Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining our Northeast market webinar today. Right out of the gate, I want to let everyone know that this will be being recorded. So Samantha, if you could hit the button, please. Thank you. So again, welcome. Glad to have you here as we kick off our webinar series for 2023. We have a great panel for you today going through the Northeast market updates. From left to right here, we have Pat Lind, who is our Transcon Manager; Mike Drake, who is our Air Export Manager; and Josh Brandes, who was our Import and Order Management Manager. All 3 are very knowledgeable, and I think you'll [indiscernible] enjoy everything they have to go over today. We do want to call your attention to the little Q&A button down the bottom. We do want to answer any questions you might have. Please feel free to enter everything and everything down in that QA section. And questions will be answered towards the end of the webinar. And we will get to anything. And then this recording will also be made available to you at the end of the webinar as well after following a short survey. With that being said, let me turn it over to Pat, who will kick things off with the domestic market update. Pat, back to you.

Thank you, Chris. Good morning, everybody. As Chris said, thank you for joining this morning, taking time out of your day to hear from us. I will be going over both the full truckload marketplace updates and also LTL market updates. On top of what you'll see on the slides, I will have some information about just other trends in the industry, regulatory trends, technology trends, things like that. So -- but we'll start with full truckload market. We'll start with challenges and trends. Really, what we've seen in the last -- really to close out Q4 and as we head into 2023, is a decrease in demand in truckload. The numbers are -- what we really look at is van load-to-truck ratio. That's the primary statistic the industry uses to really get a gauge on how demand is in the marketplace. So if you look at that graph on the right, you can see 2022 numbers in green, and the red bar -- or the red line represents 2021. And throughout the year, maybe February, we were about broke even, and we started 2022 a little bit higher, but we've seen downward trends, especially towards the close of the year and a little bit more flattening out as we closed Q4. So for every, right now, 5.5 loads available in the market, there's about 1 driver. So that's your load-to-truck ratio. So demand has gone down for a few reasons. Certainly, the economy and what's happening in the United States plays a role. There are seasonal things that play a role in demand decreasing. Also, the big thing really that we've seen though is demand in the contract space. So contract versus spot load, two very different things. Your contract customers are typically big-box retailers, companies that have significant volumes, very steady lanes, shipping thousands and thousands of dedicated trucks a year. So throughout 2021 and even into 2022, demand in that space was incredibly high. And those customers or those big-box retailers and other industries that had contract rates, their truckers couldn't satisfy the demand. So we saw a lot of the drivers that operate in the spot market go over and start helping in that contract space. So we've seen some of that soften. We've seen demand go down, and we've seen a lot of those drivers go back to the spot market. And really, for customers that need to get trucks, I would say, there's really no delays, probably a 1-day notice is -- it should be able to get a truck for you, if that's what you need in the spot market. Because demand has gone down, certainly, rates are on the down trend. If you look at the lower graph, you can see the rate outlook for dry van has decreased as we close the year out. Really what the industry is predicting, what analysts are predicting is we're probably at a point now where we're flattening out, when it comes to rates on the truckload side. Certainly, fuel plays a role in your rates, and that has gone down as we've closed the year out. But compared to this time last year, this week in January or last week in January, fuel is still up $0.79 a gallon. So last -- it was around, I would say, February, March that we saw fuel in 2021 hit numbers around $5 a gallon, $5.50 a gallon. Right now, this week, we're at $4.52 a gallon is the national average in the U.S. So we're still lower than maybe a month from now, last year, but we're still $0.79 higher on average in January compared to 2021. So as we head into February, as we head into March, if gas trends or fuel trends continue to trend downward, we will start to see a shift from year-over-year numbers, where fuel will be down potentially almost $1 compared to February, March time of last year. And then certainly, there are some other trends happening in the industry. In the truckload side, there was a lot of polls, and the DOT and other government agencies and independent companies do polls on -- with truck drivers throughout the year. And the biggest complaint right now in the industry is parking. So drivers are complaining about the lack of infrastructure and the lack of parking and availability for them to rest overnight or throughout their drive from one location to another. So there is about, right now, a little over 300,000 estimated parking spaces in the United States for truckload or for truckload drivers, which really only equates to about 1 spot, 1 parking spot for every 11 drivers. So that is probably the hottest topic amongst drivers. And there's other things like wages and benefits, and those types of things play a role in recruitment. But in general, that seems to be a hot topic for drivers right now. Driver recruitment, I just mentioned that it's continued to trend downward as we head into 2023. A lot of factors play into that, including wages, benefits. Certainly, COVID and with COVID, certainly, we've seen trends downward in number of cases. That the pandemic in general, we saw a big exit of drivers from the industry, and a lot of them have not come back, and recruiting new drivers continues to be a challenge. And then, in general, just the nation's infrastructure. So I talked about parking. But when you look at other things like places