Navigating the Freight Recession: Causes, Impact, and Recovery Outlook

We have all heard of the global freight recession and much has been discussed. I thought I would provide a simple summary of "how we got to here" and what the outlook is for the future. So, here goes...

In the dynamic world of global trade, the freight industry often serves as a barometer for economic conditions. Recently, this sector has entered a period of downturn, commonly referred to as a freight recession. This article delves into the underlying causes of this recession, evaluates its severity, and forecasts the potential timeline for recovery.

What Caused the Freight Recession?

The freight recession can be attributed to several interlinked factors:

1. Global Economic Slowdown: A significant deceleration in major economies has reduced the demand for goods, subsequently diminishing the need for freight services. This slowdown is partly due to the residual effects of the COVID-19 pandemic, which disrupted supply chains and altered consumer behaviors.
2. Inflation and High Interest Rates: Inflation has surged worldwide, leading central banks to raise interest rates. Higher borrowing costs have cooled spending on both consumer and capital goods, directly impacting freight volumes.
3. Overcapacity and Rate Volatility: During the pandemic, there was a surge in demand leading to an increase in freight capacity, including the acquisition of new ships and containers. As demand normalizes, this excess capacity has led to rate volatility and lower revenue per shipment for freight companies.
4. Geopolitical Tensions: Ongoing geopolitical issues, including trade wars and sanctions, have reshaped trade routes and affected the volume of international shipments.

How Bad Is the Freight Recession?

The current freight recession is notably severe due to its wide-reaching impact across multiple transport modalities, including shipping, trucking, and air freight. Several key indicators highlight the severity:

• Decline in Freight Rates: Container shipping rates have plummeted from their pandemic highs, with some routes witnessing rate declines of over 50%.
• Reduced Shipping Volumes: Major ports have reported a noticeable drop in container throughput, with some experiencing double-digit percentage declines year-over-year.
• Financial Strain on Carriers: Many freight carriers are facing financial difficulties, evidenced by reduced earnings forecasts and increased merger and acquisition activity as companies seek to consolidate and cut costs.

When Will We Come Out of the Freight Recession?

Predicting the end of the freight recession is challenging due to its dependence on broader economic recovery and stabilization in global trade relations. However, several factors will play critical roles in determining the timeline:

• Economic Recovery: A rebound in major economies, driven by consumer spending and industrial investment, will be crucial. This recovery may be spurred by easing inflation and stabilizing interest rates, likely setting the stage for increased freight demand.
• Resolution of Geopolitical Conflicts: An easing of trade tensions and resolution of conflicts could lead to restored trade routes and improved freight volumes.
• Adjustments in Industry Capacity: The freight industry may need to undergo further consolidation and capacity adjustments to align with the new demand levels.

Industry experts suggest a potential recovery timeline ranging from late 2024 to early 2026, depending on the rapidity with which these factors converge. The road ahead for the freight sector is fraught with uncertainties, but with strategic adjustments and economic stabilization, a gradual recovery is anticipated.

In conclusion, the freight recession is a complex phenomenon influenced by economic, political, and industry-specific factors. While the current outlook is challenging, focusing on adaptive strategies and monitoring economic indicators can help industry stakeholders navigate through these turbulent times.

The Most Important and Most Misunderstood Concept in Business - Opportunity Cost

 The term opportunity cost is thrown around a lot in business. However, my experience, through observation, is very few people truly understand it. My intent in this blog post is to try to explain why you should always consider opportunity cost in every decision you make. 

Let's start by defining the term using the economic idea:

"Opportunity Cost is the potential benefits an individual, investor or business misses out on when choosing one alternative over another" 

I had a conversation with a person today who said they were saving a lot of money by not hiring a house cleaner. My mind immediately went to this concept, so I asked the person, "How much is your time worth"? I had a general idea of their income and, more importantly, their income generating capability so I explained to them not hiring house cleaner was costing them money! The next best alternative for their time (i.e., working) generated more income than cleaning their home themselves. Voila! Opportunity cost!

If the person responds, as some do, that they make no more money by working more (Strictly salary), therefore the concept does not apply, I ask then a follow on question. 

