2023 In Review: Let’s turn the page

A friend of mine says: “Experience is recognizing your mistakes as you’re repeating them.” With the world turned upside down during the pandemic, and despite all the talk of agility and resilience, much of it proved illusory when stress occurred.

In many cases, supply chains were shown to be brittle and unable to respond in a timely fashion, resulting in mass frustration and excess cost among producers, sellers, logistics service providers, and, of course, consumers.

So, here we are now. The pandemic is in the rearview mirror and everything is back to normal, correct? What are the lessons we learned? What are the steps we took as a result of those lessons? And what changed during 2023?

Well, it turns out not very much. In today’s world of sound bites, snips of information, and the growing tide of misinformation, little seems to stick. Memories are short and the focus is largely on the here-and-now. As long-time freight transportation industry veteran Ted Prince says: “Institutional memory half-life is in nano-seconds.”

There are game-changers on the near-term horizon, however. AI-enabled transformation is moving forward apace across a broad spectrum of applications. During a recent piece on “60 Minutes,” Geoffrey Hinton, the anointed “Godfather if AI,” spoke about how quickly AI was advancing and that we’re entering a “great period of uncertainty”—and a risk that we may actually lose control of it.

What does all this mean for supply chain performance? So far, not so much. While adoption rates of advancing technology in other sectors—think social media, for example—can be rapid, supply chain lags the field in many respects.

Advancement in electric vehicles (EVs) and autonomous vehicles (AVs) is moving along, but so far has not driven transformational change in transportation operations or cost, although the promise is there. More commonly, talk is about the more mundane aspects of moving America’s freight: service issues across modes; fuel volatility; capacity (too much or too little); price fluctuations; and continuing concerns about staffing issues and regulatory changes.

In summarizing 2023, we canvassed a seasoned group of industry observers to record what’s happened and what it means to our logistics and supply chain operations as we head into 2024. While everyone is anxious to turn the page, here’s what they had to say.

How did shippers view 2023?

We’ll be taking a look at each mode, but first let’s get the reactions of several shippers and see what they believe shaped the last 12 months.

“Retailer inventories continued to be higher than desired in late 2023,” says the head of supply chain for a large national retailer who prefers to remain anonymous. “Significant reductions in orders continue to be a primary lever, effectively reducing inbound flows to retailers. The import and domestic carrier markets suffered demand reductions and pricing for ocean has fallen to 2019 levels.”

Further, he points out that labor strife in ports and at UPS was narrowly avoided. “And we think peak season will see little impact from either event. Labor availability for seasonal help has loosened up compared to 2022.”

This retail shipper adds that railroad speed and service is not much better in 2023 than 2022, leading many shippers in continuing to push more shipments to truck to avoid rail service issues—a factor propping up sinking demand in the truckload market.

“E-commerce demand seems to have fallen significantly for many of the midsize and small shippers,” he adds. “Many parcel carriers are reporting reductions in package volume, and this is leading to a ‘reassessment’ of pricing, peak surcharges, and GRI agreements. As of now, it’s looking like a buyer’s market for parcel services.”

According to Bill Hutchinson, senior vice president of enterprise logistics at WestRock, 2023 was “an interesting compression of rising equipment and labor cost and a collapse of freight demand. I expect it will take the industry another 12 months to balance supply and demand, barring more
significant geopolitical issues.”

With that in mind, Hutchinson says that there needs to be a continuing focus on taking touches out and minimizing dwell time for carriers through the supply chain. “It’s now a top priority regardless of market condition to be a shipper of choice even when the market favors you. Rising equipment cost, uncertain energy cost and driver availability are putting increased pressure on private and dedicated fleet cost structure, and this will continue to drive innovative solutions to leverage shared capacity in short-haul markets.”

Hutchinson adds that upcoming Scope-3 requirements and sustainability efforts are ramping up as shippers try to find the inflection point and available infrastructure to try EV and alternate energy solutions. “Most shippers are testing and listening,” he says. “Scaled solutions are still not here for many shippers of heavier products.”

Domingo Amunategui, former vice president of supply chain at a major forest products manufacturer, observes that after a sudden reduction in container volumes in the third and fourth quarters of 2022, ocean carriers quickly changed their approach regarding rates. “Some carriers tried to hold part of the price gains, but by the end of first quarter of 2023, all had gone down close to pre-pandemic levels for most lanes.”

