Truckload Market Update: In search of seasonality

The U.S. full truckload (TL) market, estimated to produce between $300 billion and $356 billion in annual freight revenue, is looking forward to a more normal supply-demand year in 2020.

Actually, what top TL executives say they’re looking for is a repeat of 2018 when as Donald Broughton, managing partner of freight transportation analyst firm Broughton Capital, says “was so good and rates so strong that is was virtually impossible to fail.”

That robust year did not carry over, however. According to the Cass Truckload Linehaul Index that measures per-mile pricing for truckload carriers, trucking rates stalled out in July, falling 0.1% from the prior year after a 27-month run of annual increases.

In the meantime, prices on trucking’s spot market, where some shippers try to seek out bargains in eschewing long-term contract rates, plummeted this year, falling as much as 20%. That fact has caused twice as many bankruptcies in the first half of this year than all of last year, taking slightly more than 2,000 trucks out of the TL market.

This month, Logistics Management explores the three factors that are affecting capacity and rates heading into 2020: the abnormal seasonal freight demand this year; the effect bankruptcies are having on overall capacity; and upcoming regulations
involving driver hours of service (HOS) and tougher drug testing standards that could put a dent into TL capacity next year.

Seasonality uncertainty

Normally, truckload demand follows a fairly predictable pattern throughout the year. Nearly every TL carrier loses money in January, hopes to break even in February, and then earns whatever profit there might be in the first quarter during March.

Seasonality then builds throughout the year as farm demand grows, automakers prep for the upcoming model year, and housing starts heat up with the weather. Then comes the back-to-school retail demand leading up to the Christmas season.

However, that’s not happening this year. “If you look at 2019, it has been a search for seasonality,” says Mark Rourke, CEO of Schneider, the nation’s 2nd-largest TL carrier. “I’m somewhat encouraged for seasonality for the peak season, but we’re not shouting from the rooftop.”

Jim Gattoni, president and CEO of Landstar, agrees, adding that TL volumes this year have been affected by what he calls “the softening of U.S. industrial production” and increased truck capacity in the industry following the record 2018 for many carriers. “It’s difficult to forecast long-term pricing conditions in the truckload market, and particularly in the spot market where Landstar typically operates.”

However, Gattoni adds that Landstar’s recent results reflect that more normal seasonal pricing patterns began in June. “Although demand for freight services has slowed and capacity has become more readily available in 2019 as compared to 2018, we believe, overall, that we continue to be in a relatively healthy freight environment.”

What’s strange in this healthy environment is the extraordinary number of trucking bankruptcies. Let’s look at some factors explaining these closures.

Why the bankruptcies?

Trucking bankruptcies typically occur due to several factors: a sudden drop in freight demand, a slowing economy, a spike in diesel fuel prices, or some other external economic shock. But few of those factors alone fully explain why approximately 640 carriers went out of business in the first six months of 2019, according to Broughton’s calculations.

Rather, the common thread among those bankrupt or closed carriers is that they were too heavily concentrated in the spot—or non-contract—portion of the TL business. So what happened?

“Last year, pricing power was extraordinarily strong for TL carriers, and most chose to do one of three things with that revenue—pay higher wages to attract and retain drivers, buy new fuel-efficient equipment, or invest in IT to allow better equipment utilization,” explains Broughton.

This year, as spot rates plummeted around 20% or more, those carriers that did not invest those profits wisely are paying the price. “If you increased driver pay, but didn’t invest in other aspects of your operation, your costs are still high and now spot rates have not followed,” Broughton adds. “That becomes a problem when your competitors invested wisely and you didn’t.”

Broughton says that the vast majority of large, publicly held TL carriers—Schneider, Werner, J.B. Hunt and Swift-Knight—are doing fine. It’s the smaller, mostly privately held TL carriers that dominate the spot market that are paying the price. “If they paid down debt, invested in more fuel-efficient trucks and more IT, they’re doing fine,” he says. “If they didn’t and mostly played in the spot market, they have some real issues.”

Derek Leathers, president and CEO of Werner, the nation’s 6th-largest TL carrier, says that TL capacity is starting to “right-size itself” following the 2018 boom. “What happened in 2018 was historic,” he says. “Rates went up at very rapid levels, and people thought that was normal and didn’t adjust their costs accordingly. After spot rates fell 20%, they woke up and had losses.”

Still, leading TL executives say that the overall effect on truckload capacity has been minimal. The largest TL carrier to falter this year was Eastern Freightways, which was absorbed this spring by Estes Express, America’s largest privately owned freight transportation carrier.

“I think it’s more psychological at this point,” Schneider’s Rourke said when asked about the bankruptcies’ effect on capacity. “It gives shippers some pause. But those carriers weren’t large enough to have a material impact.”

Regulation impacts

At press time, the Federal Motor Carrier Safety Administration was mulling industry input from thousands of comments regarding a modernization of its HOS regulations.

The HOS tweaks are expected to have minimal impact on capacity; however, TL executives say they’re more concerned with the exemptions sought by certain niche carriers, such as agricultural haulers, from certain HOS requirements. “I’m not a fan of carving out a bunch of exemptions,” says Schneider’s Rourke. “That makes it difficult for enforcement.”

“The thing that concerns us is the number of exemptions bantered about for HOS,” adds Leathers. “No one industry is more critical than another. If we have a set or rules then they should be applied evenly.”

One regulation that could affect capacity is a new proposal that would require hair follicle testing of drivers for illicit drugs that would replace urine tests. One new study showed drivers might be five times to eight times more likely to be caught via hair follicle testing, which could greatly affect capacity.

The U.S. Bureau of Labor Statistics estimates that there are 3.3 million employed truck drivers, while the Owner Operator Independent Driver Association estimates that there are 350,000 owner operators. A recent Trucking Alliance drug test survey revealed that 8.5% of truck drivers failed a hair test for drug use.

“It’s absolutely more effective in finding the habitual user,” adds Rourke. “They’re going to be more restrictive than people realize—and for the right reasons.”

The rate question

So, where are TL rates heading once we take all of this into consideration? If you’re a shipper in the spot market, you’re enjoying double-digit drops from last year’s record highs. But keep in mind that the vast majority of TL business is under contract.

“There’s still a gap between contract and spot rates, but that gap has closed materially,” says Rourke. “We see a hardening of carrier spot rates, and that’s appropriate and necessary.”

As for contract rates, comparisons from last year’s renewals are difficult, Rourke says, because 2018 was such a strong year. As far as 2020, Rourke says flatly, “I would say that rates would be flat.”

Gattoni of Landstar adds that shippers and carriers should understand that 2019 has seen rates normalize in the marketplace following a “very unusual rate environment.” For example, he says that rates for much of 2018 didn’t follow typical seasonal pricing patterns, whereas rates in 2019 have been more in line with historical trends.

So, what is bottom line for truckload shippers? If you’re a shipper of choice, expect about the same rates in 2020 that you had in 2019. If you have extraordinary demands and freight markets remain tight, you can expect mid-single-digit price increases—depending on your negotiating prowess.