2021 Truckload Roundtable: Advantage carriers

Coming off of a year that was clearly unlike any other we’ve ever seen, the truckload (TL) market appears to have largely weathered the storm on solid footing at the halfway point of 2021. With more people receiving vaccinations, coupled with stimulus funding leading to increased consumer spending activity, the truckload market continues to see a flurry of high levels of demand, elevated rates giving carriers the upper hand, and ongoing capacity issues due largely to the seemingly endless driver shortage.

And while market conditions have improved when compared to a year ago, there’s still a long way to go before things get back to a point of market equilibrium.

Joining us this year to help truckload shippers traverse a very unique period in the sector’s history 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;

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?

Avery Vise:: Market conditions are likely at or near the peak of their favorability for truckload carriers, but the slope on the downside of that peak is uncertain. The pandemic has created unprecedented situations on both the demand and capacity sides of the ledger, and the range of plausible outcomes remains quite broad.

Enormous levels of stimulus from Washington have fueled a buying spree the likes of which we have never seen, especially in durable goods. One scenario is that spending on goods crashes in 2022 or 2023, especially if inflation continues. However, while growth in freight demand almost certainly has peaked, unprecedented levels of consumer savings and debt retirement could maintain a solid floor on freight volume.

Pandemic-related constraints on driver capacity might make it harder than usual to bring demand and capacity into balance, but nobody truly knows how many drivers have left the market permanently.

John Larkin: The truckload market is currently tight as a drum. The combination of changed consumer buying patterns, low inventory levels due to the changed consumer buying patterns, and a debilitating driver shortage made worse by pandemic fears has created one of the tightest supply dynamics we have witnessed since deregulation in 1980.

Normally, fleets would be adding trucks at a time like this to handle the big surge in demand, but they’re thankfully showing restraint this time around. First of all, many of the trucks in their existing fleet are unseated with drivers. Why add incremental power if the tractors would simply sit against the fence with the existing unseated portion of the fleet?

Also, carriers are more generally reluctant to add equipment this deep into a freight market expansion knowing that expansions don’t last forever. Who wants to be caught with surplus equipment when the market begins to contract? Instead, many carriers are struggling so severely with the driver shortage issue that they have actually been reducing their fleet size in the face of this robust market.

Garrett Holland: While thankfully we appear to have the pandemic under control and the peak of lockdown-related consumption has likely passed, demand for consumer goods remains robust and fueled by stimulus measures. Inventory levels have been depleted.

Capacity for carriers remains limited by driver shortages and OEM production challenges. The net result is a severe imbalance in demand and supply, which is a condition that likely persists through the balance of 2021 and extends into 2022

LM: How should shippers approach the market?

Larkin: Shippers would be wise to consider using a dedicated fleet for base load, repeatable freight. They would then have their core freight flows covered at prices that are locked in, contractually, for a number of years.

A core carrier program is also recommended for the next layer of semi-predictable, if not always steady, freight. The core carriers will handle this freight in a reliable manner at a price that has been agreed upon for up to a year or longer. The freight not suitable for a dedicated fleet or a core carrier program can be handled by one or more brokers with whom, as a shipper, you have strong relationships.

Holland: In the near term, securing both production and transportation capacity ahead of peak season remains a primary focus. First-quarter demand remained very strong, and demand likely continues to seasonally build through the year. Outlooks from the nation’s largest retailers indicate sales are expected to remain very strong in the second half of 2021 despite challenging growth comparisons.

Industrial end market demand continues to build as well. Securing inventory and transportation ahead of another challenging season to avoid complications in these tight transportation markets is clearly the top priority.

Vise: Uncertainties created by the pandemic have led many shippers to use small-scale bid packages as frequently as quarterly. Nobody involved in these negotiations likes this situation, but the alternatives often seem worse. Some shippers are clearly frustrated with the current environment and are beginning to feel that they have little to lose by bidding most or all their lanes for a longer term. That impulse is understandable, but it is probably a mistake, at least until the fourth quarter or early next year.

