As 2022 came to a close, persistent inflation and a drumbeat of Federal Reserve interest-rate increases conspired with flat manufacturing, cautious consumers, and slack freight demand to cast the dark clouds of recession over trucking operators.
“The market right now clearly has too much capacity, and that needs to come out,” says Jason Seidl, who covers trucking as managing director at investment firm Cowen & Co. “We had a lot of [trucking fleets] added to the ranks during Covid, and now some of those are dropping out. We’re keeping an eye on the DOT (U.S. Department of Transportation) numbers [of lapsed operating authorities] to see how much and how fast the market is shedding excess capacity,” he adds.
That excess capacity has sent truckload spot rates through the floor. To illustrate the point, Cowen’s weekly freight indices at the end of January showed dry-van truckload spot rates down 46.5% from a year ago. It was a brighter picture for contract rates, which were down only 1.2% from a year ago. “A lot of shippers have kept their [truckload] contract carriers as healthy as they could,” he notes. Seidl doesn’t expect a rebound in truckload volumes until the second half of 2023.
A RAY OF LIGHT
Yet going into the spring of 2023, while inflation remains problematic and there continues to be too much capacity chasing too little freight, some carriers see a ray of light breaking through the clouds.
“Volumes and tonnages are generally holding steady, depending on the market and the commodity,” observes Frank Granieri, chief operating officer of supply chain solutions for less-than-truckload (LTL) carrier A. Duie Pyle. “Customers are still ordering but ordering less. They are saying if a recession is imminent, it won’t be deep or last long. ‘Short and shallow’ seems to be the most popular phrase.”
While other modes and regions have softened after back-to-back years of extremely strong results, Granieri says that Pyle “has been able to experience slight shipment growth” in its primary area of operations—regional hauling in the U.S. Northeast—aided by recent expansions into Virginia and West Virginia. He says Pyle in 2023 will continue to invest in its network and add more direct ZIP codes, which he “expects to drive similar [growth] results.”
A tepid freight market didn’t stop LTL industry leader Old Dominion Freight Line (ODFL) from charging into 2023 on the strength of a record quarter for revenue and profit. Fourth-quarter 2022 revenue per hundredweight was up 16.7%, more than offsetting a 9.1% decline in volume, compared to 2021’s fourth quarter. Its operating ratio (operating expenses as a percentage of revenue) improved 240 basis points to 71.2, the best mark in the industry.
The company also announced that current president and CEO Greg Gantt is retiring in June. Succeeding Gantt is Marty Freeman, a 30-year company veteran, who moves into the top spot from his previous role as executive vice president and chief operating officer.
Gantt credited ODFL’s employees for its record-breaking results in 2022, citing progress with the company’s long-term strategic plan, which focuses on ODFL’s “ability to provide superior service at a fair price, while also ensuring … sufficient capacity to support our anticipated growth.” ODFL expects to fuel that growth with some $800 million in capital expenditures in 2023, with $300 million going to real estate and service center expansion, $400 million to rolling stock, and $100 million to IT and other assets.
Going into March and the second quarter, “we believe the freight cycle will start turning,” said Gantt in ODFL’s February earnings call, noting as well that freight volumes often are a leading macroeconomic indicator. “I think that we’re in a good spot, with our headcount, with our fleet, and certainly with the service center network to be able to let volume start flowing again.”
FULL STEAM AHEAD ON EXPANSION
LTL carrier Pitt Ohio is another major market player that’s not letting a freight downturn derail its plans for expansion and is, instead, positioning itself for a market rebound later this year. Based in Pittsburgh, the mid-Atlantic regional carrier in January expanded its next-day service for New York, adding 32 next-day lanes.
“We are full steam ahead on [investments in] equipment, technology, people, and our footprint,” said Jim Fields, Pitt Ohio’s chief operating officer. And while shipment count early in the year has been off slightly, Fields expects gradual improvement. “Many customers have come to rely on us for a certain level of quality service and reliable solutions to their needs. That’s where we excel,” he notes. That’s helping in rate negotiations with customers “who still want quality service and consistent capacity and are willing to pay for it,” he adds.
At Pitt Ohio’s sister company, Dohrn Transfer, President and COO Robert Howard says he hears similar sentiments in the market. “The last half of 2022 we saw demand decline,” he notes. Going into the new year, some industries, such as agriculture, fared better than others, such as retail, yet “most customers are pretty optimistic and expect a moderate pickup starting in the second quarter,” Howard says.
“Rates are pretty firm, and while some are asking for decreases, most are holding the line,” he adds. “We’re pretty transparent with customers on our costs. We won’t be the low-price carrier, but we will bring a value to them that is clear.” His biggest challenge going into 2023: recruiting and retaining qualified Class A drivers and mechanics. Dohrn has training schools that provide opportunities for dockworkers to graduate to drivers as well as to become mechanics, he notes.
Mario Harik, chief executive officer at LTL carrier XPO, also is seeing a mixed response from customers. “Some are shipping more with us; others are shipping less because they see softer demand for their products,” he says.
Moreover, there is a larger, post-pandemic trend among companies to rethink and recost their entire supply chains, which “is a major tailwind for XPO and the LTL industry as a whole,” Harik adds. Such re-engineering by both brick-and-mortar retailers and e-commerce sellers is intended to cut leadtimes and speed orders.
