The Impact of High Labor Costs and Weak Demand on the Global Freight Market

Current Labor Cost Trends

Labor costs in the global freight market are experiencing mixed trends. UPS anticipates a substantial drop in labor cost growth, while J.B. Hunt and C.H. Robinson are managing excess resources and expected personnel expenses, respectively. FedEx highlights significant past investments in employees, and UPS reports notable increases in direct labor costs and contractual wage rates.

"Additionally, our labor cost growth rate will drop substantially. We will also see the majority of the $1 billion in savings from Fit to serve." --- (UPS, earning call, 2024/Q1)

"On a consolidated basis, these costs aggregate to approximately $100 million related primarily to having too many resources with our people and capacity for our current business levels that we plan on scaling into overtime." --- (JBHT, earning call, 2024/Q1)

"We continue to expect our 2024 personnel expenses to be in the range of $1.4 billion to $1.5 billion, excluding restructuring charges with productivity initiatives and lower headcount offsetting increases driven by the restoration of target incentive compensation related to the expected improvement in our financial performance." --- (CHRW, earning call, 2024/Q1)

"So we had announced $1,000,000,000 of investment in our employees back in September of 2021, where we were able to make adjustments along the way to adapt to the marketplace, and that's one of our strengths." --- (FDX, conference, 2024/05/13)

"• Direct labor costs increased $199 million. Contractual wage rate increases for our U.S. union workforce resulted in an increase in costs of $328 million." --- (UPS, sec filing, 2024/Q1)

Weak Demand and Freight Volumes

Weak demand has led to a significant decrease in freight volumes, with J.B. Hunt reporting a 22% drop and FedEx noting a 13% decline in global daily freight pounds. This trend is echoed by UPS and C.H. Robinson, who both highlight reduced revenues and suppressed freight rates due to ongoing weak market conditions.

"That said, we and our railroad partners know the true test of our collective service will come once freight volumes increase with higher overall demand on our networks." --- (JBHT, earning call, 2024/Q2)

"Global average daily freight pounds decreased 13% in 2024 primarily as a result of weak global economic conditions as well as lower volume from the USPS." --- (FDX, sec filing, 2024/Q4)

"The lower adjusted gross profit per transaction in truckload services was driven by the weak demand and excess capacity in the surface transportation market discussed in the market trends and business trends sections above, which have continued to suppress freight rates in the first quarter of 2024." --- (CHRW, sec filing, 2024/Q1)

"• International airfreight revenue decreased approximately $53 million due to continued weakness in market demand, impacting both volumes and rates." --- (UPS, sec filing, 2024/Q1)

"Overall volumes decreased 22% compared to the first quarter 2023. Revenue per load decreased 5%, primarily due to lower contractual and spot customer rates as well as changes in customer freight mix compared to first quarter 2023." --- (JBHT, sec filing, 2024/Q1)

Operational Challenges Due to Labor Costs and Demand

UPS plans to reduce labor dependence and save $3 billion by implementing a "network of the future." FedEx improved profitability despite weak demand. C.H. Robinson benefited from declining freight rates, enhancing cash flow. J.B. Hunt faces challenges in balancing cost control and future growth. Labor contract negotiations impacted UPS's pricing and customer behavior.

"Imagine a lights out building, that's network of the future. Executing network of the future over the next 5 years will significantly reduce our dependence on labor and save over $3,000,000,000 in expense." --- (UPS, event transcript, 2024/05/02)

"Overall, I want to acknowledge and thank the entire team for their efforts in delivering these strong FY 2024 results and improving profitability, despite a very challenging demand environment." --- (FDX, earning call, 2024/Q4)

"Our operating cash flows benefited in the prior year from declining freight rates in ocean and truckload services, which resulted in a decrease in net operating working capital and drove strong operating cash flow." --- (CHRW, sec filing, 2024/Q1)

"The challenge we face today as an organization is managing the business to best prepare us for future growth while balancing the need to manage and control costs in the near term." --- (JBHT, earning call, 2024/Q1)

"And this was related to noise around the labor contract negotiation. If you look at who declined during that time frame it was predominantly dual-sourcers, who are low GRI customers. So last year's base pricing was a bit artificially inflated because it is just the mix change." --- (UPS, earning call, 2024/Q2)

Pricing Strategies Amid High Costs and Low Demand

Freight companies are focusing on reducing costs and enhancing efficiency to manage high labor costs and weak demand. FedEx and UPS are implementing cost-saving programs, while C.H. Robinson leverages AI to reduce waste and improve operating leverage, all aiming to maintain profitability and competitive pricing.

