What Can Trucking Firms Do To Stay Profitable In a Rapidly Softening Market?

Trucking establishment closures are nothing new in a cyclical market. However, there are ways to stem the fall.

A hearty welcome to the 61st edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.

Trucking firms running in the spot market continue to feel the heat of falling freight rates, which have resumed their descent after a brief lull at the start of October. While freight rates remain higher than pre-pandemic, the working environment has changed quite drastically. For one, fuel prices remain much higher than pre-pandemic, spiking operational costs and choking carriers that already run on thin margins. 

Secondly, finding and retaining truck drivers, especially in the long-haul market, has continued to be challenging. Inflation and surging demand have meant increased labor wages, carving out another chunk from the already-dwindling carrier profits. While worker attrition in the trucking industry is nothing new, the hot job market seen since the pandemic mounts more pressure on trucking firms holding onto their drivers. Case in point — the US Bureau of Labor Statistics data, reflecting that for every person in the job market today, there are 1.6 jobs available on average. 

Driving a truck is arduous, and truckers lead stressful and weary lives. Pit this job description in an economy flush with opportunities that pay well, provide comfort, and allow workers to get back home every evening, it isn't hard to see why the trucking market has had a lot of difficulties holding onto its people. 

Regardless, the trucking industry's employment rate has been phenomenal since the shock of COVID-19. FRED data shows that truck transportation grew its employee strength by roughly 4.3% since Feb '20. However, September saw a month-over-month fall in employee strength, with the industry shedding 0.75% of its workforce. This could be the market reacting to the softening of demand in the spot market — seen from lower tender rejections from carriers even as shippers adhere better to their routing guides. Falling freight rates and loosening capacity is not a happy sight for trucking firms. 

This is further exacerbated by new capacity entering the market. While the growth rate of new trucking establishments is slowing, the market might not be shrinking at the moment (data from the third quarter is yet to come in from BLS, but the second quarter remained robust). 

"During such 'at-risk' situations, owner-operators and small trucking firms are the ones that are culled first. But it's not all doomsday. We have a lot of very healthy companies as well. The major carriers with large contracts made a lot of profit last year and are going to be okay through this phase," said Chris Jones, executive vice president at Descartes. 

While spot market rates have kept plumbing new lows, trucking firms operating in the contract market are not seeing the same degree of drop in rates. Most of the freight within the trucking system moves on contracts, and thus, the angst of carriers in the spot market does not entirely reflect the fate of the industry. 

On the side of shippers, there's growing conviction to be more prudent with their RFPs. In the course of a year, shippers push roughly 80% of their loads over 20% of their total designated lanes, while the remaining 80% lanes carry the rest of the 20% loads. Shippers today are looking to put only the loads that move on high-frequency lanes on their RFPs, while the rest (roughly 20%) goes on the spot market. Such shipper behavior will inevitably help streamline contract tender rates across major lanes, reducing the volatility we often see in the spot market. 

"Trust and reliability are critical metrics shippers look at when they contract a carrier. This would mean that shippers will still go behind premium carriers as long as they operate well, keep their promise, and have high service levels," said Jones. Aside from being reliable, carriers will do well to take the time and explain contract conditions in meticulous detail to their shippers to ensure they stay on the same page.

From the operations POV, transportation planning is critical for carriers to stay profitable. "Based on the loads shipper partners are forecasting for volumes, you should be able to map out the kind of trips you'd be doing and work on ways to optimize operations. This also ties to the services you offer — more sophisticated logistics services carry premiums and are also more complex to execute," said Jones.

Carrier bids are another topic of contention. When a carrier firm partners with a major retailer, they could be offered volumes that makeup 10-15% of the carrier's business. While this is good for business, the carrier management must understand how this would fit into its existing network. If the tendered volumes go beyond the carrier network's bandwidth, it would need transport partners, which in turn requires planning in advance.

"Visibility is another big aspect to staying profitable. One angle to visibility is to do a better job working with the owner-operators or drivers on your payroll. You'd need visibility into their location to make more informed decisions on what loads to give them," mentioned Jones. "But there's another class of visibility technology called capacity matching."

What makes capacity matching interesting is that it has a network effect to it. With visibility, carriers can share capacity across multiple companies. This is particularly true of the freight brokerage market, where brokers have a certain amount of business that runs across specific lanes and aren't privy to the available capacity out in the market. 

"As a carrier, if you're able to work with other brokers, you can share that capacity. Consider a trucking firm that has loads moving from Cleveland to Chicago, but finds it hard to get return loads, racking up deadhead miles. However, there will be firms that operate in the same lane, but in the opposite direction. A broker wouldn't know that, but network matching through improved visibility can help match that unutilized capacity with loads." 

Carriers participating in such networks can keep their trucks full by maximizing the number of loads they get. And in a market that continues to soften, employing prudence and leveraging visibility solutions will help companies stay afloat and profitable. 

The Weekly Roundup

For the past five years, the US trucking industry has been contending with a dwindling pool of available drivers and, until recently, has been the topmost concern according to the American Trucking Research Institute (ATRI.) The driver shortage has dropped a spot, to number two, in lieu of concerns over the high price of fuel without the benefit of the shortage easing.

Small businesses are taking control of their supply chain to great effect. The pandemic created a lot of issues for companies relying on a steady stream of goods from overseas. While larger businesses could take the hit, many smaller businesses had to either fold up shop or get creative. Now, some small businesses are taking the supply chain and production into their own hands at less cost than what they were importing.

The cost of diesel fuel is likely to remain high due to a growing shortage. High demand and reduced refinement capacity in the US have kept diesel fuel prices high. While gasoline has dropped approximately 24% since June, diesel, which is typically cheaper than gas, has only dropped 8%. With a ban on Russian fuel imports, it is expected that transportation costs and heating bills will rise this winter. 

The US is pushing the growth of EV sales but is facing supply chain hurdles. The Biden administration is aggressively pursuing its goal of zero carbon emissions and has quintupled its purchase of electric vehicles, an increase of 11% of federal vehicle acquisitions. Supply chain issues and a lack of charging infrastructure could stymie the zero-emission timeline. The US government operated some 610,000 vehicles in 2020, which traveled 4 billion miles and consumed more than 360 million gallons of fuel. 

…said who?

“The growth in US import volume has run out of steam, especially for cargo from Asia. Recent cuts in carrier shipping capacity reflect falling demand for merchandise from well-stocked retailers, even as consumers continue to spend.”

-  Ben Hackett, the author of the Global Port Tracker report issued by the National Retail Federation, commenting on the drop in retail demand before the holiday season

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