to eat and places to sleep, and all the things that play into kind of a lifestyle of a truck driver, there's a lot of negatives that play a factor in trying to recruit younger generation or recruit people from other industries into trucking. But one thing that's happening from a regulatory standpoint, legislation was introduced in January by the Republican side of our government, or the house, if you will, to potentially lower the age for drivers to -- from 21. So to drive overstate lines, generally most states, the requirement is you have to be over the age of 21, despite you can get a CDL license around the age of 18. So the goal of this builds to potentially lower that age from 21 down to 18, hoping that we can get more drivers that are capable of driving long hauls or crossing state lines into the industry at a younger age, which could potentially increase the amount of capacity in the market. Specifically, they were looking at hauling ocean containers out of major ports and then certainly just long-haul trucking from coast to coast for dry vans as well. And then the last trend I want to touch on is just technology. And all these trends I'm talking about affect the LTL side of our business. So that's why I'm going to -- we'll look at LTL next in terms of rates and fuel and things like that. But technology certainly is playing a role in the trucking industry and -- there was a big announcement this week that Volvo, major automotive manufacturer for trucking, made a sizable investment in a automation -- sorry, autonomous trucking company out of Canada. So that's just one example of many that we're seeing in the industry where autonomy, and certainly, when we talk about technology, there's a variety of things that are important in the trucking industry, but the hot one right now is autonomous trucking. And there's a lot of companies that are investing in the technology, developing the technology, testing the technology. We may be many years away from it being used, but you're starting to see some of the large auto manufacturers and those that make these trucks that drive cargo throughout the U.S., they're investing in that technology now, whether it's through acquisition, partnerships, exclusive deals with some of these companies. So that's a hot topic that we'll continue to probably talk about in 2023 and beyond. We can head to the next slide, please. So a lot of the same things happening on the FTL in terms of demand are certainly bleeding over into the LTL marketplace. Month-over-month declines in November, December to close out 2022 were reported. If you look at a lot of the major LTL carriers in the United States, their Q4 earnings or releases, a lot of them, a lot of same language about volumes decreasing, demand going down. But at the same time, investments are being made. And so a lot of companies, Expeditors included, were making a lot of investments to improve our LTL networks. And that's done in a variety of ways. Certainly driver retention, we talked about earlier the difficulty in driver recruitment on the truckload side. Same thing on the LTL side. Just because cargo is going on and off a truck, a lot of these drivers or teams of drivers are taking trucks from coast to coast. And while their trucks are getting unloaded and reloaded with new things, you still need a healthy supply of drivers to be able to operate an LTL network. So carriers are making investments in better wages, better benefits, a lot of one-time or sign-on bonuses. And all that results in higher operating costs for LTL carriers. On top of investing in the drivers, there's investments in facilities. So in 2020, 2021, in the height of COVID, I'm sure a lot of you, if you're shipping domestic, you saw a ton of transit time challenges, delays, misroutes, cargo getting lost. A lot of that was a result of facilities that just could no longer handle the amount of volume moving through their network. Certainly, warehouse staff played a role in a lot of those being understaffed. But you need to have, obviously, spaces big enough to be able to offload cargo throughout a day and then reload it back out on to trucks. And so LTL carriers, a lot of the major players of the market, Expeditors included, are making investments in facilities, whether that's expanding current locations, looking to add or lease new buildings to have maybe 2 hubs in a certain market. On the Expeditors side, we've opened a facility in Columbus in 2022, and then we expanded in our Atlanta hub into another facility to be able to handle the amount of volume coming through our network. So there's capital investments being made on that side as well. And then buying more trucks. It's very expensive to buy the vehicles needed to operate these networks. So there's investment in new equipment as we head into 2023. So while volumes are down, we did see a lot of investment. And as a result of that, a lot of the major LTL carriers passed along rate increases. And when we talk to our average customer, a lot of them saw 6% to 8% rate increases towards the end of 2022, which is pretty typical with the likes of FedEx and some of the larger LTL national carriers, they tend to, towards the end of Q4, introduce rate increases or GRIs going into next year. So we saw a lot of that continuing, despite volumes going down. And, again, a lot of the discussion around rate increases fell back to a lot of the investments being made in their own companies to be able to operate their business. So those are the big things happening right now. Certainly, fuel, it's not on this slide, but it plays a role. So the same fuel challenges, and/or while it certainly decreases, it will bleed over into the LTL market and should make, hopefully, shipping a little bit more affordable, especially if it continues to trend downward. Shippers should expect to see, as fuel goes down, some cost savings in their general spend. So that's my last slide. I will answer any questions in the Q&A if there are any that come up. Thank you.

