Quarterly Transportation Market Update: Truckload - Full speed ahead for profitability

It’s the tightest truckload (TL) market in this century—maybe in a generation. And while there’s some debate as to whether demand has peaked for the year, there’s little doubt that the pendulum has firmly swung in favor of the carriers.

“It’s a very good market,” says Mark Rourke, executive vice president and COO of Schneider, the nation’s second-largest TL carrier. “Overall demand across multiple verticals in our industry remains very, very strong.”

In fact, demand has gotten so fierce and capacity so tight that TL carriers are being increasingly choosy as to which shippers they retain as customers. “We’re turning down freight,” says Myron Shevell, chairman and CEO of the Shevell Group, parent of Eastern Freightways, a major TL company based in Elizabeth, N.J. “We could probably double our business, but it’s a matter of building manpower.”

Because the economic health of the trucking industry so closely tracks the overall economic activity in the country, trucking is often viewed as a leading economic indicator. That indicator is flashing bright green and signaling full speed ahead for carriers at the moment. But, for how long can we expect things to continue?

The current economic expansion is in its 10th year—the longest in modern history. According to Bob Costello, chief economist for the American Trucking Associations (ATA), next year’s growth in Gross Domestic Product could be closer to 2% rather than the stunning 4.2% growth posted in the second quarter of this year.

Along those lines, ATA’s advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 1.8% in August after increasing 1.9% in July. In August, the index equaled 112.9 (2015 equals 100), down from 115 in July. “There was just a tiny dip in August, but we’re pretty confident freight levels will remain above the industry norms of the last three to five years,” says Greg Orr, president of CFI, the nation’s ninth-largest TL company. “At this point, there’s no major sign of a slowdown anytime soon.”

So what’s driving this “Goldilocks scenario” for the truckload sector? It’s a rare confluence of a terrific economy coupled with shifting demographics in the TL driver marketplace. Throw in a regulation or two that’s further crimping capacity, and you have the best marketplace for carriers in perhaps a generation.

Drivers, drivers, drivers…

Those changing demographics along with mounting restrictions—such as random drug and alcohol screening—have further tightened the pool of regulatory-compliant drivers. This certainly isn’t a new phenomenon, but TL executives say that the situation is worse today than ever.

“Labor scarcity is driving this, and that can be favorable for the industry,” says Schneider’s Rourke. “We’d like to have more drivers, and we’re leaning in on the problem very hard, but it’s never easy.”

Rourke says that it was always hard finding a driver to work in an industry where starting pay is barely $50,000. But in an era when unemployment is below 4%, trucking is now competing with home construction and other industries that can offer a better lifestyle with similar or even higher pay—without the restraints of drug testing and long stints away from home.

“We’re competing for a smaller pool of qualified candidates that’s exacerbated by our safety standards,” says Rourke, who adds that he’s also signing someone’s retirement letter every week. “I’ve been doing this for 30 years, and it was always hard. But we’re in a whole new category today. There simply are more bodies exiting the industry than entering.”

In fact, the ATA estimates the current shortage to be around 51,000 drivers and forecasts that figure to reach 100,000 in a few years. “It’s like running a crap shoot, and it creates huge problems for us by taking away our stability,” says Shevell. “Just waving a magic wand is not going to solve the problem. It’s going to take years.”

One solution the federal government has proposed would allow a small number of drivers under the age of 21 with sufficient training in the military to work in interstate commerce. Until now, that has been prohibited. However, that proposal is getting mix reviews.

Shevell has called it a “horrible” solution that only will make highway safety worse. Currently, truck drivers are involved in about 13% of all highway fatalities despite heavy trucks being only about 4% of all the vehicles.

In the meantime, the Bureau of Labor Statistics reports that 918 truck drivers and driver sales workers died on the job in 2016, making trucking the most dangerous profession in the country. There were 5,190 fatal work injuries across all occupations and industries in 2016, a 7% increase from the year before and the highest number since 2008.

