"Imminent." "Inevitable." "Just the beginning."

The International Brotherhood of Teamsters is escalating its rhetoric against UPS as the two sides attempt to reach a tentative labor agreement ahead of the expiration of their current five-year national contract on July 31. Economic terms like pay and benefits remain roadblocks in talks, and the Teamsters say they will strike Aug. 1 if a deal isn't in place by then.

"Chinstraps are buckled," the Teamsters said Friday. "The rank-and-file are getting strike-ready."

In recent interviews with Supply Chain Dive, logistics and labor experts said a strike still isn't a certainty despite the union's demands to speed up negotiations, but note the chances of one are increasing. Progress will depend on how willing negotiators are to adjust their current economic proposals.

"It's like a game of chicken — who's going to budge first?" Trevor Outman, founder of Shipware, said of the negotiations. "UPS wants a revenue-neutral or cost-neutral proposal. In other words, they don't want to pay up any more than what exists today. And clearly, that's not gonna work for the Teamsters."

If the standoff continues and results in a strike, U.S. supply chains will see significant disruptions. The current contract covers around 330,000 UPS employees, including delivery drivers and package handlers, helping the company deliver millions of packages every day.

The most vulnerable UPS shippers are those without alternative carriers in place to handle diverted packages, experts say. It gets even harder if they don't have enough volume and financial muscle to compel other carriers to make extra room in their networks at the last minute.

"If I'm in a logistics professional's shoes right now that's sourced with UPS, I'm doing everything I can for the next couple of weeks to get something in place to ensure I've got a way to deliver packages to my customers," Outman said.

Negotiations timing favors the Teamsters

Timing matters in labor contract negotiations, and for this bargaining round, it’s in the Teamsters' favor.

UPS' bottom line benefited during the COVID-19 pandemic from a surge in demand and locked-in contract wages while competitors grappled with climbing labor costs, said Alan Amling, distinguished fellow at the University of Tennessee’s Global Supply Chain Institute and former VP of corporate strategy for UPS.

"That tends to work against you in the negotiations because none of that profit is getting shared with the people on the front lines," Amling said. "That's the Teamsters' position, and it's hard to argue against that. I mean, it's a fact."

Now, the bill is due, with the Teamsters demanding large raises in the next contract and calling a recent proposal from UPS "unacceptable."

"Following marathon negotiations, UPS refused to give the Teamsters a last, best, and final offer, telling the union the company had nothing more to give," the union said Wednesday.

The Teamsters' continued push for a "final offer" weeks before the current deal expires is an attempt by the union to wriggle the negotiations out of an impasse, said Todd Vachon, an assistant professor in the Rutgers School of Management and Labor Relations. And if that offer is rejected by Teamsters' membership with time to spare before the contract expires, that gives its negotiating committee another opportunity to turn up the heat and pursue more favorable terms before a strike.

"It's a way for them to demonstrate that they need to get more, otherwise what's going to happen a month from now is they're going to vote this down and they're going to be on strike," Vachon said.

If both sides remain at an impasse, there's not much influence that outside parties can exert on contract negotiations.

While Congress passed — and President Joe Biden signed — legislation imposing a labor agreement on rail workers to avoid a strike or lockout last year, UPS negotiations present a different situation. With company employees covered under the National Labor Relations Act, not the Railway Labor Act, lawmakers don't have the authority to force striking UPS workers to return to their jobs, said Art Wheaton, director of labor studies at Cornell University’s School of Industrial and Labor Relations.

"There's fewer tools for Biden and the Biden administration to force the Teamsters to accept any of the contract language," Wheaton said.

Diverse carrier mix will benefit shippers

Parcel volume flows apparently haven't shifted much despite contract negotiations remaining unsettled.

Rival FedEx didn't see any material benefit from the talks in May when anxious UPS customers could have shifted packages to other carriers, although it is having "great conversations with legacy UPS customers," EVP and Chief Customer Officer Brie Carere said on a recent earnings call.

But activity from UPS shippers diverting packages to other carriers will increase the closer the deadline gets without a deal in place, experts say. The question is how much of UPS' business will other carriers be able to take on, as the company represented 24% of the U.S. parcel market by volume last year, according to Pitney Bowes.

Carriers generally have capacity to spare as delivery demand has cooled from its pandemic-driven heights. However, Michael Foy, director of business development at Inmar Intelligence, said FedEx and other carriers will limit how much diversion activity they're willing to accept. Volume shifts will be easier for shippers that have existing business with UPS competitors.

