2022 Truckload Roundtable: A slow return to stability

A year ago, at this time, the truckload (TL) market was booming. And, for good reason, due to various factors, including the pandemic stimulus driving increased consumer spending, elevated rates, and hyper-tight capacity.

Now, a year letter, demand is ebbing down in tandem with rates coming off of record-high levels. While that may be good for shippers, there’s still plenty for them to monitor in the form of record-high inflation and diesel prices, and, of course, the interminable need for truck drivers. Indeed, some of the previous challenges have lessened, but the current state of the TL market is far from fluid in terms of market equilibrium.

Joining us this year to help truckload shippers put the many moving parts of the market into perspective are three of the top freight transportation experts in the nation, including: John Larkin, operating partner, transportation and logistics, Clarendon Capital; Avery Vise, vice president of trucking, for FTR Transportation Intelligence; and Garrett Holland, senior research analyst for investment firm Robert W. Baird & Co.

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

John Larkin: There’s a big debate underway with regard to the state of the truckload market.

One faction suggests that a weakening spot market foretells a weakening contract market. There’s plenty of evidence supporting this theory, as dry van and refrigerated tender rejections are clearly losing steam. Similarly, spot rates in these two mainstay sectors are softening from all-time highs.

And given that spot pricing typically doesn’t break out fuel surcharges, record high diesel prices are just exacerbating the declining truckload spot rates in the dry van and reefer markets.

However, truckload carriers that purposely avoid the spot market and that operate primarily in the contract arena are reporting that freight volumes remain strong and that rates are holding steady. It appears that shippers are seeing a larger percentage of their diminished load counts accepted by their core contract carriers.

This leaves the recently upsized spot-market-focused truckload carriers scrambling to keep their wheels rolling. These are the carriers that are expected to bear the brunt of a freight slowdown and the attendant rate pressures currently in play across the dry van and reefer truckload market segments.

But to be clear, 8% to 9% inflation has destroyed some demand in the freight market. Consumers have less buying power and, as a result, simply can’t buy as much as they were buying during the heart of the pandemic.

Garrett Holland: The balance between the supply and demand of freight capacity is now clearly easing. Historic tightness that has extended through the pandemic has given way to loosening market conditions. This is best reflected in the spot truckload market, where pricing has dropped around 35% cumulatively in recent months.

The combination of inflationary pressure, building retail inventory, and slowing consumer demand are contributing to the pressure. Seasonal strength from produce and beverage season should help spot rates stabilize in the near term, but the probability of sustained spot market pricing weakness and freight recession is now significantly higher as we look out into 2023.

Avery Vise: After nearly two years of stress as reflected in wrecked routing guides and sky-high spot rates, the truckload market is starting to normalize gradually. Spot rates in the van segments fell steadily in winter and early spring, and we have seen sharply stronger employment levels among carriers.

Soaring diesel prices has been a catalyst. Drivers who left larger carriers in droves to take advantage of the superhot spot market have begun to move back to the relative stability of working directly for larger carriers.

However, we don’t expect market stress to vanish like it did in late 2018 and 2019. While driver capacity is finally adjusting, consumption remains extraordinarily strong despite inflation, and supply chains remain disrupted, leading to stress and pent-up demand.

The semiconductor shortage has metered truck production, limiting carrier growth. Stress and rates probably have peaked, but the downside will likely be frustratingly gradual for shippers.

LM: How should shippers approach the market?

Holland: Shippers should increasingly look to optimize transportation budgets as market conditions normalize. Given the need for inventory restocking, significant freight volume was moving inefficiently across higher-cost modes.

Improving supply chain fluidity should enable rebalancing of freight share back to intermodal channels, for example, and yield incremental savings for shippers. We expect incremental relief in global air and ocean freight pricing as we move through 2023 as well.

Vise: Normalization probably will be uneven not only among segments of the market, but even among individual truckload carriers. The market has never seen a sustained period of constraints on truck availability. Carriers faced a shortfall in 2018, but production was much stronger in 2019 than it has been during the current rebound.