If you paid me $100 and I was able to give you 3 more hours with your kids would you pay me? The answer is almost always yes. Once again, the value of those three hours is $100 (likely they would have paid even more) and the cost of a house keeper, at $20 per hour, means it costs $60 to clean the house, so it is clear the person makes money by hiring a house keeper. They get 3 hours with their kids for $60 when they already told me they would pay $100 or more. 

Now, let's apply this to business. You hear a lot in business how strategy is as much about what you will not do as what you will do yet companies can't seem to turn anything off. Why is this so important? The answer is simple. In an environment of scarce resources (which I dare say every company has scarcity) you have to assume that every dollar and every minute spent doing one thing is a dollar or a minute not spent doing something else (see kids and housekeeping analogy above). If you assume that is true then where is the analysis of what the dollar or minute could be doing?

The concept of NPV (Net Present Value) tries to get at this. Theoretically, any project with a positive NPV should be funded. However, that assumes unlimited resources. Given that we know resources are limited NPV will tell you that the project with the highest NPV should be funded and the other should not. This is the opportunity cost. If you choose the lower NPV project then you would be forgoing the more lucrative one. I found the conclusion at Sapling to be the clearest:

"If both projects have a positive NPV, compare the NPV figures. Whichever project has the higher NPV is the more profitable and should be your first priority. Doing both projects is fine, since both will be profitable, but if you can do only one then go with the higher-NPV project. 

Some may say "the resources are different so do both" but that is very rarely true. Almost always resources are fungible or, you can relieve some resources and acquire the ones you need. Time, of course, is your most valuable resource and that is completely fungible. 

In his book Good Profit by Charles Koch Mr. Koch describes this concept and uses it throughout the book. He says:

"The true cost of any activity is the highest-value activity forgone [italics and bold are mine] - that is, the opportunity cost. This is the methodology I encourage employees to use in making decisions, and I strive to practice what I preach."

So, the next time someone does a project ask them, "what activity are you forgoing to do what you are doing and what is the value of that forgone activity"?  If they cannot answer that question, then they have not done good project analysis and they are not allocating scarce resources efficiently. 

I think this is a core concept whether you are in supply chain or any other part of the business and what I find is the businesses that are highly successful are able to prioritize, using the concept of opportunity cost, and focus all their resources on the few incredibly high value projects. They do not spread their resources so thin that no high value resource is starved. 

Many of you know I served in the military and we called this the "Principle of The Concentration of Forces". The definition is:

"The ability to apply sufficient military force at the right place at the right time and in a manner that assures the achievement of the desired and decisive results"

Let's all agree to learn from the concept of opportunity cost and its military counterpart - concentration of forces. 

  

 

Why CSCMP EDGE Conference is So Important

 Last week I spent most of my time at the Council of Supply Chain Management Professionals (CSCMP) Edge conference in Orlando Florida. Just a few hours into the first night and I remembered why coming to this conference is so important and has been such a great part of my supply chain career. I thought I would share some thoughts with you and hopefully the younger readers will realize your supply chain career is a life long journey. Getting to know the leaders of your generation will make you a leader. So, here goes:

1. Relationships: Yes, we all talk about this, however, this is truly very important and CSCMP has been there for my entire career. From the moment I started coming to this conference I met a number of people in different industries and different supply chain disciplines. From that point, we grew up together, learned together, celebrated together and helped each other. If I had not joined CSCMP early in my career and been intentional about coming to the conference year after year, I would not have known these people and my career would have been less fulfilling. 
   
   
2. Education: Continuous learning is must for any career and certainly supply chain is no exception. Because of my connection to CSCMP and attending conference sessions, I have been able to learn a lot of nuances about the discipline and I have used those learnings to hone my craft. I highly encourage anyone who attends to also attend the academic's conference on Saturday and Sunday. Quite frankly, that has been a highlight of my sessions and learning from the most brilliant academics makes me challenge what I think "I know". 
   