"You can't just all of a sudden start getting contracts in place in the next three weeks — it's nearly impossible," Foy said. "But, if you're a retailer and you've got 70% of your business with UPS, maybe 10% with a regional carrier and 10% with the Postal Service, then you have a little bit more leverage."

Shippers have made strides in recent years in diversifying their carrier mix, in part to mitigate their exposure to single-carrier disruptions and capacity constraints. The average number of last mile carriers per company account in April was 5.52, up from 4.98 the year before, according to a May project44 report.

“If you're 99% UPS [deliveries] and it's the week before the strike, you don't have a lot of options,” Foy said.

Nothing for retail inventory planners has been easy over the past three years. After the shortages of 2020 and 2021, the industry spent the past year trying to unload products as consumers cut their spending in the face of steep inflation.

Although down from their peak, many inventory positions remain elevated for current sales levels.

“I've worked at multiple apparel retailers recently that have more inventory than I've ever seen,” said Matt Garfield, managing director with FTI Consulting. “It looks like you're walking into a peak season distribution center and we were in the middle of February, March.”

Even though the era of bare shelves is not far behind the industry, many are learning to live on leaner inventories and plan to chase products as needed in 2023 and beyond.

In doing so, retailers are prioritizing cost control and margin protection over the risk of lost sales.

“A little scarcity is not a bad thing,” said Joe Feldman, senior managing director with Telsey Advisory Group.

Inventory levels have peaked. But they’re still bloated.

Target issued a mid-quarter warning in June 2022 that its profits for the period were in for a significant hit as the retailer worked to “right-size its inventory for the balance of the year” amid a “rapidly changing environment.” The retailer blamed intense pressure on consumer spending from inflation on necessities, including food and gasoline.

Target led the way, but discretionary retailers, with few exceptions, spent the rest of the year trying to clear inventory. Analyzing retailers across major sectors, Telsey Advisory Group analysts found that, across segments, inventory growth averaged at 46% in Q2 2022. In apparel and e-commerce, that figure was considerably higher, at 65.6% for both sectors.

“Coming out of 2021, inventory was really lean, lower than it should have been, because you couldn't get goods and everybody was chasing,” Feldman said. “I think the miscalculation was the demand level.”

Retail inventories hit their peak in October, when they were up 18% from 2021 levels. Inventories have since fallen considerably but remain well above where they were three years ago, or even a year ago.

 

 

An improving supply chain has magnified the problem, at least on paper. By February, overall schedule reliability in ocean freight was up month-over-month by 7.7 percentage points and up year-over-year by a “staggering” 26 percentage points, according to DHL.

For consumer companies, that means goods have been shipping faster and arriving earlier than a year ago, which shows up in inventory levels. Apparel sellers such as Under Armour and PVH have noted this in their earnings. At PVH, which owns the Calvin Klein and Tommy Hilfiger brands, inventory was up 34% YoY at the end of Q4.

“We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times,” PVH CFO Zac Coughlin told analysts in March. “And in the fourth quarter this year, we experienced much earlier receipts of inventory as these supply chain and logistics disruptions had eased.”

Excess is costly up and down the supply chain

The inventory story played out differently for retailers and many of the brands that supplied them. As retailers moved to cut back their positions, wholesalers were often left sitting on excess stock.

“Wholesalers really got hammered,” Garfield said.

Apparel sellers GIII Apparel Group and VF Corp, for example, both cracked 100% inventory growth in 2022, according to Telsey Advisory Group analysis. Nike, one of the largest apparel brands in the world, hit 44% inventory growth in the period ending Aug. 31.

“If retailers have too much inventory, they're going to stop purchasing, or slow down their purchases, or push out their purchases from their vendors,” said Joel Wolitzer, SVP and business development officer with Rosenthal & Rosenthal, which provides factoring and other financing services. “We have seen that slowdown on multiple levels.”

For merchandise suppliers, life can be made tougher by the fact many retailers don’t place firm purchase orders, which means their vendors have to place informed speculative bets on how much a retailer will purchase, informed by a retailer’s projections. Even purchase orders can be changed or delayed.

Suppliers producing private label merchandise for retailers can be put in an especially tight spot if their buyer decides to pull back on their orders.

