We’re sitting most of the way through 2023 at this point, and we are continuing to live in interesting times. The shipping frenzy brought on by the COVID-19 pandemic has run its course and the industry is returning to more normal levels. At the same time though, it is important to note that a decline from never-before-seen highs does not necessarily indicate a freight recession is underway. Many of the year-over-year data points will indicate large declines, but on a quarterly or monthly basis, the data is much more stable.
When looking at spot and contract pricing, It is easy to be concerned about the fall off of rates relative to the last two years. It is important to remember, as we will see later in this quarterly review, that spot and contract rates for all classes of freight remain materially higher than their pre-pandemic levels. Additionally, these rates have been stable for several months, with minimal changes in either direction. Markets are slightly soft heading into peak season, but are a far cry from previous recessions weathered by the transportation industry.
Other big news in the transportation world has been related to supply chain issues. The earlier option to offshore granted companies a larger, cheaper labor pool in East Asia at the expense of more complex supply chains with the potential for bottlenecks. Disruptions arising during the pandemic showed how risky the offshoring choice could be, as ships lined up by the dozens to offload cargo in Californian ports. In response, many carriers shifted their import handling to East Coast ports – with the port of Savannah being one of the biggest winners in the shuffle. Meanwhile, companies continue to reshore and nearshore their operations, with Deloitte estimating that over 40% of China-originating freight will shift to the Americas by 2029.
This drive to nearshore has been a boon for Mexico, which recently surpassed China as the U.S.’s largest trading partner. Mexico continues to work with U.S. officials and U.S. corporations to attract manufacturing to the country, and recent U.S. legislation has encouraged companies to reshore or nearshore. Both the return of manufacturing to closer shores and the shifting of cargo to East Coast ports have required transportation companies to re-orient their lanes and services.
And It is hard to wrap up a discussion of Q3 2023 without touching on the failure of Yellow. Yellow, previously the country’s third largest LTL provider, experienced financial difficulties throughout the pandemic boom and received a COVID loan of $700 million from the U.S. federal government. Yellow was highly levered and had nearly $1.3 billion in debt coming due in 2024. Yellow attempted to negotiate with the Teamsters, which represented over 70% of its workforce. When Yellow missed payments to a healthcare pension fund in July, the Teamsters issued a strike threat, which in turn caused many customers to look for other LTL carriers.
The full fallout from the Yellow bankruptcy is yet to be seen. The U.S. Treasury retains a 30% stake in Yellow’s equity and Apollo Global Management holds a significant amount of Yellow’s debt. Yellow’s fleet hitting the market should depress used and new trucking prices. The sudden exit of a large piece of the nation’s LTL capacity temporarily buoyed other LTL providers. Many of Yellow’s customers began contracting with other LTL carriers in the months before the announcement of Yellow’s bankruptcy, muting the immediate impact of the Chapter 11 filing.
The third quarter of 2023 has certainly been one for the books.