"inflects positively and we return to that normalized growth rate. And through these efforts, we are significantly improving the profitability of the company as we lower our cost to serve, enhance capital efficiency and better serve our customers with market leading capabilities." --- (FDX, conference, 2024/05/29)

"Continuing to leverage AI to take the capability of our people to an even higher level positions Robinson well to further reduce waste and drive structural cost changes that improve our operating leverage and help deliver on the long-term operating income margin expectations that are imperative to the success of the business. With that, I'll turn the call back over to Dave for his final comments." --- (CHRW, earning call, 2024/Q1)

"The big component, though, full year on a run rate basis, the Fit to Serve program will generate $1.3 billion in savings and we're ramping that up in Q2." --- (UPS, earning call, 2024/Q1)

"I'm truly excited about the value creation opportunities in front of us as we continue to win profitable share, execute on our structural cost initiatives and leverage the insight from the vast amount of data we compiled from moving more than $2 trillion worth of goods every single year." --- (FDX, earning call, 2024/Q4)

Regional Variations in Freight Market

Regional variations in the freight market are influenced by the regional nature of carriers, market opportunities for priority freight, and capacity adjustments. Seasonal demand fluctuations also play a role, with busy periods in spring and fall and slower periods from December to February.

"Speed matters in the spot market because most carriers are regional and only so many are working a given shipping lane on a given day." --- (CHRW, press release, 2024/05/07)

"Yes. As I alluded to before, I think there's a significant market that's there that we're not really participating in that's there for the taking in terms of priority freight and leveraging the significant assets we have internationally and the ground network that we have domestically to make Tricolor attractive." --- (FDX, conference, 2024/05/13)

"And then another player headquartered in Seattle on the regional, I think the capacity will be taken out of the market." --- (UPS, earning call, 2024/Q1)

"For FedEx Freight, the spring and fall are the busiest periods and the latter part of December through February is the slowest period." --- (FDX, sec filing, 2024/Q4)

Technological Innovations in Freight Operations

Technological innovations in freight operations are driving efficiency and transparency. C.H. Robinson's adoption of TriumphPay's solutions enhances operational efficiency and reduces fraud. J.B. Hunt emphasizes the synergy between people and technology, while FedEx integrates freight operations with its Tricolor network strategy, showcasing a trend towards technological integration in the industry.

""By joining the TriumphPay Network, C.H. Robinson will continue to deliver best-in-class carrier offerings and further underscore their position as a leader in the transportation industry." TriumphPay provides innovative payment processing solutions tailored for the transportation industry, empowering freight brokers to achieve heightened operational efficiency, improved financial transparency and enhanced risk mitigation." --- (CHRW, press release, 2024/06/17)

"Today on the FreightWaves stage, Brad Hicks, president of Highway Services and EVP of People, gave a keynote showing how people and technology work together to drive innovation and efficiency." --- (JBHT, twitter, 2024/06/04)

"So that's excellent. And then I'll just also say in our freight business, we have a DAP like service, which is our forwarding hub, and it's actually well ahead of plan as well." --- (UPS, earning call, 2024/Q1)

"Please go ahead. David Vernon: Hi, guys. Thanks for the time. So Raj, I hate to come back to the same topic again, but when you were with us a few weeks ago here in New York, you were sounding like it was a little bit more of -- you're moving in the direction anyway of more closely integrating some of the Freight stuff with the Tricolor network strategy." --- (FDX, earning call, 2024/Q4)

"The TriumphPay Network and integrated technology solutions remove friction and reduce fraud in the presentment, audit and payment of approximately $48.9 billion in unique brokered freight transactions." --- (CHRW, press release, 2024/06/17)

Future Outlook for the Freight Market

Expectations for the freight market remain cautious, with companies like J.B. Hunt and C.H. Robinson highlighting the potential for fluctuating transportation costs and their impact on cash flow. The outlook suggests a mixed scenario, balancing between cost management and adapting to weak demand.

"I'm just wondering if you can give us some expectations around kind of how you're approaching the market the rest of the year, anything you've learned out a bid season that would speak to kind of what the volume outlook might be for full year Intermodal growth, in the segment." --- (JBHT, earning call, 2024/Q1)

"And so that may very well be in our future. However, the converse is also true, and you saw that as a -- cost of purchase transportation came down and we received a net of about $1.5 billion back into our cash flow at the end of the last cycle as that came down." --- (CHRW, earning call, 2024/Q1)