Truckload Roundtable: Staying Focused on a wild ride

It goes without saying that 2020 has been an unprecedented year for the truckload (TL) sector given the combination of the economic landscape and the effects of the COVID-19 pandemic.

The current market could perhaps be best viewed as uneven, with significant and sudden shifts seen in pricing and capacity at the onset of the pandemic, which saw the U.S. economy essentially grind to a halt for several weeks starting in mid-March. While we’re starting to see signs of economic improvement, both the U.S. economy and the truckload market likely have miles to go before things are firmly on the road to recovery.

Joining us this year to help truckload shippers navigate what is currently a very bumpy ride are three prominent freight transportation experts, including John Larkin, operating partner, transportation and logistics at Clarendon Capital; Ben Hartford, senior research analyst at Robert W. Baird & Co.; and Avery Vise, vice president, trucking, for FTR Transportation Intelligence.

Logistics Management (LM): How would you define the current state of the TL market?

John Larkin: The truckload market has been on a roller coaster ride over the past several years. The second half of 2017 and the first half of 2018 were terrific from a demand and rate perspective. The pro-business, pro-investment policies implemented by the Trump Administration generated a lot of momentum in the freight markets. Carriers, as is often the case in bullish freight markets, couldn’t help themselves and added more capacity while increasing driver pay to fill the unseated capacity and incremental trucks.

Just as that incremental capacity had come on full stream, the trade war with China erupted and volumes began to drop steadily starting in the second half of 2018 and through 2019. Rates—contract and spot—began dropping, spot rates more precipitously. As we moved into 2019, hope sprang eternal that the trade situation with China was stabilizing, and the year got off to a respectable start before being derailed by the COVID-19 pandemic.

Governments rushed to close large segments of the economy. Carriers serving the grocery stores and consumer products e-tailers flourished during the month of March, as consumers rushed to bolster their inventories of paper products and foodstuffs. Other carriers serving other industry verticals began to suffer almost immediately.

The suffering became more widespread in April and May as carriers struggled with reduced volumes and plummeting rates. As states began to open up their respective economies in May, some firming in the market occurred as produce loads have become available and auto plants have come back online. The jury is still out, however, with respect to when the supply/demand balance will normalize in the truckload segment.

Ben Hartford: In a word: bifurcated. Entering 2020, industry fundamentals were already showing signs of stress following the growth in supply in 2018-2019 and the weakening demand conditions over the several prior quarters. Conditions in mid-March—typically the period in which volumes are seasonally improving—rapidly diverged as a result of the COVID-19 pandemic, with the fault line dividing the shippers and carriers exposed to essential, non-discretionary goods and those exposed to non-essential products.

This bifurcation is still largely in place at the moment. Demand for freight—and, as a result, supply—at retailers with more essential goods has begun to moderate from the peak of the crisis in late first quarter, but remains solid, while trends within the more discretionary retail, consumer-oriented shippers remain very weak, but are showing some incremental signs of improvement as the second quarter progresses and efforts are made to reopen economies.

Avery Vise: Truckload is uncertain in the wake of the pandemic. April represented an all-time high for FTR’s Shippers Conditions Index and an all-time low for the Trucking Conditions Index, but April says virtually nothing about the future. Before the crisis, we had expected a mostly flat year in both volume and rates.

The one thing we can say for certain about the rest of 2020 is that it will not be flat. Volumes have been recovering well—though in fits and starts—and rates should firm modestly. Both probably will be negative year-over-year, however.

We expect considerable friction in the restart for various reasons, including varying state and local policies on social distancing; bankruptcies and business failures due to lack of revenue; extremely generous unemployment benefits, at least through July; and supply chain disruptions that probably will constrain volumes for months to come.

LM: How should shippers approach the market?

Hartford: The consequence of the pandemic has clearly eroded demand, with overall retail sales growth deteriorating in the second quarter and measures of industrial and manufacturing activity falling to cycle lows in recent months. Supply, as a result, is plentiful, and some shippers have been taking advantage of the resulting pressure to spot truckload rates.