“Those goods can only go to that retailer. Suppliers can’t sell them anywhere else,” Wolitzer said. “So they’re kind of stuck.”

For larger wholesale brands, they may have ended up with higher inventory levels than their retail partners, but that’s not necessarily the worst-case scenario if they have their own sales channels.

“It's probably better for, say, Nike or Adidas to control the way they clear through the excess inventory,” Feldman said. The alternative, he added, is to “put it out there in the market and let the retailers decide what to do with it, and just cut price and potentially impact the brand.”

For all players in the market, inventory excess is costly. Additional warehousing can get expensive. As Wolitzer noted, if companies have to borrow to pay for that warehousing, then there are financing expenses such as interest as well.

Operational efficiency and capacity also declines once a certain amount of space in a warehouse is filled, Garfield noted.

"It's a very big impact to your overall profitability — your cost per pick, cost per unit, those kinds of core profitability measures that we look at for distribution,” he said.

Have retailers learned their lesson? And which lesson?

The past two years raise fundamental questions about how to buy and plan inventory, and can yield some contradictory answers. One of the biggest is: Is it worse to have too little inventory in boom times or too much in downturns?

“Two years ago, you just had to have inventory. If you had it, there was a buyer out there,” said Oliver Timsit, founder of the apparel brand Oliver Logan. “We’ve come to terms with the fact that we can’t have something for everyone.”

With supply chain problems easing, many of the same tensions that predated the pandemic are now coming back into play. While out-of-stocks could mean the opportunity cost of a lost sale, overstocks come with financial costs of storage and financing costs.

Inventory excess also comes with opportunity costs by tying up working capital, and, perhaps most importantly, means less space for fresh products.

“Much as we all thought that the retailers learned their lesson — that they're better off ordering less, chasing demand a little bit, and having very clean, profitable sales, meaning fewer markdowns — they all fell into that trap of: ‘Oh, if we just have more, we'll sell it,’” Feldman said. “And then they got caught.”

Should demand recover, Feldman thinks retailers will have an easier time chasing inventory than they did in 2021 given normalizing supply chains.

“Those bottlenecks are gone," Feldman said. "So if you do have much more normal ramping of production on the manufacturing side, getting it here shouldn't be too much of an issue, at least in the near term. I’m hopeful these guys will be smarter about it.”

Still, retailers are unlikely to ramp up purchase orders anytime soon — even if demand does come roaring back.

“I think it’s going to be awhile before merchants and executives are really ready to place that bet for a large inventory position,” Garfield said. “Those conversations were brutal last year. The earnings — they weren’t fun calls, and I don’t think anyone wants to go back to that time.”

The U.S. manufacturing industry sank to new lows in June, as companies continued to struggle with soft demand.

ISM’s Purchasing Managers’ Index registered a 12-month low of 46% in June, as anxieties grow that the U.S. is headed for a recession later in 2023. The reading was down from 46.9% in May. A reading below 50.0% indicates an industry in economic contraction.

The .9 percentage point dip was due in large part to a sizable drop in production levels as demand eased and companies lost confidence in a rebound in the second half of the year, said Tim Fiore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee.

"The U.S. manufacturing sector shrank again, with the Manufacturing PMI losing ground compared to the previous month, indicating a faster rate of contraction," Fiore said in a statement. "The June composite index reading reflects companies continuing to manage outputs down as softness continues and optimism about the second half of 2023 weakens.”

A month after warning that without a turnaround companies could face layoffs, Fiore also noted that manufacturers have started trimming staff.

"Demand remains weak, production is slowing due to lack of work, and suppliers have capacity," Fiore said. "There are signs of more employment reduction actions in the near term."

A second national indices for the manufacturing sector — the S&P Global US Manufacturing PMI — showed a slightly better picture with a reading of 46.3, down from 48.4 in May.

But the change signified the index's sharpest month-to-month decline of the year, driven by steep decline in new orders. Customers continue to pull back on orders amid high inflation and interest rates, according to the report.

"The health of the US manufacturing sector took a sharp turn for the worse in June, adding to concerns over the economy potentially slipping into recession in the second half of the year," Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. “Leading the darkening picture was a severe drop in demand for goods, with new orders slumping at a rate among the steepest since the global financial crisis of 2009."

ISM survey respondents noted in their comments that some customers have been less inclined to purchase far in advance, with hopes of an economic bounceback in the second half of the year now dim.

