 2020 and 2021, cargo company executives were talking about how they were dealing with volume levels once projected for 2025.
Not anymore. “So, by definition, if you pulled forward four to five years’ worth of growth [into one or two years], at some point, it is going to slow. It’s inconceivable that you are going to see 40% growth every year,” she says. Becker notes as well that consumers seem to have “kept their wallets in their pockets,” as more of their weekly paycheck goes to increasingly expensive food, fuel, and utilities, and as other spending once devoted to discretionary goods shifts to services.
“Once you have your treadmill or stationary bike or whatever you bought for your home during the pandemic, you really don’t need to buy another one,” she notes.
As for parcel carrier strategies for dealing with a shifting market, she observes that coming into peak season, “FedEx invested in and prepared for a level of volume” that did not arrive. In response, FedEx is “hitting the pause button, focusing on consolidating operations and cutting costs, then allowing [slower] growth to catch up to the facilities [it] has.”
UPS, on the other hand, has been focusing on “revenue quality” and, in Becker’s view, has been sounding the alarm on a slowing parcel market since earlier this summer.
In her experience covering both companies for many years as an industry analyst, Becker has observed that “FedEx has always thought of investing to stay ahead of growth. UPS always invested to catch up with growth.”
REGIONAL PARCEL OPTIONS EXPAND
Market makeup and capacity dynamics also are shifting due to the impact of Amazon’s now operating its own parcel delivery network, along with the rise of regional parcel carriers. They provide an often-attractive option to shippers, who are increasingly carving out some of their parcel volumes to give to regional players instead of putting all their package freight into one or two big national buckets.
One example can be found in two of the largest regional parcel network operators: East Coast-based LaserShip and West Coast-based OnTrac. Last year, LaserShip agreed to acquire OnTrac in a $1.3 billion deal. Now the two companies are in the process of expanding operations as well as launching connecting transcontinental services among points in their two primary regions, says Josh Dinneen, LaserShip’s chief commercial officer.
While it’s not at the level of the past two years, Dinneen says, 2022 definitely is experiencing a peak season. “No one is canceling Christmas.” But is demand softer? “All signs point to yes,” he says.
Nevertheless, he believes that there is excess capacity for “millions of packages,” which is providing shippers with better options for securing capacity at competitive rates.
Dinneen emphasizes that there is still profitable growth to be had in the parcel business, particularly within the regional markets, citing their lower cost structure and the ability to provide consistently good service. And despite weakening demand, LaserShip and OnTrac haven’t put the brakes on plans to invest in their network.
Dinneen says they are spending more than $100 million this year on expansion. The company in July launched transcontinental service between major hubs in Southern California; New York City; Columbus, Ohio; and Reno, Nevada. It just finished construction on a new automated sort center in Columbus. It will soon open a new, fully automated sort center in New Jersey, doubling its capacity to serve Eastern Seaboard customers.
Lastly, by year’s end, LaserShip will have moved into new, larger facilities in Charlotte, North Carolina, and Nashville, Tennessee. A Texas expansion with new sort hubs opening in Dallas, Austin, San Antonio, and Houston is on the drawing board for 2023.
The market, however, remains in a somewhat fragile state, facing pressures and challenges from all sides.
“Everyone’s cost of labor has increased materially,” Dinneen notes. “Amazon has announced another warehouse labor wage increase. The challenges will be labor inside the four walls, the costs of moving packages, securing sufficient rate increases, and keeping a consistent balance between capacity and demand.”
SHIPPER TACTICS GETTING MORE SOPHISTICATED
At the same time, shippers, out of necessity, are becoming more sophisticated about their parcel tactics and strategies, leveraging access to inexpensive, powerful new technology tools; better, more timely data; and far more accurate visibility into costs and alternatives.
“Talking to our clients, they want more reliability and more speed,” says Gaston Curk, chief executive officer of e-commerce shipping specialist OSM Worldwide. “Amazon has changed the experience for the end consumer. Customers want more predictability, [enhanced] visibility, better tracking.” He notes that shippers are concerned about market disruption going on today, from a slowing economy to a potential recession and other issues on the horizon, including “UPS entering negotiations with the Teamsters next year on a new labor contract. They’re afraid to put all their eggs in one basket,” he says.
He also cites the evolution of the U.S. Postal Service, “which is transforming as we speak,” Curk notes. “Traditionally, they were a letter carrier. Now they are evolving to become more competitive [in parcels and packages] with UPS and FedEx, as a more reliable and cost-effective option.”