According to Amunategui, capacity during the year was abundant, which created a very competitive market for shippers. “We had several cases of carriers improving their initial rate bid during the year due to risk of losing volume to some spot players coming up with aggressive pricing. And despite a drastic change in market conditions, service remains an issue for ocean carriers. Leadtime variability was certainly much lower than 2021 and 2022, but some player’s performance was still below what you would expect of a service provider in need of more business.”

On the domestic trucking side, Amunategui says it was a very tough year for carriers. Spot rates adjusted down the second half of 2022, and that made an impact on all contract rate renewals for 2023. Overall, they’re now at par with pre-pandemic levels, even with input costs much higher—fuel, labor.

“There are plenty of tractors, trailers, and drivers. All the equipment deliveries delayed due to supply chain issues are now available, and that’s putting  pressure on carriers to go find volume to cover their fixed costs. With the lower demand there aren’t enough loads to put pressure on the driver pool, making it seem that’s no longer an issue, we just need to be mindful it’s still there and will return.” - Amunategui

Importantly, Amunategui’s view is that container visibility was a hot topic during 2021 and 2022. “This brought a lot of money into new and existing tech companies offering all kinds of solutions. So, this was a year of consolidation for many of those players, but it has also been an exposing year for players that didn’t have the right product or were overstating their capabilities.

According to Amunategui, as a shipper, it’s a confusing market to make the proper purchasing decision. “Every company is offering some sort of AI supported solution—sometimes an exaggerated term for just an algorithm—and they spend a ton of time marketing many bells and whistles that don’t necessarily address the shippers’ pain points. There’s a huge need for end-to-end visibility for shippers, but I’m not sure it’s a one-stop shop. Every part of the supply chain is unique, and you need to partner with a company that understands your biggest pain points.”

So, transformational change is the order of the day, with no clear understanding yet as to what that exactly means over the long-term.

Trucking

Trucking in 2023 was a disappointing mixed bag of declining prices and volumes and shrinking capacity.

According to Satish Jindel, president of SJ Consulting, the truckload industry had one of its worst years in the last five, with declining loads leading to a drop in spot market rates of 20%, even when the cost was still basically the same as a year ago. “This caused pain for most carriers of all sizes,” he says. “Contributing to this were major changes at Flexport, Convoy shutting down, and a sharp decline at even large publicly-traded brokers.”

Jindel also observed that the less-than-truckload (LTL) industry “got the gift of a lifetime” with the shutting down of Yellow, which took 10% of the industry capacity out of the market and helped almost all other LTL carriers gain shipments.

“Yellow’s demise is giving the trucker’s former competitors a boost in a lean freight market. Companies including XPO, ABF Freight and Old Dominion Freight Line are reporting strong growth in pricing power, shipment volumes and other key measures during the most recent quarter. ArcBest says that average daily shipment count at its ABF Freight unit rose 20% in the third quarter from the second quarter, while a key pricing measure grew 16%. XPO, now the third-largest LTL carrier, increased its daily shipment count 7.8% last quarter.” -Satish Jindel

On the other hand, within the first four months of 2023, an astonishing 31,278 trucking companies either shut down or shifted their services to larger fleets due to falling freight spot rates and rising fuel costs. “The U.S. trucking business hit new lows since the pandemic in the second quarter, with volume falling 9% against the second quarter of 2022, and spending down 10.9%. And July brought a further decline in U.S. transport spend and supply chain activity, albeit at a slower pace,” says Jindel.

A couple of benchmarks illustrate the current trend are as follows.

• Trucker Schneider National lowered its annual earnings outlook for 2023 after third-quarter adjusted profit plunged 71% to $36.3 million. (Dow Jones Newswires)
• Third-quarter net profit at freight broker C.H. Robinson Worldwide plummeted 64% to $82 million on a 27.9% drop in gross revenue. (Minneapolis Star Tribune)

John Larkin, a long-time transportation veteran, strategic advisor at Clarendon Group and senior partner at Venture 53, contends that 2023 has been pretty awful across the board. “Demand has not rebounded and consumer spending has been affected by inflation and interest rate hikes, which affects commodities and products, from construction materials to consumer goods. Americans are spending on services rather than goods in a post-pandemic ‘bust-out’ in travel and entertainment.”

