2023 Truckload Roundtable: Stuck in neutral

Many common themes that were hovering above the truckload (TL) market a year ago remain intact today, including elements such as lower contract and spot rates and excess capacity—which bodes well for shippers, but not so much for carriers.

And while it still appears to be a shippers’ market, that’s not likely to last much longer. Should demand levels head up and inventories continue to trend down, that would present a scenario that truckload carriers would welcome—and could trigger a return to pricing power in tandem with tighter capacity. However, things are not there yet, due to continued economic uncertainty, a possible recession, not to mention ongoing inflation increases.

Joining us this year to help truckload shippers put the many moving parts of the market into perspective are four 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.
• Lee Klaskow, senior freight transportation & logistics analyst for Bloomberg Intelligence.

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

John Larkin: After the big surge in truckload demand during COVID, the truckload market has really cooled off. Inflation has reduced consumers’ purchasing power, and the end of the pandemic has channeled a higher percentage of disposable funds into services, such as airline trips, hotel and resort stays, and meals at restaurants. Plus, inventories became bloated as supply chains initially could not keep up with heightened demand during the pandemic period.

As demand waned as the economy reopened, supply chains weren’t turned off quickly enough and inventories became bloated across many industries. Now, with reduced demand, inventory drawdown has taken longer than expected. At the same time, rising interest rates have put a damper on interest rate-sensitive, transportation-intensive sectors such as housing. The net result of all these pressures on demand for goods has been persistent weak demand for truckload services since the onset of the fourth quarter of last year.

Garrett Holland: As John mentions, it remains very much a shippers’ market given abundant truckload capacity. This dynamic is evident in extended pressure on spot truckload rates and near record-low tender rejection levels. There’s simply too much freight capacity in the marketplace relative to the current level of demand.

Lee Klaskow: I have a funny feeling that I’m going to be saying “normalizing” a lot today. I know that might be an over generalization, but it’s how we see things. We’re at unsustainable conditions when spot dry van rates were over $3 a mile in January 2022, and we’re at unsustainable levels at under $2 today. We expect the market will continue to rebalance from what appears to be a bottom today in rates. This rebalancing will come from a combination of supply leaving the market and a return to seasonal demand trends. Higher-cost operators may park equipment or leave all together.

The pace of demand growth will be dependent on the overall economy. According to consensus expectations on Bloomberg, there’s a 65% probability the U.S. economy will go into a recession. The U.S. economy usually goes into a recession following a commodity shock, inverted yield curve, and when the Federal Reserve is raising interest rates. That being said, if the Fed can’t navigate a soft landing, which is still not out of the question, any recession will likely be shallow and short in our view.

Avery Vise: The truckload market is stabilizing overall, but the pandemic-induced market swings have taken their toll on many individual operations. The number of carriers exiting the market—most of which are very small—is running at an all-time high. While total payroll employment in truckload remains near the peak, the monthly figures don’t capture the smallest operations that are seeing the most pain.

FTR estimates that utilization of seated trucks has just recently bottomed out, although the recovery does not look as sharp as what the market saw in the past couple of cycles. Certainly, it will look nothing like 2020, which was driven by a host of demand and supply factors that likely will never occur again.

This recovery is far from certain, however, as our outlook does not contemplate a significant economic recession. On the other hand, we could lose more capacity than we’re currently forecasting.

LM: How should shippers approach this market?

Holland: Shippers are looking to reset contract rates and stretch transportation budgets as much as possible. The wide spread between spot and contract rates and carriers hungry for volume contributed to the deteriorating contract pricing trends for carriers through this latest bid cycle.

Shippers should realize healthy transportation savings annually. However, they need to balance the desire for cost savings against the need for quality service and ensure carriers can deliver on awards even through a market inflection.

Klaskow: Shippers’ relationships with capacity providers can be as diverse as the shippers themselves. For some shippers it’s all about price, for others it’s all about service, and for others its somewhere in between. Price-sensitive shippers view trucking as a commodity and will be opportunistic when it comes to securing capacity—they will never change.

