Marty Freeman, president and chief executive officer of less-than-truckload (LTL) carrier Old Dominion Freight Line (ODFL), recalls that at this time last year he felt somewhat optimistic. He remembers telling his team and customers that by mid-2023, he expected the freight and logistics markets would be in the midst of a rebound.
“Well, I guess you can say I was disappointed that [scenario] never materialized,” he shared in a recent interview. Persistent inflation, the impact of some 11 interest rate hikes on the cost of capital and subsequent business investment, declining imports, and a massive inventory overhang from pre-pandemic ordering all conspired to flip that expectation on its head as 2023 wheezed to a close.
Do things look brighter for 2024? “We’re not hearing any doom and gloom, but no one is sticking their neck out and saying [the market] will grow 5 to 6% in the coming year,” Freeman said.
Some industry experts do bravely claim to be “cautiously optimistic” about the coming year. Evan Armstrong, chief executive officer of consulting firm Armstrong & Associates, believes “the freight recession has hit bottom, and now we are coming out of it.” He expects to see the traditional soft first quarter in the freight market and a pattern of single-digit growth from the second quarter on.
This optimism, however, is at best tempered. The expectations among shippers, carriers, and logistics service providers is for a new year saddled with many of the same challenges and issues they faced in 2023. Geopolitical conflicts, slower economic growth, bottom-dwelling rates, too many trucks chasing too little freight, and flattening demand for warehouse space are expected to keep the pressure on the market. That likely will drive more carriers, brokers, and logistics service providers to scale back, if not exit the market completely.
Not your typical cycle
In the trucking market, the uncertainty around the future ties back to the unusual conditions of the past four years. “In typical market cycles in the past, 5 to 10% more capacity would enter the market in the upcycle, and that much would leave in the downturn,” pointed out Mac Pinkerton, president of North American surface transportation for C.H. Robinson, one of the nation’s largest freight brokers and logistics service providers. “The influx of new carriers at the start of this upcycle was considerably higher … a record, more than 100,000 carriers in one year [during the pandemic]. There was no precedent for how much or how quickly capacity would contract once the market turned.”
Pinkerton explained as well that “rates have been at the bottom of the market, bouncing along at the cost of operating a truck for 18 months. That defies all past experience.” Typically, when a market bottoms out, within a few months capacity tightens and rates rise. “Not in 2023,” he said. Capacity is slowly contracting, but since carriers made record profits during the pandemic and were able to pay down debt and build cash reserves, “more carriers have been able to weather the downturn longer than usual,” he noted. “They can run loads at current depressed rates because they lowered their operating expenses or are drawing on cash reserves” to stay in business while they wait for the upturn.
These markets conditions could be beneficial to shippers looking to negotiate contracts, according to Armstrong. “This is a good time for shippers to run an RFP [request for proposal] event, lock in the more normalized rates on transportation, and make sure you have good agreements—and good relationships—with your core carriers into the next two to three years,” he advises.
As for the LTL market, ODFL’s Freeman believes it is relatively stable following the closure of Yellow and the redistribution of its shipments to other carriers, although he noted that some of the freight has yet to find a permanent home. He also shared the results of a recent poll of customers that found that their expectations, while muted, were for flat to modest LTL growth in 2024.
One silver lining to the down market is the driver market, where turnover is down, and drivers are available. “Now is the time to recruit drivers, before the market turns up again,” said Steve Sensing, president of supply chain and dedicated transportation solutions for Ryder.
Advantage: Ocean shippers
The same cyclical pattern is showing up in the ocean container freight market—and presenting shippers with the same opportunities as in trucking to fine-tune their capacity needs and rates, noted Mike Bozza, deputy director for ports at the Port Authority of New York and New Jersey.
“As we look back at the tremendous volumes we saw in 2021 and 2022, that was a huge frontloading of cargo that we are still dealing with,” he said. “Inventory levels remain high, and restocking [has been lower] than anticipated. It’s been a surprise for us how long it’s taken for the inventory overstocking to right itself.” He expects the soft market conditions to extend well into 2024.
As a result, import container volumes are down, and ship operators have been parking vessels, eliminating some schedules, and “slow steaming” others in a bid to cut expenses. “Shippers have had to adjust,” Bozza said. “If your schedule is canceled and your cargo is time-sensitive and misses a sailing, you really have to be on top of that.”
As if to illustrate the woes befalling ocean freight, Maersk, the world’s largest containership operator, announced in its third-quarter earnings report that it was laying off some 10,000 workers this year in response to a freefall in shipping volumes and rates that cut its revenues in 2023’s third quarter almost in half compared with the same period last year.
The layoffs will take the company’s global workforce to under 100,000 people. “Our industry is facing a new normal with subdued demand, prices back in line with historical levels, and inflationary pressures on our cost base,” Maersk CEO Vincent Clerc said in a statement.