Only four of 15 manufacturing sectors reported growth in June, according to ISM: printing & related support activities; nonmetallic mineral products; primary metals; and transportation equipment.

Comments from these sectors offered some of the only bright spots in the reports, with one nonmetallic mineral products ISM respondent saying, "Here we are almost halfway through the year, and while things are challenging, we may be doing all right.”

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Even as space frees up within FedEx and UPS' networks, shippers are poised to continue diversifying their parcel carrier mix in 2023, industry experts say.

Adding new last mile carriers emerged as a popular strategy during the pandemic after volume surges limited capacity at the two delivery giants. FedEx and UPS have seen service levels rebound and demand normalize, but many shippers continue to keep other delivery options on tap.

If anything, shippers are adding alternative carriers at an even faster rate. The average number of last mile carriers per company account in December was 5.73, up from 4.86 the year before, according to project44 data.

A mix of factors is buoying this ongoing trend, including higher rates and concerns over UPS and the Teamsters' contract negotiations — their current agreement expires July 31. Increased capacity and more robust services from smaller competitors are also driving interest in alternatives.

The result is that last mile carrier mixes are starting to look more like shippers' varied LTL portfolios, said Caleb Nelson, chief growth officer and co-founder at logistics software provider Sifted. Looking forward, diversification isn't expected to slow down, leaving some industry experts wondering if Amazon will capitalize by launching a competing service.

"I think it's going to pick up pace this year, and it's mostly because shippers are a little bit behind and the regional carriers that have stepped in to offer competitive solutions to FedEx and UPS are far more advanced this year than they've ever been before," he said.

Rate hikes, surcharges leave opening for competitors

While a slowing economy is driving down ocean and trucking rates, last mile rates have remained persistently elevated, putting a strain on shippers' finances. The fact that rates in the sector have remained so high for so long is unusual, said Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS.

"In my entire career with UPS, there were only a few years over the 27 years I was there where it was a seller's market — that's not the typical state of things," Amling said. "The typical state of things is a buyer's market and you're creating [market] share and the carriers are really aggressive in how they're courting business."

Despite volumes declining in recent quarters, 2023 is set to be another expensive year for FedEx and UPS shippers due to higher annual rate increases and surcharges. The Cowen/AFS ground parcel index, which measures shipping costs, is expected to reach a record high in Q1.

Both companies have defended their rate increases and surcharges, saying they are needed to keep service levels high and combat inflationary pressures.

"Honestly, we have had very productive customer conversations," FedEx Chief Customer Officer Brie Carere told Supply Chain Dive in October in regards to rising shipping costs. "I think our customers really are very well-informed and they understand the seriousness from an inflation perspective."

While smaller competitors have also raised prices, some have undercut FedEx and UPS's recent 6.9% general rate increase with lower hikes.

"With this added capacity and new competitors, we are going to go back to a buyer's market where there are more alternatives and better opportunities to get lower prices in the market and still maintain service levels," Amling said.

As alternatives expand, is Amazon next?

Since the onset of the COVID-19 pandemic, FedEx and UPS have pursued volume growth in more profitable segments like healthcare and small business while demonstrating a willingness to let go of lower-yielding e-commerce packages from large shippers. UPS, for example, reached an agreement with top customer Amazon that will result in fewer packages from the e-commerce giant inundating its network.

Meanwhile, many alternative carriers have stepped up to fill the gap by gearing their services around delivering online orders. LaserShip/OnTrac, The Frontdoor Collective and Better Trucks are among the last-mile delivery companies set to expand into new markets in 2023 while siphoning volumes from the top carriers.

“Customers are usually coming to us because they are frustrated with service from some of the big players,” Better Trucks co-founder and CEO Andy Whiting told Supply Chain Dive in November. “There’s been challenges with either service or price or a combination of the two, or they’re looking for alternatives.”

Experts say another company could soon enter the parcel carrier fray, placing increased pressure on FedEx and UPS: Amazon. The e-commerce giant aggressively expanded its logistics network to fulfill and deliver in-house orders when the pandemic supercharged demand, and it has since grappled with excess capacity as sales have slowed.

At the same time, Amazon has rolled out new services that make use of its sizable logistics assets. The company launched long-term inventory storage services at its distribution services for third-party sellers in 2022. By the end of January, Amazon plans to expand its "Buy with Prime" service to all U.S. merchants, connecting their outside websites to Amazon's fulfillment network and delivery capabilities.