Good morning, everybody. I hope everybody enjoyed their holidays. Here to give an air market update on the Northeast and also like a global -- a small global update on the current air market. So as you can see in this slide here below -- what we're really going to do this -- actually, the session is compare like where we are now versus like 2019 because in 2019, 2020 is when COVID hit. So really the goal of where we want to be, going into 2023 and future years, is like how do we compare to 2019 before COVID. 2019 was a very consistent market. It was very, I want to say, predictable, but a little bit more predictable than it was when COVID hit. We had, in 2019, stable flights. The market pricing was stable, capacity was stable. Whereas when we went into 2020, we were seeing, after COVID started, multiple flight cancellations, people not traveling anymore. And then also [ more ] like rate hikes and spikes and things like that. So as you can see here, going into 2023, and this is the third week of January data, the market demand is exceeding capacity. So the market as a whole is pretty wide open. Demand in some areas of the world, as you see yellow, is a little bit more dynamic where demand is matching capacity. And then we do have some like one small area where demand is exceeding capacity. So as -- for a global snapshot, this is kind of like where we see things, as far as capacity and demand is related currently. So if we go into the next slide, we can get into the regional update for North America. So this is all exports from North America to, as you can see, like America, South America, Europe, Middle East, Africa, India and Asia. So as far as Americas go, we do have a lot of capacity into Canada and Mexico. We have a lot of good mix of carriers that can help support these lanes. And then LatAm is pretty open. Europe, actually surprisingly, has been pretty consistent. All throughout COVID, we haven't seen too many delays or backlogs into Europe, with the exception of Amsterdam. Sometimes I don't get backlog a little bit, but we were able to manage that. And the big reason to that, too, is that we do have a lot of freighter capacity into Europe. So we have daily freighters out of JFK into Luxembourg, Liège, Frankfurt, France. And then we were able to actually, in COVID, like tender these carriers who are so reliant on passenger demand and passenger travel, solely freighter carriers that rely on freight, right? So we were able to kind of like find there and then use that to help support the rest of Europe to get your freight over into Europe timely. Middle East, Africa and India, there is some backlog, but not really. Demand does match capacity. So we're not really seeing a lot of delays there either. North Asia, still manageable, with China, Japan and Korea. Shanghai was a little bit -- we did see a little bit of backlog just because a lot of the carriers do have to take additional fuel on their flights, which is reducing the payload. So some carriers like [ Korean ] Airlines, they're -- they got to take a higher -- they got to take more fuel, which reduces the cargo payload, but they also have a lot of [ passenger ] capacity, which we're seeing in the market. People are traveling again, so they have to take a longer route around Russia because of the war in Ukraine. They can't go into the Russian air space. So because that's -- because of that, the fuel has to increase a little bit. So -- and then Southeast Asia, including Australia, demand does exceed capacity. This isn't anything new that we've seen in the market in previous years and prior to 2019. So your Taipei to Kuala Lumpur, Bangkok, Malaysia have always had backlogs. But we do a good job, and we historically have done a really good job managing these lanes through our carrier agreements that we have in place and also managing our carriers from a transit time perspective as well. So if there ever is a time where there are backlogs, we do communicate that to our customers, if you do have any shipments that need to be delivered for installation, any basic like trade shows that need to arrive or like wind-down situations. For Southeast Asia, we do really suggest moving that stuff on Express service. So -- and a lot of time [indiscernible], you want to move on Express service anyway. But Southeast Asia, importantly, I would definitely keep an eye on anything going there. We can get into the next slide. So for air market insights, compared to 2019, supply and demand is still down. Capacity is down. Demand has been down. But on the next slide, you'll see when we get there kind of an uptick in passenger capacity just because people are traveling. We did have a lot of challenges in 2019 at the airports in JFK and Boston because of staffing issues. People just didn't want to work, like it was hard to find, for the airlines, people that wanted to work, wanted to show up to work. So there were a lot of labor challenges there. We did see a lot of wait times at the airports, as far as tendering freight is concerned. In 2020, 2021, we did see some carriers, some truckers were calling us like, "Hey, like our driver has been trying to tender freight for -- they've been there for a whole day now. Like what am I supposed to do with our driver. Like he needs to eat, he needs to go to the bathroom. He needs to do things like that." So it was a real mess there for a while. What we did to manage that was we tried to get the truckers out to the airlines a day earlier, so that we weren't missing cutoffs and then our freight now missed the allocations that we had booked, and then we have to rebook everything. So we try to be more proactive in that aspect by advancing our internal cutoffs to the airlines internally, so that we could still make those deadlines. Where we stand today, though, freight is getting to, I know [ Logan ] every day, where the truckers only have to wait in line maybe an hour or 2. And this is the same for JFK as well. So it seems like as far as any labor challenges go, the airlines are staffing back up. People are looking for more work now. And then also, as far as the overall market goes, as you saw in those previous slides, everything was either green or yellow where demand was not exceeding capacity or at match capacity. So what that does is basically it helps encourage like a softer market. So with the softer market, when things aren't -- when demand isn't so high, what we can do is we can offer longer rate validities. Whereas like early 2020, it was literally like there was week-to-week rates, like rates were changing almost at every booking. Now we can get like a 6- to 