Shippers appear to have been most successful when they navigated the pandemic market at a tactical level, working with carriers and brokers constantly on a lane-by-lane basis. This approach—often marked by discrete short-term bids rather than broader RFP packages—probably will still serve them well for months to come at least. Indeed, this might now be the “new normal.”

Larkin: Shippers looking for high service levels should look for their core carriers to handle the bulk of their loads. Pushing for rate decreases would likely result in carriers hammering the opportunistic shippers on price the next time supply and demand tighten significantly.

Shippers that are more focused on “pinching pennies” and less concerned with service would be well advised to consider upping the percentage of freight they tender to intermodal carriers and the spot truckload market as supply and demand loosens. In addition to lower rates, intermodal fuel surcharges can be around half that of truckload and spot truckload market pricing and typically doesn’t reflect the full impact of rising fuel prices.

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

Vise: Truckload carriers generally should become increasingly confident of available capacity, which should improve their ability to make and keep commitments to shippers. However, carriers’ expectations of freight availability might become less dependable. Some supply chains—automotive, for example—are barely more stable than they were during the most disruptive periods.

Also, some sectors of the economy such as residential construction are at risk of a significant downturn, which would be challenging for many carriers. Overall, consumer spending probably cannot maintain current extraordinary levels. While service in general should improve, those improvements surely will not be uniform.

Larkin: Truckload carriers continue to struggle with driver recruiting and retention. There appears to be no silver bullet solution to this seemingly endless challenge. To make matters more challenging, truckload carriers are not able to secure enough new trucks—due to the global computer chip shortage—to keep their fleets updated. Maintenance issues are more frequent as fleets age, so be prepared for service level challenges as 2022 continues to unfold.

Holland: With improving labor availability, transportation service should steadily improve. It’s too early to declare supply chain congestion over, though. OEM production challenges continue, and supplier delivery times remain extended. Cooling demand will help networks rebalance, but we need relief from the unending series of supply chain shocks that have persisted in recent years.

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

Larkin: Contract price increases during the tight supply-demand environment experienced during the intense COVID era enabled carriers to pass along meaningful pay raises to drivers and allowed most carriers to expand margins sufficiently to allow carriers to earn their cost of capital and satisfy investors. However, spot rates have generally nosedived in 2022.

We suspect that with record high diesel prices, many smaller carriers, including those that recently secured their own operating authority, will find current spot rates to be non-compensatory. Many of the drivers associated with these fleets will either park their trucks while awaiting a bounce back in spot market rates, sell their trucks, or seek employment as drivers with carriers owning their own rolling stock. Once enough capacity is shed from the spot market, spot market rates should firm and perhaps bounce back somewhat.

Holland: Declining spot market pricing has resulted in a record-wide spread between spot and contract rates, which should drive another strong quarter of brokerage performance. Contract re-pricing strength helps insulate transports from near term performance downside, but we expect the rate of contract-oriented repricing to fade from the double-digits and potentially decline in 2023, consistent with the historical correlations with leading spot truckload market pricing trends.

Vise: Those are great points by John and Ben. I would note that pricing is starting to become more rational, in large part due to a spot market that has begun to return merely to a strong environment rather than extreme. Volumes and rates in the spot market are still well above the five-year average, but they’re finally indicating seasonality, at least in dry van and refrigerated.

Last year, the spot market displayed essentially no seasonality, so we’re seeing at least some incremental rationalization. Seasonality and ongoing disruptions will keep a floor on spot rates, but we should continue to see them settle as route guide capacity continues to rise. Contract rates are still rising, but the peak probably is at hand for the same reason. The real wild card is the American consumer. Capacity is improving, but rates will remain firm if consumption remains robust.

LM: How do you view the state of driver availability?