"They were all set to launch a third-party service before the pandemic hit, and then they had to pull it back," the University of Tennessee's Amling said of Amazon. "I would not be surprised if they dust off all those plans and execute those in 2023."

Some shippers have begun diverting freight from Yellow Corp. over concerns about the company’s future, TD Cowen analysts reported in a June research note.

Mired in a fight with the International Brotherhood of Teamsters over a network overhaul Yellow considers critical to its survival, the carrier resorted to the extraordinary step of suing the union on June 27. 

The bank published its report, “Tensions escalate at Yellow, freight diversions have started,” the next day. 

“Analysts are starting to see freight diversions to other carriers, with [ArcBest-owned ABF Freight] and [TFI International-owned TForce Freight] as potentially the biggest winners of diverted freight from Yellow,” the report said.

Yellow CEO Darren Hawkins, however, said the largest unionized U.S. LTL carrier has maintained its shipment count during an interview Monday with Fox Business.

“Our employees want the company to be here,” Hawkins said. “Our customers definitely want us to be here. Even with all the noise around the company, our shipment counts have held up, and that’s crucial for us to work through this period while we’re getting to negotiations.”

Still, uncertainty in the company’s future is unnerving shippers, which “could become a very slippery slope” for the carrier, according to the analysts.

A Yellow spokesperson argued the TD Cowen report did not accurately describe the One Yellow modernization plan to sell 28 terminals and combine its YRC Freight, Reddaway, New Penn and Holland subsidiaries.

While the company got the union’s go-ahead and implemented the first phase of the plan in the western region in 2022, the union has fought the second phase in the eastern region for more than 8 months.

The $137 million lawsuit, accusing the Teamsters of “unjustifiably blocking” One Yellow, noted the company had also requested White House intervention to bring the union back to the table.

The company has nearly $1.6 billion in debt payments and obligations due in the next three years. It has warned employees it is running out of money and its survival depends on lenders agreeing to provide financing, which will require a deal with the Teamsters on One Yellow.

TD Cowen analysts Jason Seidl, Matt Elkott, Elliot Alper and Uday Khanapurkar noted that they “are not predicting the demise/survival” of Yellow. But their report modeled the potential earnings gains to other publicly traded carriers in the event of a shutdown. 

Carriers like Old Dominion Freight Line are unlikely to absorb a high percentage of Yellow’s volumes given their strict pricing discipline and freight profile, the report said. 

“In our view, fellow unionized carriers such as [ABF Freight] (strong exposure to long haul lanes) and [TForce Freight] would likely experience gains ... as they are more compatible with Yellow’s freight. We also would expect strong private carriers to compete for business.”

During the Fox Business appearance, Hawkins said Yellow wants to negotiate a deal that “allows the company to modernize and also increase wages over the period of the next few years.”

“The only part of the recipe we’re missing is a ratified union contract,” he said.

A port labor dispute has boiled over into a full union strike — this time in Canada.

Container terminals at Canada's West Coast ports are at a standstill after the International Longshore and Warehouse Union Canada and the British Columbia Maritime Employers Association reached an impasse in negotiations, leading the union to strike on July 1. 

More than six days into the strike, the two parties are still at an impasse on certain contract terms, dashing hopes for a quick resolution. Now, business leaders, politicians and analysts are watching the situation closely, asking: How did we get here? How could the strike end? And what effects could the work action have on supply chains?

Here's what we know so far.

How are supply chains affected?

While ILWU Canada members work at all four port authorities on Canada's West Coast, the British Columbia ports in Vancouver and Prince Rupert are most affected.

The two seaports are among the country's largest maritime gateways, handling roughly a quarter of Canada's trade, according to the BCMEA. Such cargo volumes make the Pacific Coast gateways vital for Canada's trade relationship with the United States and countries in Asia.

The strikes are mostly affecting containerized operations at the seaports, the BCMEA told Supply Chain Dive in an email. Grain operations are protected by federal law, and the two parties also agreed to continue to service cruises.

Still, the impact on containerized products has alarmed several supply chain stakeholders, with some warning in public statements or emailed analyses that a prolonged strike could exacerbate inflation, affect Canada's trade reputation, alter ocean rates and force cargo diversions, among other supply chain spillover effects.

Hapag-Lloyd detailed some of those effects in a website advisory for customers.