According to Larkin, capacity has not adjusted proportionately to the drop in business, so rates have continued being depressed. The UAW strike as not helped the situation, although Yellow departing has helped the LTL sector, but had little impact on TL.

Additionally, the Convoy failure has had a minor impact on market pricing and capacity. Overall, deceleration in retail sales, inventory levels that remain too high, and inflation have conspired to impact the trucking industry, with little short-term relief on the horizon.”

More alarmingly, says Larkin, operating ratios for TL carriers have risen, however, solid balance sheets coming out of the pandemic have helped mitigate the impact.

Another trend that he’s labeled “Continentalization” is driving the continued move to “near-shoring” in Mexico, which has dented transpacific volumes. He says he sees Mexico being an overall better partner in terms of proximity, demographics and work ethic.

Intermodal

Intermodal has not had a banner 2023 either, and lags the performance of prior years.

“Roughly half of U.S. intermodal shipments are related to international trade, so what happens at ports is extremely important to railroads,” U.S. port volumes, especially on the West Coast, have already been trending down for months and are a major reason why rail intermodal volumes have been on the decline in 2023.” - John Gray, senior vice president of the Association of American Railroads (AAR). 

According to Joni Casey, CEO of the Intermodal Association of North America (IANA): “An uncertain demand outlook, including the impacts of shifting global trade flows [China down? India growing? North American re-shoring? Tariffs?] is a potential challenge for international intermodal traffic. Macro U.S. domestic issues—interest rates, recession uncertainty and inventory levels—probably have the most direct impact on intermodal volumes.”

Casey also remarked that the challenge to intermodal operations from both EV and AV over-the-road trucking doesn’t appear to be immediate. “On the other hand, the opportunity for electrification of short-haul drayage and the introduction of autonomous vehicles looks promising, in specific markets,” she adds. “And keep in mind that Class I railroads are experimenting with battery-powered locomotives.”

Larry Gross, seasoned intermodal analyst, president of Gross Transportation Consulting and publisher of “Intermodal in Depth,” says that as volume dropped, the intermodal network got the breathing room it required to eliminate the previous system congestion. “Equipment cycle times improved and the previous capacity shortages were resolved,” he says. “There’s currently plenty of capacity, but insufficient demand.”

According to Gross, the resolution of the ILWU contract negotiations on the U.S. West Coast—and subsequently Western Canada—enabled volume that had been diverted to the East and Gulf coasts to begin flowing back to its natural West Coast routing. This process is ongoing and will provide an intermodal tailwind in the coming months.

“On the domestic front, intermodal’s share of the U.S. long-haul truck market has been significantly hurt by the problems incurred during the post-pandemic disruptions and currently stands well below pre-pandemic levels,” says Gross. “There’s plenty of well-priced truck capacity available at present, and it will be a challenge for intermodal to regain this share in the coming months.”

Total intermodal volume in third-quarter 2023 fell 7.1% on a year-over-year basis, according to the IANA. While domestic container originations grew 1.6%, loadings of international containers contracted 13.2%. Trailer volume continued to fall, this time by 23.3%, according to IANA.

“The picture improved for domestic containers, but slower demand for goods, still-high inventories and a competitive freight environment continued to check intermodal volumes in the third quarter,” adds Casey. “We’re starting to see signs, though, for a turnaround next year.”

According to Ted Prince, of TP Associates and a long-time industry insider, intermodal is returning to where it was a couple of years ago, but railroads are facing “barbarians at the gates” from activist investors and hedge funds. “The intense focus on cost reductions have not only been hurting ability to grow or even provide an improving level of service,” he says. “Has anyone taken any substantive lessons from the pandemic?”

Rail

Rail has also had a difficult year, with a litany of negative publicity relating to safety and continuing service issues as the carriers seek to rebound from the pandemic-era operating issues. Seasoned rail analyst Tony Hatch of ABH Consulting say the railroads need to change the narrative.