12-month rate validity, depending on which region of the world we're quoting. And then also, we do see fuel starting to go down as well. So it's been a steady decline, as far as fuel is concerned, over the past year. So yes, I mean, up and up, as we go to the next slide, we can talk about the global air capacity. Yes. So as far as the global air capacity is concerned, if you look at the top of the -- top graph, so this is basically comparing December 19, 2022 through January 1, 2023. So like 2 weeks of 2022 and 2023 versus where we were in 2019. So what you really want to look here are the circles that are highlighted in yellow. As you can see, as far as capacity is concerned, we were fortunate enough to see capacity kind of like level out now 3 years later as to where we were in 2019. So things have like -- if we were to look at this graph in 2020 and 2021, there is a lot of red on this graph. So now that from North America to Europe and also vice versa and then also Asia to North America and -- on the import side and then also on the export side, things are pretty stable now, like we're almost back to where we were in 2019 during those weeks. As you can see, like intra-Europe, intra-Africa, in those regions and [ MAIR ], capacity is still down a little bit, but really like what we're concerned about right now is just from North America to Europe and vice versa and also Asia. So if you look at the graph below, the light gray line represents the passenger belly capacity. So this is what I touched on the previous slides. This is what's really interesting to us. So if you look at the graph like early in quarter 1 2020, that's when COVID happened. So as you can see, there was a really steep drop in cargo capacity because passengers weren't flying anymore. People didn't want to travel. And then it's been on a steady incline since then, which is great to see. People are traveling again. Airlines need to meet that demand, that passenger demand. And we really rely heavily on that, on the air side to move your cargo day in and day out. As you can see, and as I said before, the 2 purple lines represent the freighter capacity in the market. So freighter capacity has been pretty stable for the past 3 years. We haven't really seen a dropoff. Where we do usually see a dropoff in freighter capacity is typically at the end of every year because that is when they are preparing for Chinese New Year. So a lot of the freight from Asia to the U.S., there is a steep drop in demand. And a lot of times, what happens, too, is with these Asian carriers, the -- that demand into the U.S., the import -- on the import side, does support those flights. So basically, what they're focusing on as a freighter carrier is, how much freight do we have to send to the U.S.? If it's not there, they just cancel the flight. So everything coming back, we kind of just -- it's just to help them out with some return freight. So you will see a steep dropoff at the end of every year in freighter capacity due to Chinese New Year coming up. And that's kind of where we are right now. We've seen a lot of cancellations to China with some of the carriers, especially [ Peking ]. [ Peking ] seems to have a little bit lower capacity than Shanghai, but we do have a lot of U.S.-based carriers that are still flying to Shanghai because we do have that export demand out of here to Shanghai. So we can go to the next slide here. Yes. So what we can expect for the first and second quarter of 2023? As I mentioned before, we can expect wait times at the airlines and airport staffing to be stable on the Northeast. Some -- there are times where, in the U.S., a lot of the -- some of the airports may have like strikes or something like that. But for the most part, I'd say like there really aren't any crazy wait times anymore. So we're kind of getting away from a 24-hour tender to the airline the day before, where it's like now we can kind of shorten your transit times, get back to where we were in 2019, with tendering freight the same day as the cutoff and being confident that we'll make those deadlines. As far as COVID-19 goes, for the most part, it's still here to stay, in my opinion. We're going to see some outbreaks in China, where we can't send freight there anymore. It did happen, I believe, back in November, where flights were kind of just canceled at the last minute. That was only like 3 or 4 days though. So it's not like if there is a COVID outbreak, it's for weeks and weeks on end like it was before. It's pretty manageable now. So it doesn't really have as much of an effect on the market anymore as it did before, but it's still there, lingering, still has an effect. And then also -- as far as capacity goes, I think capacity is going to stay stable throughout the year. If anything, passenger capacity is probably still going to rise a little bit, hopefully. But with passenger demand, which gives us more options, which still encourages a softer market, we can keep your rates valid for a little bit longer. So overall, like on the outlook, things are going to be pretty stable this year, I believe, to most regions of the world. Some regions are still going to be a little bit more unpredictable, but overall, like I think things will be pretty stable. So -- and then I'll give this off to Josh to give you guys the ocean update.

Thanks so much, Mike. So one of the things that's been a recurring theme throughout this presentation regardless of mode, and it's definitely going to continue through our ocean update today, is decrease in demand. And I think everybody out there, regardless of the industry, is very cognizant of the fact that there's hesitation in the market, recession concerns, certainly, in like the tech space, heavy layoffs. And other places, we've seen some pretty substantial layoffs for sure. So a lot of everything is based around uncertainty in the market and a decrease in demand. So what we like to look at here is seeing that in the future, judging that against what capacity is available and talking a lot about what the industry has learned over the past 2 years -- 2-plus years, what most would consider just straight out pain. So one of the things, certainly, that stands out a lot to us as we look into some of the details about steamship line actions that they've taken and how they're dealing