The Polar Vortex Effect on RFPs

Demand continues to be strong and truckload capacity is tight. Plentiful freight has created new opportunities in 2014, while spot market rates have maintained record highs. Carriers can also take advantage of the Polar Vortex Effect to negotiate for higher contract rates. What’s the Polar Vortex Effect? Read on.

The series of winter storms that hammered much of the country immobilized many trucks and trains throughout a four-month stretch, disrupting the supply chain and the entire economy. The effects of that Polar Vortex lasted long after the snow melted. Pent-up demand continued through much of April. By that time, seasonal freight had begun to kick in, and the economy began to expand in earnest, generating additional cargo for all equipment types. Rates peaked again on the spot market in June, and the national average market rate for vans has remained at or above $2.00 per mile, including the surcharge, through the end of August.

Even if demand stagnates or wanes, rates are likely to rise due to carriers’ operational costs as well as capacity constraints. Fuel costs are stable, but labor and other costs are on the rise. HOS and the persistent driver shortage have hampered productivity for fleets of all sizes. And as we’ve already seen, the weather is also a factor, but it’s unpredictable.

Consumer purchases, manufacturing, housing and exports contributed to a 4% increase in GDP in the second quarter, following a 2.1% decline in Q1. The “personal consumption” category increased 2.5%, which is a bit disappointing. Hidden in that number, however, is a whopping 14% increase in purchases of durable goods, while non-durable goods increased 1.9%. Imports also increased in Q2; they detract from GDP but add to domestic freight tonnage, so this is positive for the transportation sector.

Forecasts are mixed for Q3 GDP growth. The Institute for Supply Management (ISM) is bullish while other analysts expect slower growth, but demand for freight transportation should be solid in either case.

Van rates are up by 12% to 13% in Q3 on the spot market, year over year, while contract rates are 3.8% higher than they were in the same season last year. Those increases are the result of generally higher rates as well as a mix of more headhaul freight, not just the traditional backhaul freight on load boards (the mix may have been 60% backhaul and 40% headhaul and it is now closer to 50-50). Demand and rates are soaring for flatbeds, as well, and reefer fleets are enjoying modest increases.

Rates may plateau in Q4. Demand usually tapers in Q4, but fleet costs aren’t coming down. Fuel prices may be stable, but there is increased pressure on fleets from the costs of labor and regulatory compliance. So when demand slackens in Q4 of this year, rates are more likely to plateau than to drop significantly.

Expect contract rate increases in 2015. We have seen a sustained increase in spot market rates this year, and that pattern typically leads to an increase in contract rates. As a forecasting tool, spot market rate trends are a valid indicator in more than 70% of the cases, on a lane-by-lane basis. I anticipate an increase in contract rates, starting with the Q1 bidding season.

And if you’re bidding on a shipper’s RFP, you can use DAT RateView to analyze both the contract rates and the spot market “broker buy” rates for any of 20,000 lanes. For lanes that you don’t know well, look up a 13-month rate history that helps you to evaluate seasonality and volume in each lane, or download hundreds of rates at a time to complete your bid worksheet. If your current business doesn’t dovetail well with the lanes represented in the bid, try to develop TriHauls (triangular routes with added profitability), or use other creative dispatch tactics to handle new lanes.

Looking for more RFP bidding strategies? Download the white paper “Win by Losing: How to Respond Effectively to a Shipper’s RFP.

Photo from Wiki Commons.