According to Hatch, the railroads suffered three body blows: their role in the supply chain crisis; they’ve been blamed for back-up in ports; and they’ve been targeted for labor strife

Hatch says: “The railroads have been painted as greedy ‘robber barons,’ with labor the victim and the industry being unsafe after East Palestine derailment. People forget that nobody was injured and the reason this product is on the rails is because it’s so much safer than having it on the highway.”

According to Hatch, new leadership is starting to change the narrative, with Alan Shaw at (Norfolk Southern), Katie Farmer (BNSF) and Joe Hinrichs (CSX) moving their companies “away from the ‘cult of the OR’ toward service improvement and how to enable growth.”

Bill Rennicke, Partner at Oliver Wyman, has not seen any particular issues arising from international trade matters or geo-political angst on rail business. However, he does see the future impact of AI on the industry as quite high, but does not envision any material impact from AVs for at least the next five years.

Finally, the threat of a two-man crew mandate hovers over the business, which would significantly impact rail cost and competitiveness in the face of the rise of autonomous trucks and the consistent pressure to do better on pricing.

Air

Air cargo has not had an easy year, either. According to the International Air Transport Association (IATA), the decline in air cargo demand will slow to 3.8% this year, but airline cargo revenues will tumble 33% to $142.3 billion as a surge in passenger flights ushers in more belly capacity as global trade slows.

More disconcerting is that cargo volumes, currently 5.3% below weak 2019 levels, will end the year 5.5% below the four-year benchmark at 240 million cargo ton kilometers (CTK)—an acknowledgment that market conditions will worsen slightly in the second half of the year when shipping volumes traditionally peak.

IATA estimated that airlines will carry 63.7 million tons this year compared to 67.8 million tons in 2019. Still, cargo revenues will remain well above the pre-pandemic level of $100 billion as labor shortages and fuel expenses led carriers to charge more for their services.

The projected 3.8% decline in airfreight shipping is an improvement from the 8% reduction last year. But some analysts note that temporary signs of stabilization likely have more to do with easier 2022 comparisons when the Chinese economy was still closed down, rather than with any demand improvement.

IATA also says its estimate of the airlines’ cargo revenues in 2023 has been revised downward from $149.4 billion to $142.3 billion, which is to say 31.4% less than in 2022. It expects traffic, on the other hand, to be at virtually the same level as it forecast in early 2023, with a reduction of 4% to 57.8 million tons. The drop in revenues will mainly be the result of the fall in freight rates rather than a reduction in cargo volumes.

According to Chuck Clowdis, managing director of analyst firm Transport Logistics Group, despite a small jump in the Baltic Exchange Air Index, up 0.7%, expectations regarding a major recovery are premature. “The Shanghai, week-over-week data shows up a bit, but still year-over-year down 22.5%,” he says. “Air cargo shippers enjoyed a pretty favorable year, in general.”

Clowdis also sees “political complications” in the U.S. Congress and the elections coming in 2024 already driving consumer uncertainty. “While 2023 had plenty of challenges in these areas, we expect 2024 will be even more intense,” he says.

On the positive side, air cargo service providers continue expansions, mergers, and acquiring new and converted equipment. “This is a good sign of confidence in the marketplace,” adds Clowdis. “On a cautionary note, cargo theft usually concerns truck freight. However, despite tighter security on air cargo movements, rising theft is a factor that should not be overlooked.”

Ocean

The head of the world’s third-largest container line says there’s no need to panic over a sharp retreat in carrier earnings. According to a report in the Wall Street Journal, CMA CGM CEO Rodolphe Saadé says that he expects weak trade volumes that are roiling the shipping sector this year to continue in 2024.

According to Saadé, the tumbling profits from record highs during the pandemic essentially bring the business back to pre-pandemic levels. Big container lines made tens of billions of dollars during the pandemic, when shipping demand soared and freight rates skyrocketed. Industry analyst John McCown says that net profits for shipping lines were down a combined $54 billion in the second quarter.

CMA CGM’s own profits were down 83% from last year’s second quarter, although it still earned $1.3 billion. However, Saadé says that he expects the second half of 2023 will be weaker than the first half of the year. Pricing has continued to adjust from pandemic levels, and signs are that this trend will continue, particularly as new capacity enters the market.