with their capacity and with their fleet, that stands out right out the gate is when we look at just scrapped units. So this is looking -- these 2 charts are talking about scrapped capacity. Essentially, what we're talking here is the life of a vessel, the size of a vessel and how often that's relinquished to scrap. It seems like a long, long ago time when we were talking back in the years of 2018 and 2019, we were also facing a recession or a potential recession at those stages, and carriers were having such weak demand, and vessels were becoming outdated much faster that there was potential where carriers were scrapping much earlier than they would historically because the scrap was more valuable to them than the vessel itself. And that's so what you see there on the left side graph that's highlighted in red, the right part of it is the age of vessels that were scrapped getting much younger in that period of weak demand of 2014 through 2019. Certainly, a big change for the industry that isn't quite as often talked about. But the point is, carriers were really depleting capacity and removing capacity and focusing in on newer, larger vessels that were also more fuel efficient and better environmentally. So all of those things kind of combine into goals of the industry. And naturally, financial goals of each carrier ties into what they're doing with their fleet. And the big thing that stands out as no surprise really, over the last couple of years is a lot less deleted units. Nobody was getting rid of any vessel last year whatsoever. Only 2 vessels were scrapped, which is crazy if you look at the comps from previous years. And naturally, the reason of that is just carriers were flushed with demand. Everybody was begging for space. There was nowhere to put anything. There were backlogs for weeks, if not months for a lot of the last 2 years. So carriers really had no need to scrap. Any available vessel was used and utilized. And I don't think that would come as much of a surprise, but you naturally see the age of the vessels that are scrapped go back up as there was less of them. The only ones that they did scrap were older vessels. And you can see that activity portrayed a lot better on that graph on the right. That's -- the bar graph piece is showing you the TEU, the 20-foot equivalent units, that were scrapped from the marketplace. So you can see we had a huge period of the teens -- 20 teens, where there was a lot of scrapping activity and all for the reasons that I just mentioned. But you also see those red dots at the age of the vessel. So those kind of piggyback off of what I was mentioning was highlighted before as they were scrapping, especially in 2016 and '17, much younger vessels and much more volume out of the market. All that being said, this is just looking at deletions. This isn't looking at the net change. Every year, we've still grown in increments of 2 to even as much as 10% in terms of throughput through the years and in terms of capacity. So the overall fleet gets larger, but this is just looking at what's been deleted out of it. You want to go ahead and change to the next slide, Julie. Now looking forward into the future, we can see the investment that carriers have been making. This is looking at vessels to be delivered. This is the order book for carriers by carrier, at least for some of the larger major players in the market. What you're looking at here is the volume that's going to be added to their fleet in each of the -- so the year would be '24 to '26 for the top section. This year in the second section and then the 2022 deliveries in the bottom section there. Red means that it's already been delivered. Gray shows that it's on order. You have the TEU count in the black number listed and the percentage change in green. But really what this graph is showing is a huge investment by carriers in much more newer vessels added to their fleet, especially the large carriers, right? The European carriers make up the largest portion of the overall global fleet. Important to note, they operate heavily, of course, on Asia to Europe just as much as they do Asia to the U.S. So this is looking at global overall, right? I mean when you're talking about ship builds, an order is usually placed about 3 to 4 years ahead of the time that it's delivered. So naturally, carriers were making heavy investments while they were, one, flushed with cash over the past couple of years, but also, two, in desperate need of more capacity. So those actions were all taken over the past few years, and they'll come to fruition in the next 2 to 5 years. So you can see 2% growth in terms of the actual percentage year-over-year increase of their fleet, 8% scheduled for this year and 13% on order for the next 3 years. MSC clearly outpacing everybody in their investments that they're making. CMA making huge investments as well. COSCO Group is the main predominant Chinese-based carrier trying to catch up and doing so. But the very bottom graph, with the dark blue, also helps provide some context by carrier, so you get a little bit of an understanding of the size of fleet of each of these operators. So you can see how the big boys are. Like I mentioned, it's predominantly the main 3 European-based carriers, which would be MSC, Maersk and CMA, followed closely by COSCO. And I should note, COSCO consolidated with China Shipping about 3 to 4 years ago. And even after that, has placed some pretty heavy investment to make themselves a real close global player for sure. So some of the other carriers that are in the mid-tier pack, Evergreen, ONE Line, Hyundai and Yang Ming, those are all Asia-based carriers that are facing a lot of pressure with what the big guys are doing as far as what's happening with the rate action that we'll talk about shortly that we've all seen over the last quarter, 1.5 quarters. So one of the things that certainly plays into what carriers do with rates is naturally going to be their cost. Everybody saw over the last 2.5 years during everything that happened throughout COVID and the crazy demand spike that ensued, rigs went through the roof. Naturally, you had 1,000% increases in rates, or say, 100% increase in rates. It's really difficult for carriers to sustain that when demand just isn't there. We just showed capacity is excessive