Covid lockdowns in China. Moderating demand easing capacity constraints. Softening e-commerce sales as brick-and-mortar stores make a comeback. Is it just an early, temporary seasonal lull for parcel carriers or a harbinger of a shifting market?
Gary Frantz is a contributing editor for DC Velocity and its sister publication CSCMP's Supply Chain Quarterly, and a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.
A year ago, parcel carriers were awash in e-commerce–fueled shipments as homebound consumers, flush with Covid-stimulus cash, flocked online to buy everything from foodstuffs to furniture to home-improvement goods. Home deliveries and overall parcel volumes exploded. E-commerce levels once expected to take four years to reach arrived with a vengeance in 2021, stressing carrier service levels and consuming capacity.
A year later, e-commerce continues to drive strong parcel volumes. Despite consumers once again cruising the aisles at shopping malls, department stores, and big-box warehouses, those millions who discovered the ease and convenience of buying online and home delivery during the pandemic aren’t abandoning their digital shopping carts. They’re online, they’re staying there, they’re ordering nearly as much as ever, and they’re not going back.
The first quarter of 2022 saw parcel carriers report strong earnings and growth. Yet despite confidence in continued growth, the picture coming into focus for the remainder of 2022 is muddled. Challenges abound from issues already present and on the horizon: Painful, persistent inflation. Shrinking consumer paychecks and increasing living expenses across the board. Rising interest rates. Record-high gas prices. Continued supply hiccups impacting the production of everything from refrigerators to automobiles. And a stubborn resurgence of Covid-19 cases in China that’s locked down Shanghai’s port, has delayed ships, and threatens a repeat of last year’s port logjams and supply chain delays.
John Janson is senior director of global logistics at promotional products company SanMar, which operates eight distribution centers around the country and dispatches some 100,000 parcel shipments each night. He recalls seeing a recent overhead view of the Port of Shanghai and the surrounding waters. “You could hardly see water,” there were so many ships parked offshore, he notes. And stacks and stacks of containers waiting on shore. Rising Covid cases had dramatically curtailed port operations.
As cases subside and the port plays catchup, he fears “the potential to throw us right back into a very congested period” as a delayed surge of goods—a “bullwhip effect,” if you will—begins to make its way across the ocean, hitting U.S. ports in early to mid-June. “You look at the number of container moves Shanghai can do in an hour, and what they can do at [the ports of] Long Beach and Los Angeles. Just do the math. It will be hard for Los Angeles and Long Beach to catch up.”
He adds that the current negotiations between U.S. port operators and the International Longshore and Warehouse Union, which began in mid-May, create another potential concern. “We can’t afford to have the West Coast go on strike,” Janson says. He estimates that a one-week strike, timed just as the China surge of ships is arriving, “will cause three- to four-week delays in supply chain flows.”
David Gonzalez, VP analyst with research firm Gartner, echoes Janson’s China concerns. “We … expect service issues [on the Asia trades] and maybe some [canceled] sailings by ship lines as they try to recover from the delays.” He also notes that any significant resurgence of Covid cases in the U.S. would have supply chain implications as well, as rising cases could disrupt the pool of warehouse workers, truckers, and other logistics personnel who keep parcel volumes flowing.
THE CHALLENGE OF “UGLY” FREIGHT
Nevertheless, shippers are devising strategies and parcel carriers are marshaling their resources to meet the challenges, and hopefully continue the momentum they’ve enjoyed so far this year. Some dynamics that all players seem to agree on: Rates will increase, fuel and peak surcharges and accessorials will continue to be imposed, and carriers will do all they can to avoid odd-sized “ugly” shipments that are difficult and expensive to handle.
“Carriers have become very disciplined in understanding the effect of large and bulky packages,” notes Satish Jindel, chief executive officer of analytics firm ShipMatrix, adding that “it’s only ugly if it has bad pricing. When one of those [big and bulky shipments] displaces 10 or 20 smaller parcels, [carriers] are intent on making sure that the big and bulky shipment generates the same, or closer to the same, amount of revenue.”
Jindel adds that those shippers who want to secure reliable capacity will do best by forecasting their needs more precisely and updating them regularly; making their freight as efficient as possible for parcel carriers to pick up, process, and deliver; and helping carriers maximize use of every cubic foot of space on the truck.
Carol Tomé, chief executive officer of parcel giant UPS, in its first-quarter 2022 earnings conference call, noted as well the focus on quality traffic, improving productivity, and strengthening customer relationships. “We continue to pivot toward opportunity,” she said. “We are leveraging the power of our data to become much more agile. Under our ‘Better, not bigger’ framework, we are investing in the capabilities that matter most to our customers … this is about creating a frictionless customer experience.”