The ocean carrier said it expected some route changes for ships, and told customers not to expect any vessels to be loaded or unloaded, any trains to run, nor any containers to be moved at affected ports while the strikes were ongoing.

Why did a strike happen?

When ILWU Canada announced it would strike on July 1, it emphasized three core goals it had during its negotiations: to prevent work from being contracted out, to protect workers from the effects of automation, and to secure better pay.

"Unfortunately, the ILWU Canada Bargaining Committee has run out of options at the bargaining table because the BCMEA and their member employers have refused to negotiate on the main issues, and we feel we are left with no choice but to take the next step in the process," the union said in the press release announcing the strike.

Negotiations continued at the onset of the strike, but talks broke down after the employers’ association walked out on July 3, according to the union. The employers group said that day the union needed a “course change” if talks were to resume.

"ILWU Canada went on strike over demands that were and continue to be outside any reasonable framework for settlement," the employer group said in a statement that day. "Given the foregoing mentioned, the BCMEA is of the view that a continuation of bargaining at this time is not going to produce a collective agreement."

Since then, the two parties have traded allegations — with each saying the other is being unreasonable — via public statements, but have not officially returned to the bargaining table. Federal mediators are communicating with both parties.

Is there an end in sight?

The union, employer group, and business leaders have each publicly proposed a way to end the strike, though Mark Thompson, a professor emeritus at the University of British Columbia's Sauder School of Business, says many of those proposals are untenable.

ILWU Canada has proposed to negotiate directly with the CEOs and presidents of key terminals to resolve a critical clause in the contract — a proposal which would mean bypassing the existing bargaining committee. Thompson said such an offer is unreasonable, as it would be akin to employers asking the union to negotiate directly with workers, rather than their bargaining committee. 

By contrast, the BCMEA has proposed negotiations progress into a form of arbitration, instead of the current mediated process, a proposal which Thompson said a union is unlikely to accept, as it would require abandoning its most powerful bargaining tool: the strike.

Meanwhile, business leaders — which are not directly involved in the talks, but fear the impact — are lobbying for parliament to pass back-to-work legislation to end the strike.

"It shows that they really don't believe in free collective bargaining at all when the minute a strike is called and workers walk off, they really want the government to intervene," John Henry-Harter, Labour Studies lecturer at Simon Fraser University, told CBC in an interview.

Thompson added parliamentary intervention would be both politically unfeasible — as parliament is out of session in July — and strategically unsavvy.

"The government takes a long view of this. They're afraid now if they jump in quickly, that'll just be an incentive to the parties to get into an impasse next time," Thompson said.

Still, there is some sign of high-level federal action: Canada's Minister of Transport Omar Alghabra and Minister of Labour Seamus O'Regan Jr. each said on Twitter they had engaged the parties and urged them to continue negotiations and reach a deal soon.

On Thursday, O'Regan said in a tweet he had also met with Acting U.S. Labor Secretary Julie Su, who was widely credited for brokering a deal between longshore workers and U.S. West Coast port employers after they reached a similar impasse.

"The BCMEA and ILWU need to get a deal. Workers across North America are counting on them," O'Regan said in the tweet.

The Pacific Maritime Association and International Longshore and Warehouse Union announced Wednesday night they had reached a tentative agreement on a six-year contract covering workers at 29 West Coast ports.

The tentative deal is subject to ratification by the two parties. The PMA and ILWU said they would not release any details of the agreement at this time.

Acting Labor Secretary Julie Su “played a key role” in reaching an agreement, according to the joint statement. The Labor Department chief joined negotiators in San Francisco after a series of disruptions affected port operations in early June.

“The tentative agreement delivers important stability for workers, for employers and for our country’s supply chain,” Su said in a statement. “This important milestone is welcome news to all, and on behalf of President Biden, we are pleased to congratulate both parties on what they have achieved.”

The tentative deal comes after more than 13 months of negotiations, one of the longest contract talks in recent memory. It also comes at a critical time for the U.S. supply chain, as businesses prepare for a surge of imports typical of a summer peak shipping season.

“We are pleased to have reached an agreement that recognizes the heroic efforts and personal sacrifices of the ILWU workforce in keeping our ports operating,” said PMA President James McKenna and ILWU President Willie Adams in a joint statement. “We are also pleased to turn our full attention back to the operation of the West Coast Ports.”

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Lower rates and increased air cargo capacity may benefit shippers in 2023, as carriers contend with lower demand, according to industry analysts.