and more capacity is coming on dramatically over the next few years. I should note, demand is not expected to grow by 8% and 13% over the next few years. So we're going to continue to see overcapacity. But carriers have given back a lot of what they've had gained in terms of profits over the last couple of years. But it's not as though just because the market skyrocketed for them that their costs stayed stagnant, right? So one of the biggest costs that carriers have to take on is fuel. So we like to show the 3 different types of fuel that are used. Most predominant nowadays is the lines in red, which is the low sulfur fuel. The IFO fuel is used only for carriers that utilize scrubbers. That's the blue line. So -- and the other one is liquid natural gas. So the 2 different indexes that you're looking here are the main fuel hubs in the world, which should be Rotterdam on the top and Singapore on the bottom, but the graphs look very similar, right? Global fuel is always going to be affected by oil supply. Naturally, January 2022, war with Ukraine began and Europe started to face a huge oil difficulties in terms of available oil, and you're going to see that affected in pretty much any industry. Naturally, we saw at the pump here in the U.S. All these things, the way that the oil is refined, bunker is like the bottom of the barrel, the last thing that gets utilized. But it's still going to follow those same types of trends. So you see that huge spike up, you see that ride through most of the '22 like we all saw. And then you see it start to slowly fall off and come back down, but still not anywhere close to what it was back in 2020, when we saw some of the lowest fuel we've ever seen. So important to keep in mind. One of the biggest questions we get over the last few months, and we're certainly going to touch on it is, what can I expect with my budgeting for my rates for 2023? Certainly, we're coming into contract negotiations in the coming few weeks here. We have a lot of factors in the market at play. And of course, the biggest one is demand falling off. But it is important to understand how carrier cost is affected because the biggest question is, have we hit the bottom? That's the question I think I get from just about everybody. And carriers definitely are going to have a huge focus on where fuel is because for the most part, folks are negotiating an all-in number with carriers these days. We don't really see as much bunker broken out. And even when we do, we're always, almost always, talking about an all-in number that makes that carrier profitable. That goes up with scale. The more vessels that we have that are that much larger, like we've seen in the last few years. And like I mentioned, these big investments in more fuel-efficient vessels have an effect for sure on what carrier -- what rate makes a carrier profitable. But at the end of the day, if fuel is going up, their cost is going up and they have to take that on, right? So we'll definitely have -- this is always a good barometer to try and keep your eye on to have a strong understanding of that where is the bottom kind of question. So things that carriers do to try to manipulate the rates and how much rate level they're able to garner for each vessel is all based on demand, for sure. And as we've seen demand taper off entirely, typically, what carriers would do is play around with their schedules in order to blank sail. They do two things. They either park a vessel at a hub in order to draw up demand at some of the origin ports or they'll blank a call. So blank sailing could mean that they are going to not call, say, Shanghai and go straight to the next port of call that they were going to make. For the past 3 years, all of that action has been entirely driven by schedule reliability, not so much by a drive for profitability. And so what these 2 graphs are showing are -- the one on the left is the past 7 years of on-time performance, if you will, and the graph on the right is when they are delayed, basically the standard deviation, when it is delayed, how much is it delayed by? And so you can see, even when carriers were doing their best, way back in 2016, they were operating at 85%, but a more standard would be at about 75% on-time performance. So carriers were already fairly unreliable in the years leading up to COVID. Throughout the early part of 2020, which is the blue line, still same sort of reliability that you would expect, no matter what. And then as demand ramped up through the late part of 2020 into 2021 and through the first half of '22, you see those graphs fall off all the way down to 30%, 35%. And I don't think that's a surprise to anybody that's lived in our industry for the last few years, naturally has started making international news when we saw so much congestion in the ports certainly on the West Coast, but also affecting us out here in the Northeast as well. And you'll see those graphs on the right with the amount of days delayed, go hand-in-hand with the performance of carriers. The highlight, of course, is we're getting back to a much more -- I wouldn't call it normal. We're still operating at 55% on-time performance. That's not where anybody wants to be. But I think most folks will see their lead times diminished. And when we talk to a lot of customers, obviously, the theme of the last part of last year has been inflated inventory. So every -- especially in retail, a lot of customers have had a lot of their inventory on hand and cash already invested in that inventory and have actually probably appreciated some of the longer transit times, so that you could have that inventory on the water for longer. The big problem that everybody faces now, as we go into '23, is, as you're facing recessionary concerns, you have to worry about trying to properly adjust your lead times within your operating system so that you're trying to remain as tight as you can because, of course, nobody wants to have excess inventory, even if it is on the water. You want to plan to have that factory ship those goods and have them in your possession in the tightest window possible, and managing that is becoming easier. But still, at 55%, there's a lot of risk there, right? And I think we talked to certain customers who are very gun-shy and have built a ballooned-out lead