Holland: While it remains challenging to recruit drivers, and demographic headwinds are not going away, driver availability has improved at the margin. For perspective, total trucking employment increased about 4% annually in April and is now about 2% above the prior cyclical peak registered in July 2019.

Additionally, non-supervisory long-distance truckload employment increased about 3% annually in the latest monthly reading [for May]. Carriers have increasingly indicated that challenges securing equipment are now the primary constraint for industry capacity growth rather than labor.

Vise: In most discussions, “driver availability” means the ability of large truckload carriers to find and keep drivers. By that standard, driver availability has been challenging, although it has improved greatly in 2022—and likely will continue to do so in the coming months.

However, the total number of drivers hauling freight recovered long ago, probably by mid-2021. A huge number—conservatively, more than 150,000 heavy truck drivers—stopped working directly for larger carriers and began hauling under their own authority in the spot market. A significant share of capacity shifted to intermediaries, although logistics operations owned by truckload carriers participated in that shift.

That dynamic has begun to reverse as diesel prices soared and larger carriers started to chip away at their driver supply deficits, thus taking some pressure off the spot market. Driver availability will fade away as a hot topic, but truck availability could take its place.

Larkin: This is another controversial issue. Some say the problem relates to a lack of people willing to drive a truck. Others suggest that the problem is retention related. In other words, they argue, if carriers could cut turnover, their driver problems would be solved. We suspect that the truth lies somewhere in the middle.

Certainly, increased driver pay, more frequent home time, improved benefits, and strengthened tech-enabled communication channels between drivers and fleet managers provide hope that driver turnover can be sufficiently reduced, enabling carriers to provide more consistent capacity and service levels to shippers.

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

Vise: We will continue to see a blurring of the distinction between transportation provider and transportation arranger. Telematics are becoming essentially universal, and brokers and third-party logistics firms increasingly will be able to marshal the capacity of small operations to compete effectively for contract freight.

Meanwhile, traditionally asset-based carriers increasingly will hedge their bets by shifting more activity into logistics divisions and working with independent carriers. This fluidity between what we think of today as the spot and contract markets should help reduce the big swings in pricing that have occurred over the past five years.

Larkin: Technology is coming into the industry like gangbusters. Electric power trains drawing power from batteries or hydrogen fuel cells are on the way. Five years from now, these vehicles will be mainstream and will make up a meaningful amount of truckload capacity. Great strides have also been made in the world of autonomous vehicles. Testing in revenue operations is already underway.

Having recently been chauffeured by an Aurora Driver vehicle, I can say that technology is just about ready for gradual deployment into long-haul markets. However, it’s unlikely that there will be enough autonomous capacity five years from now to counterbalance the driver recruiting and retention issues discussed above. Also, great efficiencies are being delivered to the operational decision making and administrative sides of the truckload business.

Never before have so many bright young minds and so much capital been applied to developing operational and administrative systems that will eliminate much of the labor intensity and inefficiencies found on the operational offices and the back rooms of
truckload carriers.

Holland: We’re of the view that the large, scaled, multi-modal carriers are best positioned to use technology to aggregate market share and deliver more resilient returns through the cycle. Quality-service providers in truckload will always have a market though, and there will be opportunities for smaller carriers to leverage technology benefits and power-only applications as well. Over that timeframe, we’ll also likely start to realize potential benefits from applications of electric and autonomous vehicles.

LM: What are the biggest lessons learned for the truckload market related to the pandemic?

Larkin: First, the hurdles thrown up during the pandemic were cleared by most carriers. The resilience of truckload management teams and the driver population was inspiring. Second, in-person interaction is not always necessary to facilitate excellent decision making.

Thanks to technological advancements, working from home is a viable option for truckload carrier’s employees not involved in driving and maintenance functions. Third, carriers, with planning teams sheltering in place, were able to stay put long enough to open their eyes to evaluate the flood of new technologies under development to make the truckload industry more efficient.