Supply/demand conditions always govern the trucking market, and those conditions are highly cyclical, with the pendulum quickly and frequently swinging between favoring shippers and carriers. At the moment, the momentum clearly favors shippers. We expect shippers to enjoy contractual rate relief during 2020 given the timing of the cycle, but we would caution shippers to remain mindful of how volatile the underlying supply/demand balance has become in recent years—the periods of 2014 and 2017-2018 come to mind.

Vise: Shippers should not assume that market conditions will remain in their favor beyond the next couple of months. Yes, they appear to have the upper hand on pricing and capacity due to low utilization now, but too many questions remain about the strength of freight demand and the availability of drivers as the economy recovers.

We currently forecast a strong truckload market starting in the back half of 2021 and accelerating in 2022, and others expect a tight market even sooner, perhaps this year. Shippers might want to explore what they can do now to smooth out the peaks and valleys, especially given that it will be harder than usual to recognize those peaks and valleys as they’re happening. Many supply chains remain significantly disrupted, so we could see demand ebb and flow rather abruptly for a while.

Larkin: As we look forward into the latter stages of 2020, we may see a transition from the worst truckload market in recent memory—plenty of capacity available at relatively low rates—during the second quarter to the tightest market in recent history—big volume growth after a period of fleet downsizing—during the fourth quarter. Surplus capacity is currently being parked or sold off.

The smaller overall truckload fleet will he asked to handle increased freight levels associated with the return to some semblance of normalcy in the manufacturing, construction, and brick and mortar-based retail industries. The snap back in volumes will be accelerated by the gradual lifting of “shelter at home” orders, unprecedented fiscal policy stimulus, and historically low interest rates. A pro-business outcome to the Presidential and Congressional election, or the passage of a robust highway bill, could add fuel to the recovering economy’s fire.

LM: What can shippers expect in terms of service over the course of the next year?

Vise: We expect relatively low capacity utilization over the next year due to the demand destruction on one hand and the ready availability of trucks and drivers on the other. We acknowledge some risk to this forecast if driver availability proves tougher coming out of the contraction than we expect.

However, if our analysis is correct, we expect a rather fluid environment for shippers well into next year, which should translate into improved service. In general, the upcoming change in truck drivers’ hours-of-service regulations should also improve service further by introducing more flexibility into the system.

However, any major change—even a favorable one—is disruptive, so we could see a few weeks of issues this fall, assuming nothing happens to thwart a late September implementation.

Larkin: Service should be excellent this summer as volumes still sit well below capacity. Plus, highway congestion has been greatly diminished as a result of the COVID-19 lockdowns and work from home initiatives.

However, if sufficient capacity exits the industry through the second quarter and third quarter, supply and demand should tighten dramatically as highway congestion builds. So, enjoy the great service and great rates now while they’re available and lock in as much fairly priced capacity as possible for the fourth quarter of 2020 and 2021, more broadly.

Hartford: Routing guide compliance is as strong as it has been this cycle, which is to be expected given the abundance of supply at the moment. The experience of service during the second quarter of 2020 and into 2021 depends on two key factors: the degree to which shippers look for the lowest-cost option available, as well as to which demand improves in the second half of 2020 as efforts to reopen economies progress. We expect that routing guide compliance falls as the current supply/demand imbalance begins to normalize in upcoming quarters, helped in part by incremental reductions in industry supply.

LM: Is pricing where it needs to be for truckload rates from a contract and spot market perspective?

Larkin: Truckload pricing, presently, is too low for many truckload carriers to cover their costs. While rising insurance rates and rising labor and equipment costs have been temporarily offset by weak fuel prices, a loose supply/demand dynamic has driven pricing in the spot market so low that many small carriers and independent contractors are suggesting that brokers are conspiring to drive prices lower, especially the new wave digital freight matching companies.

My view is that supply and demand are simply working, as they should in a free market, to drive spot market pricing lower and lower. Contract pricing is also under pressure and has reduced many large carriers’ margins. Additionally, low truckload pricing has led to a situation where intermodal pricing is now in line with truckload pricing in many markets, thereby encouraging some shippers to move intermodal loads over the road.