We do not yet know whether stimulus-fueled spending truly has subsided, and we’re heading into a holiday shopping season with extraordinarily lean retail inventories. On the capacity side, after generous unemployment benefits disappear this summer and fall, we could see a noticeable easing in the driver market. Shippers should only bid their most troublesome lanes and wait out the rest for a few months.

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

Holland: Friction across the supply chain after the rolling series of shocks has resulted in significant service challenges for shippers. The pandemic first triggered a massive shock then surge in demand, which would have been extremely challenging to navigate in isolation. As the supply chain grinds to catch up, we have faced other unique challenges such as the February winter storm disruption and Suez Canal blockages, which have amplified network congestion and extended timelines for production and delivery.

Network fluidity has incrementally improved in the second quarter as was evident in the moderating port backlogs and improving rail performance metrics, but labor shortages are likely to extend the challenging operating environment in the near term.

Vise: Service will probably become incrementally better over the next year as capacity utilization eases. Shippers will not need to turn as frequently to the spot market or to intermodal, which suffers its own chronic service challenges.

As with our outlook for volume and pricing, the range of outcomes is wide, but almost all would be better for shippers than the current situation. A longer-term factor could be a reversal of the deregulatory stance taken by the previous administration in Washington, but any changes on that front almost certainly would not take effect for more than a year.

A much greater near-term risk is that ongoing litigation concerning use of the leased owner-operator model in California could constrain truckload carriers’ access to surge capacity. However, the broader freight market has already begun to shift toward different models for managing this capacity.

Larkin: Garrett and Avery are both correct, and I will add that service, as measured by capacity availability, will be challenging over the next year as supply and demand are so tight that it may prove difficult to attract capacity to certain origin destination pairs at a reasonable price.

Service, defined by transit time, will also be challenged in light of the labor shortage. Similarly, transit time variability is likely to be an issue as on-time pick-ups and on-time deliveries will be challenged by the absolute lack of drivers, the lack of experienced drivers, and a return to high levels of highway congestion in many urban markets. Those desiring fast, reliable freight movements will need to think in terms of paying up for that level of quality service.

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

Vise: One reason many shippers feel they have little to lose by rebidding their entire networks is that spot rates have been uncharacteristically sticky. We have yet to see clear signs of weaker spot rates even though spot volumes might have stabilized. FTR’s forecasts of spot rates have grown incrementally stronger for months with a current forecast above 20% higher year-over-year.

One reason for this situation, of course, is that freight pressures are so strong that the contract rates that would be needed to avoid sky-high spot rates appear unacceptable. Shippers already are staring down contract rate gains of around 12% in 2021—an increase larger than what the market saw in 2018. Shippers don’t necessarily see an upside to changing course. The current market is such that the traditional tactic of trading higher contract rates for stability is not a sure bet.

Larkin: In most markets, spot pricing currently sits above contract pricing. Shippers using a high percentage of spot market freight are trying to move more of their freight over to the contract side of the market, where capacity remains tight. They’re encountering a rising price environment on the contract side of the market as well.

It’s clear that the big recent spike in contract and spot pricing has not drawn much incremental capacity into the markets. Plus, even though much of the recent price hikes have been earmarked for drivers, driver availability has not improved.

It appears that there’s little price elasticity of driver supply right at the moment. As the economy fully emerges from the various pandemic-related lockdowns, those considering careers as truck drivers will have many other options, not the least of which will be first-mile pick or last-mile delivery jobs that allow for more regular home time.

Last, an infrastructure bill will put further pressure on truck driver availability, as some drivers may prefer to drive a cement mixer, a front-end loader, or a backhoe. So, with such a tight labor market, look for carriers to continue to ask for rate increases in order to continue padding driver pay in hopes of attracting additional labor into the market.

Holland: Given the oversold market conditions, shippers continue to face rising transportation costs. With bid season approaching completion, many shippers are likely absorbing mid- to double-digit rate contract increases for this latest cycle.

