The U.S. economy, whipsawed by high inflation and persistent supply chain disruptions yet still with unemployment in the low single digits, is signaling a shift for truckers. After two full years of strong demand and tight capacity driving higher freight rates, some leading indicators are foreshadowing softer demand and the prospect of muted freight volumes that could swing the pricing pendulum back in favor of shippers—and potentially send some truckers reeling into bankruptcy.
Are the ominous dark clouds of a freight recession just over the horizon, or are we seeing only a passing thunderstorm as the market adjusts and finds its way back to a new form of normal? For the nation’s trucking services, that depends on which part of the freight sandbox you’re playing in.
“We are clearly seeing a [truckload] market normalization in process,” says Avery Vise, vice president of trucking at freight consultancy FTR Transportation Intelligence. “So far it is pretty stable. Earlier this year, we started to see contract players finally get enough capacity to bring down tender rejections and handle a lot more of the volume [under contract rates]. And that’s led to spot rates coming down.”
Vise thinks the market still has “an elevated level of spot-market volume relative to the norm.” He sees that as a shift with some legs, citing the maturation of digital brokerage technology and the proliferation of digital freight platforms that can quickly and accurately find and book available capacity—and keep truckers rolling.
“That allows intermediaries to have access to and manage capacity like an asset-based carrier, so they can compete for contract freight,” he says. “I’m not sure the terms ‘spot’ and ‘contract’ have the same meaning anymore,” he adds.
And while he believes “[truckload] spot rates have a lot more softening to do,” he says he doesn’t see “a lot of [early] relief for shippers on contracts. Not a whole lot of carriers are receptive to [price reductions] at this point, especially since their expenses are through the roof. Freight continues to be very strong even with inflation.”
Nevertheless, Vise sees spot rates through the latter part of this year and into next year experiencing “low double-digit declines.” He expects contract rates to eventually follow next year but “not really what I would call precipitous,” estimating low single-digit declines with 2023 contract bids.
RISING COSTS PUT PRESSURE ON RATES
Yet even as the market appears to soften, some truckload carriers are still rejecting hundreds of loads a week. A case in point is North American truckload operator CFI. “There are pockets out there that are a bit looser than they have been in the past, but overall, we’re not strained for load count,” says Greg Orr, executive vice president of U.S. truckload for TFI and president of CFI, which has 93% of its business under contract. “We are being told by our customers they expect to have a normal third- and fourth-quarter push. No one is telling us anything that says red flags are being thrown up.”
He notes that for CFI, with its heavy emphasis on contract shippers, rates are holding steady, and the carrier is securing increases. “From my perspective, shippers are willing to take some type of modest increase to lock in that committed capacity instead of playing the spot market,” he says.
Orr adds that shippers well recognize that operating costs for truck lines continue to escalate, with little relief in sight. “Not only diesel fuel, but think of all the other petroleum products used in a truck, and costs for maintenance, servicing, tires, and other parts,” he says, noting that some vendors have increased prices three and four times over the past 12 months. Costs for new trucks and trailers continue to climb incrementally year over year.
And the cost inflation doesn’t stop there. “Then there is investing in our employees,” Orr adds. “We increased driver pay to ensure we compete effectively for qualified drivers. And we just rolled out a 10-plus percent increase for our independent contractor program to secure supplemental capacity.”
AS COSTS RISE, A FOCUS ON SERVICE
For the less-than-truckload (LTL) side of the business, the story is similar in some respects, particularly with respect to rising operating costs. “There is nothing in our business that is not inflationary,” noted Fritz Holzgrefe, president and chief executive officer of LTL carrier Saia. Yet the demand picture remains relatively strong in LTL. Some 65% to 70% of Saia’s business is industrial-oriented versus retail. In the second quarter, shipments at Saia were up 1.8%, while tonnage per workday was up 2.2%.
Pricing remains firm as well. Holzgrefe says that contract renewals in the second quarter came with an average 11% increase. “Customers … see many of the same things we do; they respect and understand the inflationary pressures,” he notes. Asking for a rate increase is never easy, but Saia’s focus on quality and service helps temper the discussion, Holzgrefe says. “We recognize that for the customer, it’s hard to absorb a rate increase,” he notes, “but let’s talk about what your claims ratio is and your on-time service. That’s where we excel, and it makes the pricing conversation not quite as challenging.”
He added that Saia continues to invest to build out its network. The carrier already has opened five new terminals this year, added two more in August, and will open another five to seven over the balance of the year.
Looking out at the remainder of the year, Holzgrefe says the focus for Saia is to “continue to take care of the customer and execute our business plan. As we grow, regardless of the economic environment, the customer has to have a great experience.” He believes that as supply chains continue to recover and overcome disruption, “the middle mile will be pretty critical and LTL benefits from that. We’re in a good place.”
TURNING CHALLENGES INTO OPPORTUNITY
It’s a similar story at LTL competitor Old Dominion Freight Line (ODFL). “We still characterize demand as strong,” says Adam Satterfield, ODFL’s chief financial officer. And while ODFL’s July’s tonnage was down slightly compared with last year, it likely represented a swing back to traditional seasonal trends where freight volumes tend to soften in July and August before picking up again in September. “[July] was more likely a reflection of what’s going on with the economy and demand for our customers’ products,” Satterfield said. “Feedback we are hearing is all positive with respect to their needs from us.”