GIRDING FOR THE LONG TERM
Adds ShipMatrix’s Jindel: “Keep in mind that the Postal Service has a monopoly on first-class mail and that gives them a monopoly on your mailbox”—and it’s a federal crime for anyone else to use that consumer’s mailbox. “They can deliver a letter and package at the same time,” and most of the time, they don’t have to take a package all the way up to the front door or porch, like other parcel carriers. “A letter carrier can make up to 300 stops a day. On average, UPS and FedEx can get to 200 stops a day. That’s a huge cost advantage for the Postal Service.”
The softer market and demand/supply imbalance is not a short-term phenomenon, Jindel believes. “It’s not temporary; it will continue well into 2023.” Shippers, he says, “should leverage this opportunity for more reasonable prices and for reliable capacity and consistent service. The [pricing] pendulum has swung back to the shipper. Enjoy it while you can.”
The way that shippers and carriers classify loads of less than truckload (LTL) freight to determine delivery rates is set to change in 2025 for the first time in decades, introducing a new approach that is designed to support more standardized practices.
But the transition may take some time. Businesses throughout the logistics sector will be affected by the transition, since the NMFC is a critical tool for setting prices that is used daily by transportation providers, trucking fleets, third party logistics providers (3PLs), and freight brokers.
For example, the current system creates 18 classes of freight that are identified by numbers from 50 to 500, according to a blog post by Nolan Transportation Group (NTG). Lower classed freight costs less to ship, ranging from basic goods that fit on a standard shrink-wrapped 4X4 pallet (class 50) up to highly valuable or delicate items such as bags of gold dust or boxes of ping pong balls (class 500).
In the future, that system will be streamlined by four new features, NMFTA said:
standardized density scale for LTL freight with no handling, stowability, and liability issues,
unique identifiers for freight with special handling, stowability, or liability needs,
condensed and modernized commodity listings, and
improved usability of the ClassIT classification tool.
The new changes look to simplify the classification by grouping similar articles together and assigning most classes based solely on density – the most measurable of the four characteristics, he said. Exceptions will be handled separately, adding one or more of the three remaining characteristics in cases where density alone is not adequate to determine an accurate class.
When the updates roll out in 2025, many shippers will see shifts in the LTL prices they pay to move loads, because the way their freight is classified – and subsequently billed – might change. To cope with those changes, he said it’s important for shippers to review their pricing agreements and be prepared for these adjustments, while carriers should prepare to manage customer relationships through the transition.
“This shift is a big deal for the LTL industry, and it’s going to require a lot of work upfront,” Davis said. “But ultimately, simplifying the classification system should help reduce friction between shippers and carriers. We want to make the process as straightforward as possible, eliminate unnecessary disputes, and make the system more intuitive for everyone. It’s a change that’s long overdue, and while there might be challenges in the short term, I believe it will benefit the industry in the long run.
Business leaders in the manufacturing and transportation sectors will increasingly turn to technology in 2025 to adapt to developments in a tricky economic environment, according to a report from Forrester.
That approach is needed because companies in asset-intensive industries like manufacturing and transportation quickly feel the pain when energy prices rise, raw materials are harder to access, or borrowing money for capital projects becomes more expensive, according to researcher Paul Miller, vice president and principal analyst at Forrester.
And all of those conditions arose in 2024, forcing leaders to focus even more than usual on managing costs and improving efficiency. Forrester’s latest forecast doesn’t anticipate any dramatic improvement in the global macroeconomic situation in 2025, but it does anticipate several ways that companies will adapt.
For 2025, Forrester predicts that:
over 25% of big last-mile service and delivery fleets in Europe will be electric. Across the continent, parcel delivery firms, utility companies, and local governments operating large fleets of small vans over relatively short distances see electrification as an opportunity to manage costs while lowering carbon emissions.
less than 5% of the robots entering factories and warehouses will walk. While industry coverage often focuses on two-legged robots, Forrester says the compelling use cases for those legs are less common — or obvious — than supporters suggest. The report says that those robots have a wow factor, but they may not have the best form factor for addressing industry’s dull, dirty, and dangerous tasks.
carmakers will make significant cuts to their digital divisions, admitting defeat after the industry invested billions of dollars in recent years to build the capability to design the connected and digital features installed in modern vehicles. Instead, the future of mobility will be underpinned by ecosystems of various technology providers, not necessarily reliant on the same large automaker that made the car itself.