Shippers that care more about service are the ones that should be building collaborative relationships with their carriers. Shippers’ relationships with capacity providers should be considered strategic in nature, not transactional. A shipper that doesn’t turn the screw on their carriers in looser conditions should expect similar treatment from fleets when capacity tightens. This will create less volatile conditions for the shippers through any cycle.

Vise: Shippers probably should assume that the deflationary period on freight rates is ending and that truckload capacity is tightening incrementally, at least. Shippers that have, out of inertia, stuck with a pandemic-era practice of quarterly bids or “mini-bids” for specific lanes should consider reverting to annual or longer requests for proposals soon.

Those anticipating further deterioration in the macroeconomic situation might be reluctant to move back to normal procedures just yet, but the downsides probably are not as significant as many imagine. Consumer spending on goods will likely slow, but because it’s held steady for so long—basically two years at this point—it’s close to matching the pre-pandemic trend. Betting on an economic recession to loosen the truckload market certainly is understandable, but it’s a risk.

Larkin: I’ll add that shippers should take the opportunity during this loose market to take a look at the overall design of their supply chain. Many new technologies have been recently developed that can facilitate the overall review and optimization of a shipper’s supply chain. Shippers should also evaluate their modal mix and carrier mix within modes to ensure that they are minimizing expense while satisfying the needs of their customers.

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

Klaskow: We’ve seen supply chains normalize from the dislocations created by the pandemic. That process will likely continue through the year. I think service levels will continue to improve for shippers across all modes of transportation. Railroads were hardest hit in terms of service, since their networks were not prepared for the quick recovery in demand following the initial shocks from the pandemic in the second quarter of 2020.

Ports were also hit hard during the pandemic. They’re less congested today, driving better through-put and less wait times for drayage operators. Nearer-term, some western ports may face work actions as part of their negotiating tactics, which may hurt service, creating additional headaches for shippers.

Vise: The baseline for tender acceptance and on-time performance probably starts at a comfortable level for most shippers, and service probably will still be good at least through the end of the year and probably longer. By the middle of 2024, we would expect conditions to be noticeably tighter than they are today.

However, the changes over the next year could be so incremental that many shippers will not really perceive a difference. We expect the coming year to be a period of stability that the truckload market hasn’t seen in many years.

Larkin: Service levels will continue to improve as technology enables carriers to better match service levels with shipper requirements. Carriers, thanks to technology innovation, can better react to traffic congestion, bad weather, mechanical breakdowns, driver shortages, and equipment shortages. Truckload service levels have never been higher.

Holland: Supply chain congestion, which frustrated shippers from production functions to supply deliveries, has now almost entirely faded. Shippers have also made meaningful progress clearing excess inventory. While service levels and supply chain fluidity have significantly improved, the emerging problem is weakening demand across consumer and wholesale end markets. Tightening financial conditions slow demand with a lag, and recession risk remains elevated for the broader economy.

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

Vise: Contract rates are probably not where carriers need them to be, and we don’t expect them to bottom out until around the end of 2023. FTR estimates that current dry van truckload contract rates are running about 9% higher than the 2019 average. While that sounds healthy, carriers’ costs are also considerably higher than they were in 2019, especially for equipment and labor. Therefore, carrier margins are probably not what they were in 2019, which was not a great year for truckload.

The situation is more difficult for those carriers operating in the spot market. Current dry van spot rates are slightly below where they were on average in 2019, a situation that clearly is the principal factor in the continued high level of carrier failures despite steadily falling diesel prices. Spot rates have almost certainly bottomed out, but they might not rise fast enough for many stressed operations.

Larkin: The simple answer to your question is no. Spot and contract rates have fallen dramatically to the point where marginal carriers can’t remain in business. As a wise trucker once said: ‘The only cure for low rates is low rates.’ With capacity exiting and demand eventually rebounding, we will, at some point later this year or sometime in 2024, return to a tight supply-demand dynamic in the truckload market, a market where surviving carriers can raise their rates sufficiently to earn their cost of capital on operations.