As for the rate environment, “it continues to hold steady [and] has been favorable for some time in LTL,” he noted. That’s been crucial in a market where cost inflation is chipping away at margins. “We have to make our best efforts to operate efficiently and keep cost inflation per shipment as low as we can to make sure pricing is somewhat in line with the market,” Satterfield explained.
That also supports ODFL’s aggressive strategy of “expanding capacity in a meaningful way that resonates with our customers,” he said. Over the past 10 years, ODFL has invested some $2 billion to grow its service center network, increasing door capacity just over 50% during that timeframe. Its capex (capital expenditure) budget for 2022 is running at about $835 million, with $300 million allocated for real estate (service centers) and $485 million for equipment, including rolling stock.
Currently, ODFL’s network of 255 service centers has about 15% to 20% excess capacity, Satterfield notes. “Our target is 25%, so we want to continue adding capacity consistently, regardless of what the macro environment looks like.”
Going forward, Satterfield points to the eventual normalization of supply chains—and the opportunities that presents for LTL carriers. “Practically every customer I speak with talks about supply chain challenges they continue to face,” he notes. Parts and components needed to finish products on backlog. Inventories in the wrong place at the wrong time that need to be rebalanced. “That helps us in a way,” he says, noting that even as the economy slows, those challenges become opportunity for LTL carriers. “That’s why more importance is placed on service quality, and there is no other carrier in LTL that offers the level of service we do.”
THE TECH EDGE
Other trucking markets are dealing with different realities. One example is the flatbed market. “Post pandemic, we saw an absolute deluge of freight. It really elevated things for flatbed and was a very robust environment,” recalled Evan Pohaski, founder and CEO of JLE, which operates a 380-truck flatbed fleet in North America.
Flatbed is particularly sensitive to changes in the housing and construction markets. Pohaski saw things begin to shift as spring turned to summer this year. “We’ve got this really squirrely situation where there is the war in Ukraine, interest rates going up, and consumers making the transition from buying goods for the home back into services. That’s taking the wind out of the sails for flatbed,” he says, noting in particular that as interest rates rise, that puts a damper on freight volumes for housing and industrial shippers. All of which is driving a retrenchment in demand.
Yet based on conversations with customers, Pohaski says he’s confident that as the economy moves into the back half of the year, “there will be a floor on rate compression because the structural costs of the business have gone up for everyone.” And while 90% of his business is longer-term contract customers versus “you call/we haul” spot moves, it’s a much faster-paced market where agility and flexibility coupled with accurate, timely capacity and pricing information is key. That’s an area where Pohaski believes JLE has an edge.
Today’s shippers are armed with better technologies, and carriers have to match that in the systems and platforms they use to rate, route, and run the business. It’s where JLE has heavily invested and built its own proprietary tools, Pohaski says. As a result, “we are more confident in engaging with a more fluid and dynamic rating structure. We have contract customers changing rates sometimes on a daily basis. [Our systems] represent the fair market value in any given lane at any given time. That provides our drivers (80% of whom are independent contractors) with that level of timeliness and transparency they need. That’s one of our biggest value propositions.”
DISPATCHES FROM THE DRAY AREA
Another subset of the trucking market is container drayage. Trac Intermodal is the nation’s largest provider of marine chassis, deploying nearly 200,000 chassis at over 600 locations that provide drayage of marine containers to and from ports to intermodal yards, warehouses, and other locations. Trac does not operate the chassis itself; it provides procurement, fleet management, maintenance and servicing, and leasing of chassis to end-users.
Trac will set up a private chassis pool in a dedicated commercial arrangement with an ocean carrier or beneficial cargo owner. It also operates other pools where an independent trucker can pick up a chassis and use it for as little as a day or a week.
The key for chassis pool operators is getting as many “turns” per week or month as possible. A chassis dwelling on the street for a week or more means it can’t be returned and reissued. Congestion at the ports, delays at intermodal railyards, and shippers keeping boxes on chassis at warehouses too long are the biggest challenges chassis fleet operators face in keeping the chassis supply chain flowing smoothly, notes Val Noel, Trac’s executive vice president and chief operating officer.
“We have seen an uptick in both long-term terminal and street dwell,” he says. Chassis are sitting for an extended time out on the street, saddled with containers left unloaded due to labor and capacity issues at warehouses. He adds that shippers who have embraced “just in case” stocking practices have created inventory surpluses, which also impacts chassis return and reuse. “You don’t want to have product due in the store in November sitting in a container in June,” he notes.
One solution has been working with ports to establish “off terminal” distribution yards, which gets chassis out of ports and makes them available to more users in a central place. Trac established three such yards with the Port of New York & New Jersey. That allowed the chassis “to be used exclusively for pickup and delivery of cargo, not trapped in the marine terminal,” while supporting “better asset availability and utilization,” said Noel. That interoperability and flexibility to move any type of container “checked a lot of boxes people in our industry are clamoring for around change,” he noted.
If anything, the second half of the year will be a period that demands patience and perseverance as a shifting economy, inflation, rising interest rates, and other factors impact trucking operators. The biggest challenge? “If you are a small trucker, it’s staying alive,” says Jason Seidl, managing director at investment firm Cowen & Co. “If you have made it this far, you are battered and bruised. If you are a large trucker, the challenges are what they have always been: How do you ultimately maximize profit and grow?”
Gartner, Inc.