3PLs: Opportunities ahead
Last year was not an easy one for third-party logistics providers (3PLs). According to Armstrong, revenues dropped from $405.5 billion in 2022 to an estimated $308.2 billion in 2023. “After 2021 and 2022, it was pretty obvious that we would not have a comparable growth year,” he noted. “Seeing the 24% decline in 3PL revenues was not a surprise.”
For 2024, Armstrong expects to see a return to growth with revenues for the U.S. 3PL sector increasing by as much as 5%, to $321.0 billion. That compares to pre-pandemic 3PL market revenues of $212.8 billion in 2019.
Ryder’s Sensing, however, expects many 3PL customers to remain cautious. Going into 2024, many manufacturers and consumer packaged goods companies, fresh off the challenges of 2022 and 2023, remain conservative and risk averse, which is “delaying some decisions on their capacity and service needs for 2024,” Sensing said. Warehouse lease rates are no longer seeing the all-time-high year-over-year increases of the past few years, he noted.
In this environment, 3PLs will benefit from a tight focus on fundamentals, as many of them will enter 2024 with their warehouses still relatively full. “[2024 is about] how to be utilizing and optimizing the space, managing costs, and making sure you have fair agreements that work for both parties,” said Armstrong.
At the same time, some 3PLs providers are looking to expand or adapt their services to take advantage of emerging industry trends. For example, government funding and incentives have generated a lot of enthusiasm and investment around electrification and other environmental sustainability initiatives, according to Rock Magnan, president of Silicon Valley-based 3PL RK Logistics Group. He believes there is an opportunity for 3PLs to pivot and build on existing traditional services by introducing new capabilities and resources designed to support the growth of these new green industries.
“Whether it’s finished lithium-ion batteries, their raw materials, or used batteries coming back for recycling, there is a huge market emerging for logistics services to support these developments,” he said. “But to do so takes thoughtful strategy, agility, and flexibility in how you prepare your business to service these needs, many of which are unique and require specialized capabilities, facility design and operations, permitting, and trained personnel.”
Another trend is efforts by companies to diversify their supply networks, with a goal of shortening supply chains, reducing risk, and increasing resilience. Bearing out that trend is U.S. Department of Commerce data showing that for the first six months of this year, Mexico surpassed China as the U.S.’s biggest trading partner, with imports to the U.S. totaling $239 billion. By contrast, China generated $219 billion in imports.
Sensing, for one, has witnessed this shift among some of Ryder’s customers. He believes that as shippers evolve and restructure their supply chains through nearshoring and other strategies, 3PLs must also pivot and both invest in new services and strengthen their core business offerings.
Digital freight tech hits a bumpy road
The past year has also been a rough one for digital freight brokers. Digital brokers often say that technology is their core competitive advantage and pitch themselves as disintermediating traditional brokers. While they still mainly sell freight capacity first, they do it in a way that enables a more automated transaction for both the shipper and the carrier.
Their innovative model did not, however, protect them from the freight recession. Digital forwarder Flexport in October announced a major restructuring, laying off 600 employees, rescinding dozens of job offers, and subleasing some of its office space in a bid to cut costs. Venture capital darling Convoy, which provided digital freight-booking services and which counted Amazon founder Jeff Bezos among its investors, shut its doors in October, citing the “massive freight recession” and laying off 500 employees in the process.
“The pure digital freight brokers were not immune to freight market cycles.” said Bart De Muynck, principal at Bart De Muynck LLC, who has tracked the freight tech industry for years. “When freight goes down, their revenues go down like everyone else’s. Yet due to the cost [and debt servicing of] huge investments in their tech platform and the growth-at-any-cost mentality, they hit the wall.”
Additionally, because they bill themselves as tech companies (versus freight forwarders), they were hiring employees at salaries that were two and three times the going rate, he said.
De Muynck expects to see more freight-related tech firms close down in 2024. “I don’t see how any of them will survive,” De Muynck said. “There is not a single venture capital or private equity firm that is going to put more money into a digital freight broker now. Not in this market.”
He expects a similar shakeout among the smaller freight brokerage firms that got in when rates were high and capacity tight. Like the digital brokers, many of these new entrants are now struggling.
The upside, De Muynck said, is that the rise of digital brokers forced traditional brokers to look harder than they ever had before at both customer-facing technology and back-office systems. “That enabled them to improve service and cut costs, while still maintaining the ‘tribal knowledge’ and market relationships that historically have been a broker’s ace in the hole,” he explained.
Relationships will be key for survival in all logistics sectors as companies attempt to navigate a weak freight market recovery and unpack what the previous few years mean. As Sensing put it, “I think we are still learning [from the lessons of 2023.]”
Editor’s Note: A longer version of this article appeared in the December 2023 issue of Supply Chain Xchange’s sister publication DC Velocity.