time, and we're starting to advocate maybe against that and trying to look at historical data with you -- with your shipments that we've been able to move for a lot of our customers and analyze what is an appropriate lead time, and resetting those within your ERP so that your purchasing teams and your buyers and planners are able to order with the right ship dates to hopefully balance your inventory levels in the most lean possible way. So that's something certainly, we've been doing a lot of studies with our customers. And I think, just looking at this graph, I expect that to continue in the same trend that it's been. Granted, the data lags by about a month or so, so we don't have December yet. It will continue going in the right direction for sure. The only thing that could impact it is as we start doing our negotiations as well as the major drivers of the marketplace, the large retailers of the world moving 0.5 million containers every year, as those negotiations with steamship plans start to take place, which usually kicks off at the TPM conference in Long Beach at the end of February, we're likely going to start to see some action from carriers on what they're going to do in terms of trying to drive demand and manufacture demand in their favor by removing capacity. So that could potentially affect schedule reliability, but certainly something you want to be talking about with your Expeditor sales reps and account managers, going through your QBRs, understanding what scheduling has looked like, and making sure you're setting your organization out for success. The biggest chart that I think we all knew and we're very frustrated with over the past few years is the insane profitability that carriers have had. Being completely frank, if you ask anybody from Expeditors over the course of the last summer if we would see rates tank back down to where they have been, we all would have told you, there's no way. Absolutely, everybody knew rates were coming down. Absolutely, everybody knew demand was going to fall off. But we would have expected more pressure from the boards of these public companies to try to drive better profitability. As you can see, looking back from 2010 all the way through 2019, they're eking out very, very small margins and even posting losses years on years, right? And we should note, this is an aggregate of carriers. So the larger carriers certainly are able to be more profitable in lean times or low rate periods because they can move, like I highlighted before, more freight per vessel. So when you see the industry operating at a negative 3.8%, you might have Hyundai taking our losses at 10% or more. I think a lot of people remember Hanjin going bankrupt. A lot of people understand that many of these carriers are reliant on the government or central banks of their underlying country, home because those countries rely on their exports, and they need that industry to continue moving, and they need that reliability and the hands in moving freight. So we do expect further consolidation. Where that goes is still TBD, but this graph rate here is going to fall way back to earth very soon, as you see Q4 numbers get posted and eventually, Q1 and Q2 2023 numbers posted. We don't expect carriers to have anywhere near the kind of profitability that they saw even in late 2020. So that's going to be just a huge blip on the radar that goes up and then comes back down for them, and likely will continue back to more or less where we were in the past. So -- one of the things when I go back to the question from a lot of customers is, where should I forecast for the next year? We've been advising a lot of our clients to focus on what you paid in 2019. Certainly, if you can trend your spend month-over-month for the year of 2019, you'll probably see similar increases and decreases and similar carrier action this year for 2023. The numbers might be slightly higher than that. But if you start at today's number as a base point, your current 40-foot rate from Shanghai to the East Coast or Shanghai to the West Coast that you're paying, look at that compared to what it was in 2019 and trend along what changes, percentage-wise, you saw there and match that this year, that's a real solid barometer for what you're looking at for spend heading into this year. And that's certainly something we've been trying to talk about with our customers. And again, if you asked us in the middle of the summer, I don't think we would have had that same outlook. We touched on it before, but certainly, one of the big, big drivers of that schedule on reliability was congestion. And we're very fortunate to be on the tail end of seeing some of those delays. Some of the ports in the Southeast still facing some pretty dramatic delays. We don't have a ton of content down in here because there hasn't been any new news. But the ILW yield on the West Coast still does not have a contract agreement in place with the Pacific Maritime Association that represents the carriers. So we are still looking at a lot of importers that have multi-DC models utilizing the East Coast more than they maybe would to avoid risk of any potential labor action on the West Coast just because of that uncertainty. One caveat I always like to mention is almost every year that a contract is up for exploration, it goes on and they operate without a contract before signing one. So it's not like there's any unnecessary or undue fear out there that something won't finally get done. But when there's a contract, there's no-strike [ clause ]. So you know your freight is going to still move. So just for the risk adverse strategies that we see a lot of importers taking, there's a lot more freight still moving to the East Coast, overall. But even in spite of that, we're seeing a lot better improvement up here in the Northeast. The terminals, pre-COVID, had made some heavy investments in scheduling systems and updating their processes. First time in, God knows how long, investments in customer service personnel that actually have worked out okay. And the biggest problem was mostly the chassis pool for the folks that use it, leading to a lot of the congestion that we saw in New York, New Jersey. But that being said, we're by no means out of the woods or doing fantastic to where we would love to be, but compared to