Holland: Contract pricing trends likely continue to grind lower, but we would not expect full reversion in rates given significant inflationary pressure facing carriers across labor, equipment and insurance. With respect to spot market trends, we estimate spot market pricing is below operating costs on a per-mile basis for most small carriers.

Given this dynamic, we expect capacity to exit the market at an accelerating pace in the second half of 2023. Eventually, as demand recovers, the balance of supply/demand in truckload markets will re-tighten and mark the start of another pricing cycle over the next few quarters.

Klaskow: The answer is absolutely not. Spot rates are not enough to turn a profit right now for some mid- to small-sized carriers. Small and large trucking companies alike need to earn a return on their investments, otherwise they will not be making investments for the future. Large public fleets have strong balance sheets, are profitable, and can easily weather the current storm. Fleets are also facing higher costs for equipment, maintenance, insurance and drivers that don’t appear to be going away.

In addition to weak demand and rate pressures, large truckload carriers are dealing with lower gains from equipment sales. We expect that this will be a headwind for earnings into 2024 as more truckers exit the market, creating excess inventory for sellers of used equipment.

Class 8 sleeper auction prices, a leading indicator to retail, slowed for a 13th month, plunging 37%, the biggest drop in 16 years of data. Prices have collapsed since peaking in March 2022 as truckers chased historically high spot rates. Since then, spot dry-van rates are down 34%.

We expect spot truckload rates will continue to be weighed down by slack capacity, but the bottom appears near. Rates may bounce around these low levels as the markets continue to rebalance. Spot rates could find support from a return of seasonal demand and something of a peak season this year.

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

Larkin: Fewer drivers are currently needed across the industry, and as a result, most carriers are able to seat all active trucks in their fleets without providing any additional compensation. And, of course, some carriers are reducing the size of their fleets to better balance supply and reduced demand. This fleet downsizing process also makes for an easier driver recruiting and retention market.

Also, carriers are getting a lot more sophisticated with respect to dispatching drivers to optimize driver compensations while getting drivers home more frequently and more predictably. With excellent opportunities to maximize compensation while balancing home life and some newfound slack in the driver supply market, carriers are reporting a drop in driver turnover rates.

Holland: Given pressure on both small carriers and competing job markets, driver availability has clearly improved. Large carriers have noted that it’s now easier to attract experienced drivers, and turnover has slowed, too. The long-term demographic trends for drivers remain challenging, but cyclical factors have resulted in some near-term relief for driver recruiting.

Klaskow: I might get laughed off the roundtable, but we still believe that there are structural challenges facing the trucking industry. The looser truckload environment will likely give way to tighter conditions as more high-cost capacity leaves the market and the economy gets back on track. This will bring the structural issues back to the forefront, exacerbated by new regulations longer term.

Demographics, the alcohol and drug clearinghouse and increased hair-follicle testing may limit the industry’s ability to seat tractors with safe, qualified drivers longer term. This could be exacerbated if the labor market remains strong, providing vocational alternatives for truck drivers.

New emission regulations may also limit supply, whether it be regional like California, which is leading the transition towards electric trucks, or new national emission rules that will make equipment more expensive, which could limit supply growth over time. Trucking companies that can successfully attract and retain drivers may better weather the cycle.

Vise: Those are all great points. I do think that drivers are as plentiful today as they’ve been in years. Many carriers, no doubt, would disagree with this assessment, as they still struggle to keep seats filled with drivers who meet their qualification standards. However, for the overall truckload sector, capacity is as loose as it’s been since at least mid-2019. Larger carriers eventually replaced drivers who left to set up their own operations during the 2020-2021 boom, resulting in a substantial increase in the total driver supply.

Drivers are already starting to drift away to other vocations, so the driver supply will probably start to tighten soon. However, freight demand remains sluggish, so it could take a while for the market to notice. This scenario could resemble late 2016 and early 2017 as a loss of driver capacity largely went unnoticed until the market saw an upswing in freight demand in the summer of 2017.