All of this could change quickly if supply and demand tightens up dramatically toward the end of 2020. Spot pricing could jump under that scenario and contract pricing may begin a steady upward march again come the fourth quarter of 2020.

Hartford: Pricing on a contractual basis is not where it needs to be yet. From a spot market perspective, we’re getting closer to a bottom. On the contractual side, we expect additional rounds of bids from shippers into mid-2020 given the degree to which conditions changed in the heart of 2020’s bid season in March and April.

Carriers appear to be settling for slight (e.g. low-single-digit) declines in contractual rates during 2020 when compared to 2019’s awards. Spot conditions appear closer to a bottom. However, rates are still slightly lower on a year-over-year basis, but spot pricing has been slightly better than seasonal in recent weeks after meaningful deterioration in April.

Couple the early signs of stability in May and early June from a demand perspective with incremental reductions in future supply—measured by very weak Class 8 net orders and falling backlogs at OEMs—and we believe spot market pricing is moving closer to putting in a floor.

Vise: Pricing rarely is where it needs to be from either the shippers’ or carriers’ perspective, but it is what it is. Rates move based on capacity utilization, not on the profit or cost goals of the parties. Spot rates obviously are more volatile, and we’ve seen some wild swings since early March. Small carriers have been complaining about abusive rates, but the spot rate environment is basically back to the 2019 environment—weak but not catastrophic.

Contract rates are more complicated because they often involve broader commitments on volume and capacity, but, fundamentally, they follow capacity utilization, albeit not as quickly as spot. Until the pandemic, we had seen a 2020 that continued a rough balance between supply and demand, and that translated into a rather flat rate environment. We now expect both spot and contract to be negative, but uncertainty should keep a floor on contract rate declines.

LM: How do you view the current state of driver availability? Is there still a major driver shortage?

Hartford: The trucking industry made strides in narrowing the gap in pay for drivers relative to competing jobs during 2018 and into 2019, and drivers are still underpaid relative to those competing jobs—particularly in the context of their essential role in ensuring continuity in our nation’s supply chain, as they demonstrated during the pandemic.

The industry also continues to face the longer-term demographic challenges that contribute to the scarcity of qualified drivers in the industry. But we also recognize that concerns about the “driver shortage” become most pronounced during periods of strengthening economic and freight demand.

Regulations and demographics will continue to constrain driver availability, but technology can also provide some relief—as does the current state of the freight cycle, which has been the dominant reason in improving driver availability during 2020.

Vise: The question of whether a true driver shortage ever exists is a bit of a third rail in trucking—to mix metaphors. However, if we define a shortage as a period when carriers struggle to keep seats filled and can’t cover every load tendered, then we certainly are not in that situation now and have not been since late 2018.

For-hire trucking reduced payrolls in April by nearly 6%, and most of those jobs surely were drivers. However, the contraction affected the entire economy simultaneously, so most of those drivers haven’t gone anywhere. Often, trucking begins to feel reduced demand before the broader economy recognizes it, and drivers move on to better-paying jobs.

This time, most displaced drivers are frozen in place until needed—or until lucrative unemployment benefits expire at the end of July. We don’t anticipate the availability of drivers or trucks to be a stress in 2020.

Larkin: The driver recruiting and retention challenge is always, and remains, a point of intense focus for all truckload carriers. Right at the moment, driver availability is good due to the reduced freight volumes, the driver pay increases implemented in 2018, and the lack of alternative jobs available to drivers.

However, we are an economic recovery away from the driver issue becoming a red-hot topic again. A highway bill would likely further exacerbate the situation, as some truck drivers seemingly always migrate into the construction sector when construction jobs are plentiful. So, as early as the fourth quarter of 2020, we could be seeing the driver shortage issue rearing its ugly head once again.

LM: How will the truckload market look five years from now?

Vise: Truckload carriers face a couple of powerful forces that run counter to one another. Optimizing technology and digital freight matching will allow carriers and brokers to manage third parties far more efficiently than in the past. These tools feel like old news already, but their adoption remains low.

