Spot margins are compressing

Here at FreightWaves, we consume a lot of data: over 150 sources representing $260B worth of trucking transactional data and hundreds of thousands of geo-locations of trucks in the market. Our data scientists model this data and interpret the results. We also make a lot of predictions and forecasts based on this data. Many of those predictions never get published, some do.

One of the indicators we have been watching is the lead time between tender date and pickup date, which can tell us how much freight is being tendered with short pickup times. That in turn gives us insight into the health of the spot market and the direction of margins for brokers.

We have modeled tender transactions that represent about $47B of truckload tender transactions. The current tender lead time is around 5.1 days, up from an average of 3.7 days during the fourth quarter. When it comes to our data set on electronic tenders, it represents a significant portion of the for-hire trucking electronic tenders overall.

We know through numerous studies we have done and others have conducted that there is a strong inverse correlation between margins for transactional spot brokers and tender lead time to pickup. The further out a load is tendered from a shipper to a carrier to pick up, the more likely it is being tendered under a contract commitment. It also means that the shipper is unlikely to be scrambling for capacity. This, of course, means that they are not going to pay a premium in the spot market over the contract rate. This means margin compression for the freight brokers that rely on the spot market.

How does this work exactly? Well, the shorter window that a shipper has to book a load, the less price sensitive they are. It is true that shippers make most of their routing decisions based on price (regardless of how much a carrier sales rep pretends that their “relationship” matters) and if they are not scrambling for capacity they will use the carriers that are listed as first spot in their routing guide. So lead time is incredibly important. Lead time is also a kind of proxy for volatility in the freight market, much like VIX for the stock markets.

MIT published a study back in 2013 using Coyote’s loads and compared Coyote’s pricing in the market vs. published spot market indices. What they found was that the biggest predictor in variance in rates quoted to shippers correlated to tender lead time. Loads that were tendered same-day and next day had as much as a 27% premium over loads tendered with a more than four day lead time.

This also matches my own experience. When I ran the on-demand division of US Xpress back in 2002-2004, we only participated in the spot market. In our second year of operation, we did $144M in revenue and $68M in margin. Our 40% premium over US Xpress’ average rate per mile was directly correlated with the fact that the freight we handled was out-of-cycle, surge, or last minute. The division heavily taxed the operating efficiency of US Xpress’ core operations, but the margins were incredible because we were able to take advantage of the high premium spot market.

Today, most of that activity is being serviced by large 3PLs who are able to buy capacity from the spot market and participate in capacity arbitrage (buying capacity from carriers at a lower market rate and selling it off to the highest bidder). This is why the large public 3PLs had amazing quarters in the later part of last year. As contract carriers pulled back from their lower-priced commitments and undesirable lanes and moved this capacity into higher paying contract and spot, the shippers were left scrambling for capacity.

While someone might have been surprised by the quarterly reports and the ability for the 3PLs to get high margins, we were not. Shippers turn to the biggest brokers during scramble periods. As the old adage goes, no one gets fired for buying IBM. In the freight market, no shipper gets fired for using CH Robinson (or any other large 3PL/carrier). Even if freight doesn’t pick up, the shipping manager can tell his boss at least they tried with the top suppliers.

The market has since reset, albeit temporarily. Shippers have locked in more capacity at higher contract rates, in return for firm capacity commitments. The market should stabilize for the time being, but we will see high peaks around the end of March, and spot brokers will enjoy high margins again. We are also likely to see a run on the spot market when ELD ‘hard enforcement’ begins in April and the spring produce season ramps up. And don’t forget about the end of the late Chinese New Year that pushed port freight later into the cycle than years past. All of these factors will be bullish for those spot players.

For carriers that rely on the spot market, the good news abounds. Capacity is super tight. They won’t be able to get the enormous rate premiums they experienced in the fourth quarter, but still will see higher spot rates in the market this season over years past, partially supported by contract rate increases by the large enterprise carriers.

Interested in more of our insights? Check out the study we did on ELD transaction data and shipper/receiver wait times and the worst cities for drivers. Along with 500 of the coolest freight data nerds, we will be in Atlanta May 22 and 23rd for Transparency18. We would love to have you join us.