what we've been seeing for the last 2 years, we're in a really great spot. So what this is looking at is the top line here in the middle is your dwell risk over the past 3 months, where we've had about 1 to 4 days anchor wait time, 2 to 5 days dwell within the terminal and 1 to 3 days in dwell on the rail. So the past 3 months have been pretty good. That's easily cut in half from what it was at the beginning of 2020. And then if you look at the last 7 days, it pretty much matches the same, 1 to 3 wait time at anchor, 2 to 6 days in the terminal dwell and 1 to 4 days with the rail dwell. So pretty flat. Only 1 vessel that anchored with 17 vessels in the port about to arrive, and this is as of Friday when we last pulled this data. Anybody working with Expeditors, we have instant access to this information at all times. It's extremely granular, and we're able to provide it to you to really give you a synopsis of every port around the globe. And it's looking at real hard data for every single Expeditors' container we move. So it's been invaluable to us in our conversations, and I highly recommend you reaching out to your representative to try and get an understanding of any port you're trying to work your way through. Any alternative routing questions you might have, this is a great way to have that conversation. So please do reach out. I've touched on this in previous market updates, and I do want to give a little bit of a highlighted update. This is definitely specific to our New England customers and has been huge for us so far, and we want to keep cushing this as far as it will go. For the longest time, since even pre-COVID, we've got a real issue with carriers willing to call the Port of Boston [ Conley ] Terminal directly. We've always had a strong service out of Europe with MSC, but even that had a little bit of a shaky sailings going through it on a regular basis there. We've always had some abstract services that make some inopportune port of calls and long transit times, either transiting through the Suez and transshipping in Europe or stopping to transship in Cologne before going through the Panama Canal and then coming up to Boston. Those services still exist, but they're not as strong and not as reliable. What we have seen is an introduction of 2 really awesome services that we've been pushing hard with our customers over the last 6 months or so. The first one is the MSC Santana service that we have shown here. It's a [ weekly ] service. There have been difficulties in scheduling due to weak demand, so they've added additional ports. They will do things like pick up freight in Haiphong down for Houston and out of Houston call without much pre-notice to us until we've already tendered our freight or made the booking, and it really has messed with some schedule integrity. And Colin Charleston has taken some time. Boston is the last port of call in the U.S. on this. So we do face some delays. Even though I showed on the last slide, it's getting better, still a lot of calls beforehand and a lot more time than it used to take to go in and out of each of those ports before it gets to us. But still, the biggest benefit is it's a very similar cost for the on-the-water transit to New York, and it's a substantial decrease in cost for your trucking. So like I talked about before, trying to manage transit time to inventory levels, if you're looking for the tightest transit and the most reliability, we may caution against this. But if you're looking for cost savings, which we know everybody is, this is a huge opportunity for anybody moving into New England. And if you can afford a threshold of a week or so of potential delays that aren't guaranteed but could take place, it's absolutely worthwhile in exploring, so please reach out to us, and we gladly talked to you about it at any time. It calls all these ports of origin that you see here listed, 2 of which we never really had in the past, South China and Vietnam. The other service that we've seen much more consistent on transit time, but less consistent on sailing schedules, there's only 10 vessels. It's not every week. It's still fortnightly. I believe it's supposed to go weekly very soon, is the [ ZYMZXB ] service. So definitely, advantage, in that it calls less ports. It does route through Suez instead. It goes through to, again, South China, we have an opportunity for like I mentioned before, the first time in quite a while to call Boston directly. And Ho Chi Minh, again, we haven't had any Vietnam calls direct for quite some time without a transship. So this is huge. This doesn't transship. This goes to these ports and comes through -- does call Baltimore, then New York, then us, but it's huge. And for the folks that are on from Baltimore, I know they use this service heavily as well, it's been fantastic for us, and we couldn't recommend it enough. The other thing that's a huge Expeditors advantage is, we have 10 days free time for both of these carriers on these 2 services. So we're able to, for the customers running a drop-and-pick operation, everybody knows how big of a problem the tension/ [ per diem ] has been for quite a while now. Obviously, OSRA has come in to play to hopefully deviate some of that. But carriers went to a stage where they were just saying "You got 4 days, take it to leave it." And now we're at a stage where we're doing really well with having 10 days off docks. So that's very beneficial. The last thing I want to touch on, I touched on the ILWU, but just in Boston insight. We're seeing congestion eased into New York, like I talked about, so we don't really have problems with driver availability, which is huge. I think one of the biggest things is our truckers -- our main trucker in the New England market owns their own chassis, and that's huge for us. So we're able to really offer a consistent service and not have to worry about going to the chassis pools. We do have reefer availability and yard storage at those locations, and definitely recommend reaching out to us, should you have any needs on the [ dry ] front, too. We're just doing you -- bring to the port. New York has been easy to get in and out of for us, even throughout the worst part of the pandemic, but definitely calling Boston has been a huge advantage. So that's it from the ocean side, I guess.