Spot rate growth likely starts to moderate in the second half of this year as we cycle peak-growth rates, but two-year comparisons continue to grind higher and reflect pricing pressure in the market. Shippers in turn will likely look to pass along their higher costs to consumers. Some normalization in demand conditions will likely provide pricing relief by later next year, however.

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

Larkin: The driver shortage has seldom been more severe than it is right now. In addition to the driver recruiting and retention issues we already mentioned, driver training schools were closed or scaled back dramatically during the pandemic, thereby reducing the number of new entrants.

Increased use of hair follicle-based drug testing and the roll out of the Drug and Alcohol Clearinghouse have combined to shrink the truck driver labor pool. And, as alluded to earlier, the gig economy opens up a whole new world of careers for individuals that otherwise might consider joining the pool of truck drivers or potential truck drivers.

Holland: Driver availability is likely to remain a binding constraint for transportation market supply well into next year. Pandemic concerns, competition from other jobs enabling more time at home, stimulus payments, and regulatory changes have collectively sidelined a large cross section of the driver population and presented significant challenges in attracting new talent.

Despite multiple rounds of wage increases and bonus payments, driver availability conditions are showing no indications of a quick recovery. Long-term demographics suggest the shortage is more structural than cyclical as well. We’re encouraged that carriers are taking steps through compensation, but also through addressing lifestyle concerns to the extent possible to help attract more drivers.

Vise: I agree with both John and Garrett. At FTR, we no longer uses the term “shortage” to describe a tight driver market because we felt that it implied a condition that did not really exist. Yes, carriers might have to sharply increase pay, and shippers and brokers might have to resort to intermodal and the spot market, but freight that needs to move finds a way to move.

However, the pandemic created some unprecedented drags on driver capacity, including a significant reduction in the training and licensing of new drivers, a big drop in U.S. labor participation, and generous unemployment benefits.

The Drug and Alcohol Clearinghouse has removed nearly 60,000 truck drivers directly and probably thousands more who seek to avoid the inevitability of ending up in the clearinghouse eventually. Aside from the clearinghouse impact, we believe we know by year-end whether trucking faces a longer-term under-supply of drivers.

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

Holland: The truckload market is likely less fragmented and less volatile in our view as larger carriers leverage technology to better aggregate market share and smooth returns over the course of a cycle. Multi-modal offerings from large carriers offer significant potential to shippers looking to consolidate and optimize transportation services.

Quality-service providers in truckload will always have a market though, and there will be opportunities for smaller carriers to leverage technology benefits as well. Over that timeframe, we will also likely start to realize potential benefits from applications of electrical and autonomous vehicles. We don’t envision a winner-take-all technology solution emerging, but technology likely enables greater market share gains and less-volatile returns for scaled providers.

Vise: We expect the lines to continue blurring between carriers and intermediaries. Rapid evolution of digital freight platforms and the total visibility afforded by telematics are already allowing brokers and third-party logistics firms to compete for contract freight on an equal footing with traditional asset-based operations.

Also, within five years, we’ll probably see commercially viable autonomous trucks operating routinely in some low-congestion corridors, such as I-10 in the Southwest. Autonomous will evolve gradually, and it likely will be the next decade before autonomous represents more than a token share of truck freight.

However, solutions needed to make autonomous work—remote drop-and-hook lots and dedicated drayage operations, for example—are already developing due to the pressure to maximize productivity of today’s drivers. The next five years will likely bring truckload closer to shippers’ goal of reducing the market swings that we’ve seen in the past decade, but progress will be incremental.

Larkin: Ten years ago and even earlier, very little new thinking or new technology was in play across the industry. However, with many entrepreneurs, venture capitalists, and private equity firms now finally turning their attention to new business processes, automation, new power sources, and with many new process and operating optimization applications being developed and applied, I expect to see an industry that’s able to dramatically increase the productivity of assets, labor, and infrastructure.