More truckload carriers will find it increasingly attractive to focus on planning and sales and leave the operation of power units to small entities, which they will manage through logistics units. The lines between non-asset/asset-light carriers and brokers will continue to blur. However, the other powerful force is tort liability and the need to exert even more control over operations than is occurring today.

This, too, will involve technology—advanced driver assistance systems, for example. A focus on control will lead some truckload carriers in the opposite direction. The truckload market will still be evolving in five years and probably always will.

Larkin: On the one hand, I am inclined to say that we will have a network of autonomous, electrically powered double- and triple-combination vehicles operating in platoons along long haul lanes, from coast to coast, with autonomous city tractors moving individual semi-trailers over the first- and last-mile.

Digital freight matching companies will orchestrate all the capacity-demand matching with amazing speed and efficiency as a result of their effective harnessing of predictive analytics, machine learning, and artificial intelligence. Blockchain-based systems will handle all industry data and immutably ensure that all contracts are properly executed.

On the other hand, it’s entirely possible that the aforementioned list of new bells and whistles will still be under development five years out and that the industry will not look dramatically different than it does today. I think reality will be closer to the latter outcome rather than the former.

Hartford: Economic recessions tend to force consolidation in the trucking market. In fact, we saw some evidence of larger, well-capitalized carriers benefiting from a “flight to quality” during both the 2008-09 and 2001 U.S. recessions. We expect the current downturn to create similar dynamics in 2020, favoring carriers that have strong balance sheets, which has likely contributed to improved driver availability at certain larger carriers in recent months.

We expect the industry to remain very fragmented over the next five years. We do, however, also believe that applications of technology in the truckload market will become increasingly pervasive, with a focus on reducing points of friction in the supply chain. We believe carriers and brokers that continue to invest in IT capabilities that add value to shippers—through greater visibility and lower costs—and to drivers—through productivity improvements—are best positioned to grow above market levels over the next five years to 10 years.

LM: Given current events and a slumping economy, what are some words of advice you can offer to truckload shippers?

Larkin: Line up as much top quality capacity at attractive contract rates as possible, as supply and demand will inevitably tighten as the economy recovers and COVID-19 retreats. Diversify your pool of capacity providers, and never become too dependent on one carrier, one broker or one mode.

Engage in scenario planning to think through, in advance, your best reaction to alternative future outcomes (e.g., surplus capacity, weakened demand, continuation of the status quo, etc.). Continuously evaluate your supply chain to make sure that modal split, carrier selection, sourcing strategies, distribution center locations and fulfillment center locations are as close to optimized as possible given your current business volumes and anticipated
volumes over the coming months and years.

Hartford: The conditions during 2020 underscore a couple truths to the truckload industry. First, this sector is nothing if not cyclical, with rapid changes to supply/demand conditions. While few, if any, forecasted the onset of the pandemic, we note that the 2020 trucking cycle does bear some resemblance to other periods in which the U.S. economy entered recession—which is useful when planning for capacity needs in upcoming years. Use those prior cycles (i.e. 2001, 2008-2009) as instruction, keeping in mind that conditions in this industry rarely last for long. So, choose your partners wisely.

Second, as the industry approaches the 40th anniversary of its deregulation, recognize the long-term arc to its evolution, particularly as it relates to the adoption of technology. Investments in IT have ramped over the past decade, with the payoffs from those investments only beginning to scratch the surface in terms of potential.

Balance the near-term opportunity for lower rates with the understanding of the needs by quality carriers and brokers to continue to innovate, for the long-term betterment of the industry.

Vise: Freight markets might not stabilize until 2021, so now is not the time adopt any fundamental changes in how you approach the market unless it is to move toward a longer-term posture with core carriers.

Overreacting to near-term indicators and perceived trends could put shippers in the position of continually missing out on whatever benefits they can reap from the current environment, much like trading equities too frequently during stock market volatility.

Consistency limits risks and helps earn carriers’ trust. Most shippers fall somewhere between trying to be the shipper of choice and bidding out freight every time they perceive a shift in their favor. If you can leverage current conditions to achieve multi-year stability, great. Otherwise, stay where you are at least for the rest of this year and reassess.