Regular online readers of DC Velocity and Supply Chain Xchange have probably noticed something new during the past few weeks. Our team has been working for months to produce shiny new websites that allow you to find the supply chain news and stories you need more easily.
It is always good for a media brand to undergo a refresh every once in a while. We certainly are not alone in retooling our websites; most of you likely go through that rather complex process every few years. But this was more than just your average refresh. We did it to take advantage of the most recent developments in artificial intelligence (AI).
Most of the AI work will take place behind the scenes. We will not, for instance, use AI to generate our stories. Those will still be written by our award-winning editorial team (I realize I’m biased, but I believe them to be the best in the business). Instead, we will be applying AI to things like graphics, search functions, and prioritizing relevant stories to make it easier for you to find the information you need along with related content.
We have also redesigned the websites’ layouts to make it quick and easy to find articles on specific topics. For example, content on DC Velocity’s new site is divided into five categories: material handling, robotics, transportation, technology, and supply chain services. We also offer a robust video section, including case histories, webcasts, and executive interviews, plus our weekly podcasts.
Over on the Supply Chain Xchange site, we have organized articles into categories that align with the traditional five phases of supply chain management: plan, procure, produce, move, and store. Plus, we added a “tech” category just to round it off. You can also find links to our videos, newsletters, podcasts, webcasts, blogs, and much more on the site.
Our mobile-app users will also notice some enhancements. An increasing number of you are receiving your daily supply chain news on your phones and tablets, so we have revamped our sites for optimal performance on those devices. For instance, you’ll find that related stories will appear right after the article you’re reading in case you want to delve further into the topic.
However you view us, you will find snappier headlines, more graphics and illustrations, and sites that are easier to navigate.
I would personally like to thank our management, IT department, and editors for their work in making this transition a reality. In our more than 20 years as a media company, this is our largest expansion into digital yet.
We hope you enjoy the experience.
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In this chart, the red and green bars represent Trucking Conditions Index for 2024. The blue line represents the Trucking Conditions Index for 2023. The index shows that while business conditions for trucking companies improved in August of 2024 versus July of 2024, they are still overall negative.
FTR’s Trucking Conditions Index improved in August to -1.39 from the reading of -5.59 in July. The Bloomington, Indiana-based firm forecasts that its TCI readings will remain mostly negative-to-neutral through the beginning of 2025.
“Trucking is en route to more favorable conditions next year, but the road remains bumpy as both freight volume and capacity utilization are still soft, keeping rates weak. Our forecasts continue to show the truck freight market starting to favor carriers modestly before the second quarter of next year,” Avery Vise, FTR’s vice president of trucking, said in a release.
The TCI tracks the changes representing five major conditions in the U.S. truck market: freight volumes, freight rates, fleet capacity, fuel prices, and financing costs. Combined into a single index, a positive score represents good, optimistic conditions, and a negative score shows the opposite.
A coalition of truckers is applauding the latest round of $30 million in federal funding to address what they call a “national truck parking crisis,” created when drivers face an imperative to pull over and stop when they cap out their hours of service, yet can seldom find a safe spot for their vehicle.
According to the White House, a total of 44 projects were selected in this round of funding, including projects that improve safety, mobility, and economic competitiveness, constructing major bridges, expanding port capacity, and redesigning interchanges. The money is the latest in a series of large infrastructure investments that have included nearly $12.8 billion in funding through the INFRA and Mega programs for 140 projects across 42 states, Washington D.C., and Puerto Rico. The money funds: 35 bridge projects, 18 port projects, 20 rail projects, and 85 highway improvement projects.
In a statement, the Owner-Operator Independent Drivers Association (OOIDA) said the federal funds would make a big difference in driver safety and transportation networks.
"Lack of safe truck parking has been a top concern of truckers for decades and as a truck driver, I can tell you firsthand that when truckers don’t have a safe place to park, we are put in a no-win situation. We must either continue to drive while fatigued or out of legal driving time, or park in an undesignated and unsafe location like the side of the road or abandoned lot,” OOIDA President Todd Spencer said in a release. “It forces truck drivers to make a choice between safety and following federal Hours-of-Service rules. OOIDA and the 150,000 small business truckers we represent thank Secretary Buttigieg and the Department for their increased focus on resolving an issue that has plagued our industry for decades.”