The combination of all these elements will keep the United States in the leadership position with respect to supply chain efficiency and will enable us to, with the help of more factory automation, nearshore more manufacturing, thereby creating even more freight to haul.

LM: What are the biggest lessons learned for the truckload market as it relates to the pandemic?

Vise: Perhaps the biggest lesson is that often the longest-lasting economic effects of a catastrophe come not from the event itself, but rather from actions aimed at counteracting or mitigating it. We simply can’t divorce the pandemic itself from the extraordinary levels of financial support Washington provided in response.

Without the infusion of more than $2 trillion in cash from the CARES Act—not to mention the $3 trillion more injected in the first quarter of this year—we clearly wouldn’t have seen the sharp rebound in the economy and, especially, in the purchasing of goods. Aside from the tragic human cost of the pandemic itself, consequences include enormous supply chain disruptions and operational nightmares for all concerned. However, from a market perspective, the situation has been a boon to carriers and a curse for shippers, at least from a transportation perspective.

Larkin: This country’s citizens learned to appreciate front-line transportation and logistics workers for keeping store shelves filled and e-commerce fulfillment pipelines flowing efficiently.

Carriers and shippers learned that the management of their networks could be handled efficiently working remotely. And, we learned that consumer buying patterns can be greatly modified during quarantines thanks to the growth of e-commerce. I suspect that these learnings will carry over into the post-pandemic environment.

Holland: In an era of global supply chains and just-in-time inventory systems, shippers and carriers likely agree on the need for more resiliency across the supply chain. This evolution likely contributes to higher levels of inventory and more nearshoring activity, which will create industry opportunities, but take time to unfold.

Consumers likely have a greater appreciation for the role of transportation providers following the structural change in e-commerce adoption and more at-home consumption. It’s easy to take supply chain reliability for granted—because with a few clicks a needed product is seamlessly delivered to our doorstep. Transportation and logistics providers make this look easy, and we are grateful for their service to the nation and economy during the extremely challenging pandemic operating environment.

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

Larkin: Develop long-term, trusting relationships with multiple dedicated fleet service providers, multiple core carriers, and multiple full-service truckload brokerage firms. Stay on top of the latest technological and service innovations offered in the marketplace. With today’s pace of innovation, it would be easy to be leapfrogged by a competitor that has reconfigured their supply chain to gain a competitive advantage with a lower cost supply chain or a higher service supply chain.

Attend conferences, develop peer group relationships, and stay in continuous dialogue with the carriers and brokers closest to you. Stay informed on the latest innovations, best practices, and approaches to what is a challenging market. I would also recommend hiring and grooming graduates from the top shelf supply chain programs that have emerged at many of our nation’s top universities. To succeed in this new, rapidly changing, technology-based supply chain world will require that you surround yourself with top caliber talent.

Holland: Prepare for another extremely strong peak season, but also potential normalization in consumer spending mix. Experience-oriented spending remains well below pre-
pandemic levels.

And as the economy re-opens, the shift in spending has the potential to exceed a simple mean reversion as consumers resume experiences post pandemic. Additionally, demand has been significantly boosted by fiscal stimulus, which is an unsustainable driver. The acute demand/supply imbalance and related pricing strength will likely fade as we move through next year, as the operating environment starts to normalize.

Vise: The stress in truckload is almost certainly at or very close to its peak, so shippers might as well wait a few more months before making any major moves.

The overriding issue is driver capacity, and we believe that the impending end of generous unemployment benefits could be significant in loosening
up the market.

With many states ending these benefits in June, by August we could begin to understand whether unemployment benefits might be a significant factor. Also, the past year has brought an extraordinary number of new trucking operations, most of which are very small. Once the spot market begins to turn south, we expect many of these drivers to return to payroll jobs at larger trucking companies.

This dynamic will likely weaken the spot market further, leading still more independent drivers into jobs at larger carriers. Despite some thornier driver supply challenges, the market potentially could turn quickly.