Holland: Shippers and consumers alike both realized how much supply chain reliability and resiliency can be taken for granted. Quality transportation providers are increasingly viewed as partners by shippers, with greater value ascribed to reliability and premium service. While carriers have enjoyed a stronger-for-longer pricing environment in recent years, the bullwhip dynamic is real and all cycles ultimately end. The industry once again likely needs to prepare to navigate another freight cycle downturn and shifting macro trends.

Vise: A sudden and severe disruption in the economy and freight market will not resolve quickly, so carriers and shippers need to assume that constant change is the new normal, perhaps for years. When lockdowns began in late March 2020, many analysts expected the effects to be severe but temporary. Efforts to reduce that pain—unprecedented fiscal stimulus—set into motion the disruptions that still reverberate today. Of course, without that stimulus, we might have seen an economic collapse.

A closely related lesson is the value of constant and clear communications between shippers and their carriers. Freight networks collapsed and returned in a haphazard and unpredictable manner. Some still haven’t really recovered. Shippers that navigated this treacherous landscape most successfully did so by expanding their channels of communication and transparency, both in depth and frequency.

LM: Given current events and the up-and-down nature of the economy, what are some words of advice you can offer to truckload shippers?

Holland: While normalizing demand and rebalancing spending toward experiences versus goods represents clear intermediate term risk for shippers, they should seize the opportunity to regain control of supply chains in a more settled market environment.

There should be opportunity to reduce costs and network inefficiencies too. The peak shipping season may start earlier, but tepid freight demand into the fall will likely confirm the onset of a freight recession—and the need for shippers to drive more efficiency across their business.

Vise: Stay flexible. The past two years were marked by a significant shift in capacity—and, therefore, volume—to the spot market. Signs point to the early stages of a reversal, but the speed of normalization will vary by segment, region—and even commodity. To the extent possible, find carriers that also recognize the volatility ahead and are willing to work through it day by day and hour by hour to get the job done. Even in the age of data and Artificial Intelligence, relationships still matter.

Larkin: My advice to shippers is to hedge your bets. Constantly monitor the value propositions offered by dedicated carriers, contract carriers, intermodal providers, and brokers. Bob and weave with the market to ensure that your supply chain service and cost objectives can be satisfied in any type of truckload market—tight or loose.

Also, pay attention to transformational technology developments. Avoid the bleeding edge of technology adoption, but do not keep your head in the sand as the pace of technology development in the broader truckload industry is very rapidly accelerating.

LM: How do you view the impact of high fuel prices and inflation on the truckload market?

Vise: So far, consumers have continued to spend. Even adjusted for inflation, retail sales rose in April and were close to record levels from a year earlier. Inflation and soaring gasoline prices might be reducing consumers’ buying power, but it appears that Americans still have ample reserves from extraordinary stimulus.

Even so, it’s reasonable to assume that consumption in real terms cannot grow significantly and could fall. For example, the personal savings rate now is below pre-pandemic levels. Another impact of inflation is sharply higher mortgage rates, which are sending home sales sharply downward.

So, the consumer sector probably has only downside at this point. The industrial sector, though, could continue to grow due to pent-up demand. We’re still forecasting modest freight growth, but downside risks certainly have risen.

Larkin: Higher fuel prices can largely be recovered through the fuel surcharge mechanism that has been in place for many years. Carriers with exceptional fuel purchasing discounts, fleets composed of new trucks containing the latest fuel-efficient features, or those with fuel hedging strategies in place can often actually see margins expand in periods of
high price diesel.

Broader inflation is more of a concern as inflation causes consumers and business to cut back on consumption and orders for capital goods. It’s the demand destruction created by general inflation that carriers need to carefully watch.

Holland: Avery and John are spot-on, and I would add that the pressure from high fuel prices affects smaller carriers proportionately more given exposure to retail diesel prices. Fuel surcharge programs help insulate carriers from surging fuel costs, but the demand destruction from inflationary pressure is real and likely a sustained headwind for freight demand.