Technology investments are driving both better customer experiences and productivity gains at UPS. One initiative, its “Digital Access Program” (DAP), is helping speed the customer onboarding process, particularly with small and medium-sized businesses. In the first quarter, UPS created more than 500,000 DAP customer accounts, which is more than three times the number created in the first quarter of last year, Tomé said.
Investments in automated facilities along with productivity initiatives have enabled the company to eliminate 1,300 trailer loads per day. And the rollout of RFID (radio-frequency identification) technology, to be completed at 100 sort centers in 2022, is expected to eliminate manual scanning by pre-loaders and help reduce mis-sorts. “We’re really about putting our resources where we can get the highest return,” Tomé said.
As for pricing, “[it’s] really a function of demand and supply, and there is still a demand and supply imbalance, particularly in certain geographies around the world,” she said.
With respect to e-commerce behemoth Amazon, Tomé commented, “We have a very good relationship with Amazon. They are our largest customer,” she said, adding “we’ve reached agreement with Amazon about the packages that we will take in our network and the packages they will deliver on their behalf. And it’s a mutually beneficial relationship.”
POOR PACKAGING PRACTICES RAISE COSTS
Still, as shippers struggle to cope with the steady rise in parcel rates and challenges securing ample, consistent capacity, there remain cost-saving and efficiency-driving steps they can undertake to make their parcel traffic more attractive to carriers.
One area is packaging. “Shippers can focus on smarter packaging,” notes Helane Becker, who follows the parcel carrier market as senior research analyst covering airlines and air-related industries for investment firm Cowen & Co. “The one thing we still hear constantly is all these trucks cube out before they weigh out,” she says, noting that too often, shippers are putting a tiny box into a large box, wasting precious space and paying more than they should.
She recommends that shippers take advantage of services and resources available from both UPS and FedEx, which offer packaging tips “to help them ship more ‘ecofriendly’ and more efficiently, with less wasted space.”
ShipMatrix’s Jindel agrees. “[Shippers] need to work on getting rid of the ‘one-pound product tossed in a box that is designed for 15 pounds’ mentality,” he notes. He cites the example of a tube of mascara, which a colleague recently ordered. “A one- by three-inch tube, already packed in a small (1.5- by 1.5- by 3.75-inch) box came in a five- by eight- by 11-inch box. That’s 50 times the cube of the package it was already in. That’s a tremendous waste of packaging and shipping capacity. And the consumer is paying extra” for that unused space.
“Transportation is perishable,” explains Jindel. “If you don’t use it on the day you have it, it’s gone the next day.”
FINDING PILOTS, TRUCKERS, WAREHOUSE WORKERS
Cowen’s Becker points to another intractable, and likely worsening, issue for shippers and parcel carriers: finding and keeping enough skilled workers to work in warehouses and fulfillment centers, drive trucks, deliver parcels, and fly freighter aircraft. “We talked a lot about this during the past peak season,” she notes. “In 2018, UPS was hiring seasonal workers for $13 an hour. This past peak, it was hiring at $25 an hour. That’s a huge increase in labor expense.”
She also cites the projected retirement of aircargo pilots. “UPS and FedEx have a fair number of pilots retiring this decade,” she notes. At the same time, the traditional pool of replacement pilots, which normally come from regional passenger airlines, is under pressure from all-cargo airlines like Atlas Air and Amazon’s growing freighter fleet, which are hiring aggressively.
“We think pilot attrition in the regional airline industry is somewhere between 10% and 25%,” Becker says. “Forecasts project that the airline industry will have to hire 10,000 pilots a year to make up for attrition,” she notes. Yet the U.S. “only trains 5,000 a year.” She cited a comment by United Airlines’ CEO, who projects the shortage will last five years.
In the meantime, Becker says, “to the extent they can, [parcel carriers] will try to shift all they can from air to road,” where they will run smack into a shortage of drivers for trucks. “If you have to pay more to attract drivers, you are going to raise rates to cover it, and that just creates additional inflationary pressure.”
At the end of the day, “shippers who have undesirable freight will pay a heavy price for it,” says SanMar’s Janson. “Those who pit one carrier against [another] are the ones who will struggle and will face capacity constraints. [Parcel carriers] want to work with shippers who recognize the challenges they face and will work with them to help optimize their networks and the finite capacity they have available.”
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."