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

Holland: We’re of the view that the large, scaled, multi-modal carriers are best positioned to use technology to aggregate share in the fragmented TL market and deliver more resilient returns through the cycle. Leading carriers are also increasingly leveraging the financial and operating benefits of scale to supplement organic growth through merger and acquisitions, which should only drive further industry consolidation.

Over that timeframe, we’ll also likely start to realize potential benefits from applications of electric and autonomous vehicles. For all of the market enthusiasm around generative AI applications, the potential for scaled carriers to capitalize on advancements in technology over time to deliver better growth, profitability, and customer experiences should not be overlooked.

Klaskow: I do have a crystal ball, but it is cracked and foggy. That being said, I do believe the trucking market will be much tighter than where we are today. We’re not expecting the extreme conditions experienced in 2021, but maybe more like 2018. Also, truck operators will continue to face higher costs that could outpace inflation longer-term.

The EPA also passed more stringent nitrogen oxide rules that will go into effect in model year 2027. Though the costs associated with these new standards are unknown, the EPA’s estimate is about $8,300. The agency has historically underestimated mandate costs.

The true expense from the major emissions standard in 2001 was about 4x the EPA’s initial forecast, according to a study by the American Truck Dealers Association. The trucking industry has a history of pre-buying trucks ahead of the rollout of emission standards, as seen during the surge in 2005-2006.

Vise: Although driver availability today is not a problem, it’s a long-term challenge that will increasingly drive changes in the market. Demographic trends are unfavorable, and the drug and alcohol clearinghouse—while a boost to highway safety—has disqualified 132,000 drivers since the beginning of 2020. As marijuana use becomes increasingly legal, that number will continue to grow.

The truckload market will use information technology to optimize existing capacity and wring as much utilization as possible out of existing drivers. Live load and unload will increasingly become the exception, and even spot freight will see more drop-and-hook than it has historically.

A related development will be increased use of relays and other tactics to reduce the number of nights truckload drivers are away from home each night. And while the industry will continue to develop autonomous trucking technology, but the next five years probably will see only marginal use in truckload.

Larkin: We’re in the first or second inning of the transformation of the truckload industry to a more electrified, more automated, more optimized operating ecosystem. Battery electric and hydrogen fuel cell electric trucks should have 5% to 10% market share within five years, while autonomous trucks will capture some share of the long-haul, inter-urban freight market.

In addition, optimization tools such as Hoptek and Optimal Dynamics will streamline many truckload network operations. While asset pooling, relays, yard automation, and slip seating strategies could combine to dramatically improve asset utilization rates throughout the long-haul segment of the truckload industry.

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

Klaskow: Supply chains matter. Most Americans didn’t give much thought about how products got to the stores they shop at before the pandemic. During the pandemic, consumers were faced with shortages for many products we take for granted like toilet paper or personal protection equipment. I would like to think that these same people have a better appreciation for the professionals that keep supply chains humming.

Obviously, the trucking industry is critical for keeping supply chains moving. I would like to also think shippers took better stock in their relationships with trucking companies to build more collaborative relationships, which is important for service stability through the cycle. This may manifest in more dedicated business opportunities for trucking fleets.

Vise: The greatest takeaway is the value of transparency and cooperation between shippers and their carrier and broker partners. During the height of the supply chain disruptions in 2021, many shippers quite literally involved carriers and brokers in their daily load management.

For many, that practice turned an impossible situation into one that was merely daunting. While the urgency of that approach has vanished, the value is still there. All parties could benefit from understanding their respective objectives and challenges on an ongoing basis.

Larkin: First of all, we learned how truly valuable the truckload industry is during the pandemic. As demand for the transportation of goods increased, the industry dutifully responded to the challenge of replenishing inventories across the nation’s supply chains.

Second, we learned just how valuable and resilient truck drivers are. It appears that the pandemic raised awareness levels across the United States’ citizenry. Americans appreciated the Herculean efforts of drivers across the industry. Hopefully the goodwill created towards truck drivers during the pandemic will last long after it’s a distant memory.