Another shocking industry data point is the annualized turnover rate at large truckload carriers. Turnover jumped four percentage points in the second quarter of 2018 to 98%, according to ATA, and has increased 10 percentage points year over year.

“The extreme tightening of the driver market, driven by solid freight demand, will continue to challenge fleets looking for qualified drivers,” says ATA’s Costello. At the same time, turnover rate at smaller truckload fleets (under $30 million revenue) slipped one percentage point to 72%.

“There’s something happening with turnover at these smaller fleets,” adds Costello. “The driver market remains tight across the truckload sector, but the turnover rate at these smaller carriers is down 14 points from the same time last year. Like large carriers, small truckload carriers have been aggressively raising pay this year, which has helped their turnover rate level off.”

The ELD effect

Nearly all of the largest TL carriers in the country have been using electronic logging devices for a decade. But it was only last April when authorities began enforcing the mandatory ELDs on all carriers, including owner-operators.

According to various industry data, full ELD enforcement has caused between a 3% and 6% loss in overall trucking productivity as cheating on hours of service (HOS) data has more or less ceased. This has caused a further tightening of capacity in what statistics prove was already a shrunken market for trucking space.

CFI’s Orr, a longtime proponent of ELDs, says that having everyone on a level playing field has been good for business as well as safety. “The majority of carriers are in compliance now, and it’s a level playing field,” he says. “As a user of the highways, I’m happy everyone is in that space.”

ELD implementation and enforcement marks the end of an era when many drivers kept two sets of books—one for the enforcement personnel in case they’re stopped on the highways, and the other showing their real hours so they can get paid properly. Drivers routinely used to refer to paper logbooks as “comic books,” because they were mostly fiction.

“They really haven’t started to enforce it in earnest in all 50 states but that will come in time,” says Eastern Freightways’ Shevell. “You certainly won’t be able to game the system like you used to. In the past, anybody who drove knew how to beat the system. You can’t beat this system.”

Long-term trends

Any way you slice it, current demand levels are booming. Compared with August 2017, the ATA trucking index rose 4.5%, down from July’s 8.6% year-over-year increase. For the first seven months of 2018, compared with the same period last year, tonnage has increased 7.6%. That has far outpaced the annual gain of 3.8% in 2017.

Even so, the ATA’s Costello is predicting “full speed ahead” for carriers in their quest to regain profitability lost during the Great Recession and years immediately afterward.

“Truck freight remained solid in August despite the monthly decline,” says Costello. “However, the year-over-year increase was the smallest since July 2017. The deceleration in the year-over-year increases has begun due to more difficult year-over-year comparisons, as it was a year ago when freight began to surge. We should all expect smaller year-over-year gains going forward than we witnessed over this past year.”

August ended with average spot-market TL rates that were lower than June and July, but still about 20% higher than last year at this time, according to DAT Trendlines. While these are short-term comparisons, some TL executives say that the days of shippers playing one carrier off another to gain rate advantages are over.

“This is more a structural deficit that has to do with macroeconomics and demographics,” says Rourke. “It’s always hard to predict, but most strategists look at this as a more sustainable structural shift.”

Shevell agrees, saying that this is a longer-term adjustment. “Rates have been too low for too long,” he adds. “People took advantage of trucking companies, and there has been a backlash, and that’s what you have now.”

Carriers advise that shippers should be open to working with them on how to reduce overall costs and make pickups and deliveries more efficient to preserve a driver’s valuable time. “We don’t do general rate increases any more,” says Rourke, “everything is customer by customer, and it’s a lane-by-lane approach. We’re hyper-focused on what that freight is contributing to us. How efficient is that freight? How easy is it to get in and out?”

As such, executives say, TL carriers are increasingly picky as to which freight they accept.

“We just can’t put a price high enough on freight that has poor characteristics and conditions with it,” adds Rourke. “If shippers can’t fix the issue, we move on. We let somebody else accept that freight.”