The freight market resembles a complex chessboard where multiple forces interact in delicate balance. Demand, capacity, and pricing each function as interconnected pieces, where moving one affects the entire system. The Q1 Freight Index released jointly by TD Cowen and AFS Logistics provides a comprehensive scan of this landscape, attempting to discern future trends through the current fog of economic uncertainty.
Launched in October 2021, the index serves as a forward-looking pricing tool for Cowen's institutional clients, covering critical segments including less-than-truckload (LTL), truckload (TL), and parcel shipping (express and ground). By integrating AFS's extensive freight data across transportation modes and applying advanced analytical techniques like machine learning, the index aims to deliver a nuanced market perspective. Beyond historical data, the model incorporates macroeconomic and microeconomic factors, including recent general rate increase (GRI) announcements from major parcel carriers, providing both retrospective analysis and near-term projections.
"While there are some positive macroeconomic signals for carriers, the factors influencing the 2024 freight market are expected to persist through the next quarter," noted AFS CEO Andy Dyer. "No demand-side stimulus appears likely to alter the freight cycle we've seen in recent years. Even with increasing carrier exits, supply-side adjustments haven't yet reached levels sufficient to offset weak demand."
Truckload: Cautious Optimism Emerges
Despite generally flat demand, the index reveals tentative positive signs. Rising spot rates and higher tender rejection rates suggest carriers are becoming more selective about freight acceptance. However, this spot market momentum hasn't translated to contract rates, as the market remains oversupplied.
Truckload linehaul costs declined for the eighth consecutive quarter, reaching their lowest point during this period—though still 11.6% above pre-pandemic levels. Based on current conditions and seasonal patterns, the Q1 2025 truckload rate-per-mile index is projected to hold steady at 5.1% above the January 2018 baseline, unchanged from last quarter with a 0.2% year-over-year increase.
Key Observations:
- Spot vs. Contract Market Divergence: The spot market rebound hints at shifting supply-demand dynamics, but lagging contract rates confirm shippers still wield pricing power amid abundant capacity. This divergence reflects differing market expectations.
- Persistent Overcapacity: Despite some carrier exits, ample capacity continues to suppress price growth. Even moderate demand recovery would struggle to quickly rebalance the market, requiring carriers to refine capacity management strategies.
- Fuel Price Volatility: While recent diesel price declines help, geopolitical risks and potential supply disruptions could reverse this trend, necessitating close monitoring and risk mitigation.
Parcel: Pricing Discipline Meets Discount Pressure
The index shows pricing adjustments proved effective during peak season, with new "bundled" demand surcharges pushing Q4 ground parcel surcharges 16.4% above Q3 levels. Ongoing fuel surcharge table adjustments also boosted carrier revenues—average ground parcel net fuel costs rose 4.7% quarter-over-quarter despite a 4.6% drop in highway diesel prices. A similar disconnect appeared in express parcels, where Gulf Coast jet fuel prices fell 8.8% but carrier surcharges declined just 2.7%.
UPS's December fuel surcharge increase—its eighth of 2024—introduced a new "tilted" fee curve where surcharges accelerate with rising diesel prices but decline more slowly during price drops. Yet beneath these pricing maneuvers lies a challenging reality of soft demand, intense competition, and persistent discounting.
Q4 2024 express parcel per-package rates fell both quarterly and annually to just 0.5% above the January 2018 baseline. While Q1 2025 should see seasonal growth from carrier GRIs, the anticipated 4.1% increase represents a year-over-year decline due to aggressive annual discounts. Ground parcels fared better, with per-package rates rising to 24.4% above baseline in Q4. Expected Q1 2025 pressure could push this to 28.2%, though still slightly below 2023's record high.
Critical Factors:
- Flexible Fuel Surcharge Mechanisms: Carriers' dynamic surcharge adjustments demonstrate pricing agility, though risk alienating shippers if perceived as imbalanced.
- Discounting's Long-Term Toll: Prolonged price wars may erode profitability and service quality, urging carriers toward differentiation beyond pricing.
- E-Commerce Momentum: Sustained online shopping growth will continue driving parcel demand, requiring infrastructure and technology investments to maintain service levels.
LTL: Cracks in Pricing Discipline
LTL rates remain elevated but show early signs of softening carrier resolve. Unlike truckload's prolonged slump, LTL rates have stayed high since Q3 2023, initially supported by capacity constraints following Yellow Freight's collapse. While carriers maintained this discipline, recent data suggests weakening—Q4 LTL linehaul costs per shipment fell 1.3% (outpacing a mere 0.3% weight decline), with fuel surcharges dropping 3.4% quarterly and net fuel costs per shipment down 5.5%.
The Q1 2025 LTL rate-per-pound index may extend its annual growth streak to five quarters, but at a slowing pace—the projected 62.4% would be just 0.4% above 2024 and 0.2% below Q4 2024.
Notable Developments:
- Yellow Freight's Legacy: Its bankruptcy initially tightened capacity, but competitors gradually filled the void, reducing upward rate pressure.
- Transparency Pressures: Shippers demand clearer fuel surcharge calculations, forcing carriers to balance competitiveness against profitability.
- Technology's Role: Real-time tracking, route optimization, and automated warehousing can boost efficiency, making tech investment crucial for adaptation.
The TD Cowen/AFS Freight Index paints a picture of a complex, challenging market where demand weakness and excess capacity persist across modes. Carriers must employ nimble pricing, precise capacity management, and technological innovation to navigate this terrain, while shippers should optimize supply chains to mitigate cost pressures.