That’s creating LTL opportunity, Harik says, “because smaller shipments of goods need to be moved more frequently.” He notes as well that industrial customers are talking more about nearshoring, which plays to XPO’s North America cross-border capabilities. “Industrial customers represent about two-thirds of our base, so manufacturing is a demand driver for us,” he explains.
WAITING FOR THE SPRING PUSH
Over the past two months, Greg Orr, president of national truckload carrier CFI, has met with dozens of customers. The takeaway from those meetings: “Everyone is cautiously optimistic. We’re at the wait-and-see stage now, but the spring push will tell the story,” Orr says.
The first of the year saw volumes soften, impacted by the Chinese Lunar New Year and shippers recovering and resetting from the holiday push. And while Orr agrees that soft freight demand and excess market capacity have put shippers in the driver’s seat with rate negotiations, CFI’s longer-term customers (over 90% of CFI’s freight is contract) are coming to the table with concerns certainly about rates, but even more about securing consistent, reliable capacity.
“Customers recognize that we as an industry [are seeing] dramatically increased costs,” Orr says. “In most cases, they’re not pushing aggressively for [rate] decreases but want to [maintain] the status quo” on their total cost of service. “Each customer is different. It’s really an exercise in working with the customer and finding that sweet spot, whether it’s accessorials, a fuel program, or a negotiated base rate depending on where and how much capacity they need, how their cost structure is laid out, and the biggest pain point they’re facing.”
SIGNS OF LIFE
Yet another major freight player—David Jackson, president and CEO of Knight-Swift, which is one of the nation’s largest truckload operators and offers LTL services as well—sees hopeful signs where freight is concerned. Jackson struck an optimistic note in the company’s January earnings call, noting that “the freight market continues to show signs of life … as we go through January.”
One unique factor that impacted last year’s fourth quarter was that “so much of [shippers’] holiday inventory had already arrived, some of it 10 or 11 months before. It kind of sat around,” he said. So by the time October—traditionally the big-surge month for holiday freight—rolled around, “fourth-quarter freight had already arrived and was already in position,” which muted fourth-quarter volumes to some extent.
Jackson noted that the general consensus from his customers about inventory levels is that “by the time they get through the spring, things [will be] caught up.” Once that inventory overhang is burned off, he predicted, “we’ll be back to normal goods flow … without the expectation that there [will be] incremental supply” added to the market. “In fact, we believe that supply is leaving, has been leaving, and will continue to leave over the next two quarters,” he said, adding that he thinks “volumes [will] really begin to pick up in … June and July.”
LOOKING FOR A PATTERN
The current market has brought to the forefront an old truism that, regardless of the economic conditions, the amount of freight in the market, and carriers’ capacity to handle it, one overriding goal dictates buyer behavior. “Shippers always want the cheapest price,” opines Satish Jindel, president of ShipMatrix, which specializes in trucking market research and data analytics.
“What [shippers] need to be reminded of by the industry is that just because a recession is coming, that doesn’t mean the carrier has lower costs to operate,” he explains. “In many cases, and especially in this cycle, they’re actually higher. Costs for most carriers are up north of 15%,” he says, “so for a carrier to offer a lower price than it did a few months ago would mean losing money. And then some carriers go out of business. That compounds the capacity problem later, leading to higher rates, which is the opposite of what shippers are trying to achieve.”
As for when the market might rebound, Jindel says that’s a tough call given the lack of historical precedent to go by. “What economists fail to realize is that the pandemic was an event of a kind that had never been part of our economy before. There was no pattern or previous experience to guide us on how to respond or [to predict] how we’d come out of it.”
Nevertheless, Jindel believes that the way forward must include better understanding among shippers of market realities, the fungible nature of capacity, and their role in changing wasteful habits so capacity is used more efficiently.
DRIVER SHORTAGE ... OR NOT?
Over several decades of following the trucking industry, Avery Vise, vice president–trucking for market research firm FTR Transportation Intelligence, has seen any number of boom-and-bust cycles. This cycle, he says, has characteristics consistent with past market swings—with one difference: Carrier cost increases this cycle have been among the most dramatic he’s ever seen.
And while carriers imposed sharp rate increases over the past two years, inflation and rising operating costs across the board have eaten into almost all of that. Then freight demand last year fell through the floor.
“Our truckload rate forecast has continued to get incrementally weaker as we go along. We keep expecting to see a bottom on the spot market, but it never quite seems to get there,” he observes.
Overall, for 2023, FTR is projecting a total blended truckload rate decline of around 11%, with contract rates declining by 8%, and spot rates down some 18%, from 2022 levels.
What may change that forecast is carriers exiting the market and how that affects the supply of drivers. Vise explained that during the pandemic in 2021, company drivers working for fleets left and went to smaller carriers or into the owner-operator segment, where they could make more money in a high-demand market. That was evident in the surge in new DOT operating authorities granted during that time.
Then in early 2022 the market shifted, demand plummeted, and spot rates cratered. Owner-operators parked their trucks and went back to work as employees for larger fleets. Vise argues that there has been neither a shortage nor a glut of drivers, just the overall pool reallocating itself to adjust with the market cycle.
“So over the course of 2022, that driver dynamic reversed, and larger carriers mostly absorbed those drivers,” he says. “The key really is what happens over the next quarter or two” and how driver supply affects the speed and depth of a rebound.
Otherwise, Vise says, the carrier game plan is one of perseverance, keeping the trucks rolling with whatever freight they can land, and surviving until 2024.