   
3. Time to Sharpen the Saw: I use my attendance at CSCMP EDGE to immerse myself in learning. That could be from the academic sessions, the practitioner sessions or the key-note and mega-sessions which challenge my thinking on many topics, not just supply chain. By listening and thinking deeply on the leadership topics, the supply chain topics, the business management topics and all the other items presented, I am able to use this time to truly execute what Stephen Covey called, "Sharpening the Saw". If you do not take time to do this periodically, just like a saw-blade, you will become dull and worn down. CSCMP EDGE is the perfect place to rededicate yourself to this discipline. 
   
   
4. Learn what is new: The vendor portion is truly world class. By walking the show and being disciplined about making sure you visit suppliers and interact with them, you learn what is new and interesting. My advice is to plan this out and plan your interactions. Learn and engage. You will be better for it. 

Overall, I just cannot imagine being in this discipline and not interacting at CSCMP Edge every year. Thank you to the CSCMP staff and all the volunteers who helped with the conference and worked tirelessly to make it such a great event. 

I leave you with a few pictures of my participation this year on two great panels. One on X-Shoring, Hosted by Alan Amling of University of Tennessee and the other on Meaningful Employment Environments hosted by Trail Paths founder, Robert Martichenko. 

J.B . Hunt v. Schneider... Head to Head Match Up

 I always find it interesting to compare these two companies and looking at the 10K's for 2022 and the 10Q's for the first half of 2023 and interesting picture is emerging:

Projection for 2023 at Beginning of Year from 10K:

Summary (Beginning of the Year): JB Hunt and Schneider are two of the largest trucking companies in the US. Both companies reported strong financial results in 2022, but JB Hunt's results were slightly better. JB Hunt also has a more optimistic outlook for 2023.

Here's a quick look at the numbers:

• JB Hunt: Revenue of $18.4 billion, up 27% year-over-year; Net income of $1.7 billion, up 43% year-over-year; Earnings per share of $3.33, up 41% year-over-year.
• Schneider: Revenue of $16.2 billion, up 23% year-over-year; Net income of $1.2 billion, up 22% year-over-year; Earnings per share of $2.45, up 21% year-over-year.

So, which company should be more successful going into 2023? I think JB Hunt is the better choice. It has a stronger track record of revenue growth, and its guidance for 2023 is more optimistic. Additionally, JB Hunt is investing heavily in new technologies, which could give it a competitive advantage in the long run.

Of course, there are some risks to consider. The trucking industry is facing some challenges, such as rising fuel prices and a driver shortage. These challenges could impact both JB Hunt and Schneider, but JB Hunt's stronger financial position gives it a slight edge.

After 1H2023 Has Concluded, How Is The Situation Developing?

Metric JB Hunt Schneider Revenue (first half of 2023) $9.2 billion $8.3 billion Net income (first half of 2023) $778 million $622 million Earnings per share (first half of 2023) $1.55 $1.24

As you can see, JB Hunt's first half of 2023 performance was slightly better than Schneider's. JB Hunt's revenue was up 12% year-over-year, while Schneider's revenue was up 8% year-over-year. JB Hunt's net income was also up 12% year-over-year, while Schneider's net income was up 9% year-over-year.

However, it is important to note that the trucking industry is facing some challenges in the first half of 2023, such as rising fuel prices and a driver shortage. These challenges could impact both JB Hunt and Schneider, but it is too early to say how they will affect the companies' full-year results.

Overall, JB Hunt's first half of 2023 performance is in line with my expectations. The company is still growing and profitable, and it is investing in new technologies to stay ahead of the competition. I believe that JB Hunt is a good investment for the long term.

Here are some additional thoughts on the first half of 2023 performance of JB Hunt and Schneider:

• JB Hunt's intermodal segment, which handles the movement of containers between trucks and trains, performed well in the first half of 2023. This is due to the continued growth of e-commerce, which is driving demand for intermodal transportation.
• Schneider's truckload segment, which handles the movement of freight over long distances, performed more weakly in the first half of 2023. This is due to the driver shortage, which is making it difficult for Schneider to find qualified drivers.
• Both JB Hunt and Schneider are investing in new technologies, such as self-driving trucks and artificial intelligence, to improve their operations. These investments could give the companies a competitive advantage in the long run.

I will continue to monitor the performance of JB Hunt and Schneider in the second half of 2023 and beyond. I believe that both companies are well-positioned for long-term growth.