More businesses came to rely on airfreight during the pandemic as a way to circumvent lengthy delays caused by port congestion. But with ocean congestion clearing, demand for pricier air cargo services has declined.   

“As the year continued through 2022, the demand started diminishing to a more realistic level,” Jack Burt, vice president of U.S. cargo at charter company Air Partner, told Supply Chain Dive. “Ocean container services started becoming more reliable [with] more available capacity in the ocean market, making it more attractive for shippers.”

Lower demand also comes as more capacity hits the market. Air cargo carriers have added freighter capacity, expanded routes and resumed passenger operations — a complete flip from previous years where capacity was strained. 

That's led to a very competitive market, which is expected to provide shippers with more pricing and capacity options. 

“Demand year over year is quite different ... it has decreased, and that’s not a bad thing,” Burt said. “Markets are coming out of an equilibrium, which should train users for lower cost for transportation and, hopefully, lower costs for goods, overall.”

Shippers to benefit from softening rates

Spot rates in 2021 catapulted to among the highest in history, but prices began leveling off in 2022 with softer demand and greater availability of capacity.  Rates from China to North America, for instance, wrapped up last year at $6.76 per kilogram, down roughly 40% YoY, according to a Jan. 3 email update from Freightos.

“Overall capacity will continue to grow, and demand will, I think, decline,” said Xeneta’s Chief Airfreight Officer Niall van de Wouw. “That will have a downward pressure on load factors, and hence, rates, but I don’t expect a nosedive from a rates point of view, as we see on the ocean side. I think it will be more of a gradual decline.”

While the air freight industry is currently seeing a decline in YoY growth and spot rates, the turbulent market may shift again, van de Wouw said.

“We have seen the easing of rates to gradually continue,” he said. “With the big carve out, there’s not a lot of slack in the system, so if something happens, that gradual decline would bounce or even go up a little bit if something happens in your local markets.”

Shippers head back to the drawing board

Lower demand and greater capacity means that buying power has, once again, returned to the hands of shippers. But experts warn challenges may lay ahead as stakeholders look to find new carriers or renegotiate existing contracts to secure the best rates.

“There’s new airlines that have come up and been developed and opened in the last year, there are large freight forwarding companies and logistics companies that have opened up entire new divisions with owned or leased aircraft," said Burt of Air Partner. "So there’s going to be a lot of new choices for people that need to either ship something by air cargo, air charter, or even ocean or surface.” 

A November market analysis from Xeneta’s Clive Data Services found that shippers are opting for more shorter-term air cargo deals amid market uncertainty. 

“If rates are coming down, then people want to try and seize that,” Burt said. “Renegotiation is already in effect.”

Beyond capitalizing on short-term declines in rates, shippers are also taking new approaches around their long-term use of air cargo. Shippers need to work with partners to ensure that they’ve got the “right mix” of services, Matt Castle, vice president of air services at C.H. Robinson, told Supply Chain Dive. 

“It really comes back to the fact that there is still supply chain disruption, there’s still a need for shippers to recalibrate in this ever changing marketplace,” he noted. “One of the big themes that obviously played out the last couple of years, and one of the things we’re working backwards now with a number of customers, is we had to really restructure or reestablish their expectations.”

Volatile demand trends over the past few years have made forecasting ocean shipping cargo volumes more difficult, according to the head of the Port Authority of New York and New Jersey.

“There is no longer any seasonality or predictability to the cargo peaks and valleys that our industry had become accustomed to,” port director Beth Rooney said in a State of the Port briefing on Jan. 25.

Cargo volumes, which soared at many ports over the past few years, are now being met with softening demand. The trend comes as retailers pull back orders to clear inventories and the warehouse market shows signs of cooling due to demand slowdown.

The Port of New York and New Jersey celebrated record volumes in 2022 including a four-month streak as the nation’s busiest containerport, President of Global Container Terminals John Atkins said at the event. The streak was broken in December, though, as cargo volumes fell nearly 21% YoY to 613,011 TEUs. 

Rooney said the port had noticed a "rather sharp decline in volume and a softening of the market," since October. The slowdown was due to the extended lunar new year shutdowns, rising COVID-19 cases in China, rising costs, lower consumer spending and high inventory in warehouse and distribution centers, she added.

“We expect that market to remain soft but at more normalized levels through the first half of the year," she said.