Holland: John, Lee, and Avery are spot on, and I would add that the pandemic highlighted the extremes cycles can reach with respect to degree and duration across modes. Cyclical pressures are often mean reverting though, and both shippers and carriers are working through that normalization process now. The end-cycle stages can be painful, but much like challenges during the pandemic, this cyclical correction too shall pass.

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

Larkin: Carriers operating in the spot market have been severely hurt by rising fuel prices. Often, fuel surcharges are not embedded in spot market pricing. To make matters worse, many smaller carriers purchased used trucks during the pandemic, a time when used truck prices skyrocketed. With spot rates having cratered, many small carriers are unable to make ends meet and will exit the industry altogether.

Large carriers are more insulated from the impact of higher fuel prices, thanks to fuel surcharges, but not so from general inflation, which can drive up the cost of trucks, trailers, tires, maintenance, drivers, and driver benefits.

As mentioned previously, inflation has suppressed the ability of consumers to buy as many goods. And, with inflated inventories persisting, in many cases, replenishment demand and, in turn, truckload demand continue to suffer.

Holland: Pressure from high fuel prices impacts smaller carriers disproportionately 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. Fuel prices can be volatile and should be monitored as a headwind for freight demand.

Klaskow: Inflation impact has been widespread across the economy here and abroad. The good news is that inflation appears to be moderating here in the U.S. The Federal Reserve’s actions to push interest rates higher appears to be slowing economic growth and inflation.

The U.S. Consumer Price Index, a broad measurement for inflation, is expected to moderate to about 2.4% by 2025 from 8% in 2022, according to consensus on Bloomberg, which is still about 40 basis points higher than the period between 2000-2020.

Lower fuel prices is good for trucking since it will help drive margins higher, reduce the impact of running empty miles and make intermodal less compelling for some shippers. Diesel is down about 33% since peaking in June last year, but remains 18% above their 10-year average.

Vise: Putting aside the impact of fuel surcharges, last year’s surge in diesel prices was a major factor in accelerating the normalization of the market. Skyrocketing fuel prices during the second quarter of 2022 coincided with a steady softening of spot rates, resulting in a sharp rise in carrier failures. The cumulative financial damage was so great that failures are still very high even though fuel costs have fallen steadily for a year.

One of the lurking challenges for small truckload carriers is the huge increase in used truck prices during 2021 and early 2022. While those prices have fallen sharply, used trucks are still more expensive than they were before the pandemic and financing costs are significantly higher. Even though spot rates have bottomed out, for many small carriers, rates likely will not support replacement of those trucks in the near term and could drive more carriers out of business.

LM: Given the up-and-down nature of the economy, can you offer words of advice to shippers?

Vise: Although the truckload market and the broader economy appear largely to have normalized, echoes of the pandemic-era distortions are still reverberating. For example, the unprecedented scope of stimulus in 2020 and 2021 and the damage done to the services sector, due to the pandemic, continue to inject uncertainty into the level of consumer spending we can expect.

We have no reason to expect an economic upswing, but the economy has been far more resilient than many observers expected. The range of outcomes has narrowed, but they could be in either direction. Therefore, shippers should approach the market with the mindset that the market is back to normal and act as if the market could be either modestly more favorable or modestly less favorable.

Larkin: Be reasonable with respect to desired pricing reductions during this softer period of demand. Remember that the next tight supply demand dynamic could sit just a quarter or two away. Build strong relationships with your dedicated and irregular carriers during this challenging period for carriers in hopes that they will treat you well during the next period of tight supply and demand.

Holland: Embedding more resiliency and flexibility into supply chains should remain a priority for all shippers. Diversifying sourcing and nearshoring more production likely remain long-term trends. While challenges may have passed for now, the value of durable supply chains along with production and transportation partners should not be forgotten.

Klaskow: Like I mentioned before, build relationships with your capacity providers for the long-term. If you view them as transactional, how do you expect them to reciprocate when market conditions are tighter? This will create a less volatile, more resilient supply chain for your companies. Also, take a good look at dedicated alternatives if they make sense for your network.