Further complicating the matter is the issue of carbon reduction and alternative fuel management. Peter Keller, industry consultant and chairman of SEA/LNG, a global liquified natural gas (LNG) value chain, points out that the attempt to decarbonize industries by 2025 has placed huge hurdles in front of all transportation sectors. “The reality is there are no truly green fuels available in any significant quantity, and the outlook for any dramatic increase in supply is decades away,” he says.

Keller adds that the maritime industry is reducing carbon by using methane (LNG) and bio methane (bio LNG). “Others are suggesting methanol is the answer, but there are no significant quantities of green methanol,” he says. “The only green methanol is a bio product that’s made from bio-methane and is very expensive, as methanol has about half the energy density of LNG. When one buys fuel, you’re really buying energy, so density counts. Currently, the only viable pathway for the maritime industry is LNG.”

Former president of Horizon Lines, John Keenan, observes that the level and pace of change is staggering for anyone involved in the logistics space. “Look around,” he says. “The Flexport meltdown, the Convoy failure, senior leadership changes, technology companies struggling due to the continued volume decreases, and overcapacity in the liner services—with some saying this overcapacity will last until 2030. The good news is that the West Coast labor is resolved, albeit at a cost.”

Parcel

United Parcel Service’s business is getting hit from all sides. The company cut its sales outlook after revenue slipped in the third quarter because of a slowdown in global shipping demand. The package carrier is being hurt in the United States by the shift in consumer spending from goods to services, while trade between China and the United States hasn’t improved as fast as the company had anticipated.

At the same time, UPS is still coping with the loss of business during contentious labor talks over the summer, when an average of 1.5 million packages a day were diverted to other carriers. UPS says it has recaptured about 40% of that volume. However, domestic package volume fell 11.5% from last year, signaling that the company still has a gap in its pipeline that makes it more complicated to plan capacity for the holiday peak period.

According to Satish Jindel, president of SJ Consulting, the UPS/Teamsters contract added significant cost to the operation just when the parcel market was in the worst demand/supply imbalance. Capacity has increased to 110 million average daily volume (ADV) of shipments, with new capacity being added, while the demand is 69 million ADV and not likely to grow by more than mid-single digit over next two to three years.

FedEx has embarked on its “One FedEx” program, integrating the domestic operating networks of Express and Ground, and even linehaul runs with FedEx Freight. While it should help FedEx become more competitive, it should also be good news for shippers.

However, it will come with some challenges, as FedEx is under pressure from investors to improve returns that may limit it from using lower cost to reduce rates for shippers in exchange for market share gains. While consumers continued to spend, they have been shifting their expenditures from goods to other areas, causing drop in demand and shipments across all segments of the transportation industry.

Fuel

Fuel has become a major driver of operating costs, so we’re devoting the last section of this roundup to the latest developments in an important component of supply chain.

Elevated fuel prices are no longer a mere fringe concern for logistics professionals—far from it, in fact. Since 2020, spikes in the cost of fuel have disrupted global supply chain operations to the point of supplanting driver shortages as the shipping industry’s primary concern.

According to the Bureau of Transportation Statistics, cost per gallon of fuel in August 2023 ($2.82) was up $0.34 (13.8%) from July 2023 ($2.48) and up $0.88 (45.2%) from August 2019. Total August 2023 fuel expenditure ($4.72 billion) was up 13.5% from July 2023 ($4.16 billion) and up 46.9% from pre-pandemic August 2019.

The U.S. Energy Information Administration (EIA) expects global oil inventories to decline by almost a half million barrels per day in the second half of 2023, causing oil prices to rise over the remainder of the year.

Bottom line, shippers will benefit from proactively paying specific attention to fuel management in their negotiations, procurement and contracting processes with their transportation service providers.

Matt Muenster, chief economist at Breakthrough Fuel, says that its baseline forecast continues to suggest the “new normal” for crude oil prices is closer to $80 per barrel rather than the $55 per barrel we experienced during much of the five years prior to the pandemic.

“The spread between retail and whole cost per gallon sale remains high at $0.562 and unlikely to improve in 2024,” says Muenster. “OPEC+ crude oil production cuts, economic sanctions on producers like Russia and Iran, and the United States’ desire to restock its strategic petroleum reserve can play a role in maintaining elevated price.”