CSCMP's Supply Chain Quarterly
February 22, 2020

Bumpy road ahead

The trucking industry—particularly the truckload segment—will see continuing uncertainty as demand grows slowly and rates remain flat.

The state of the trucking market in 2016 and the early part of 2017 offers a potent reminder that, while the United States still ships 80 percent of its cargo on trucks, the industry has some ground to make up following the last recession. In some respects, the market may appear to be healthy, especially over the long term. But when compared to prior years, the growth rate seems to be slowing. This was especially true in 2016, when available loads and opportunities dried up, capacity was "loose," and freight rates softened aggressively.

Data from the American Trucking Associations' (ATA) most recent American Trucking Trends indicates a year-over-year decline in revenues to $676.2 billion in 2016, from an all-time record of $719.3 billion in 2015. On the positive side, 2016 witnessed gains in truck sales as well as in the number of truck drivers employed.

Article Figures
[Figure 1] ATA trucking tonnage index (seasonally adjusted; 2000 = 100)
[Figure 1] ATA trucking tonnage index (seasonally adjusted; 2000 = 100) Enlarge this image

Truckload: Rates continue soft
That excess capacity forced many trucking companies to engage more fully with the truckload spot market. Some carriers that generally refrain from participation in that segment found themselves scrambling for freight and revenue, and therefore were forced to enter that market. Although rates typically are discounted by up to 30 percent on the spot market, in 2016 discounts were as deep as 65 percent in some cases.

Current analysis by the online freight marketplace and information provider DAT Solutions shows that spot rates remain stagnant even though more shipments are moving across the country. In addition, the Cass Truckload Linehaul Index, which many transportation industry executives and analysts consider to be the most accurate gauge of freight volumes and market conditions, shows that 2016 rates tracked somewhere between those of 2014 and 2015 for most of the year. For the last four months of 2016, however, motor carrier rates were nearly aligned with 2014 levels. For 2017, the index shows that rates began the year in line with 2015, only to dip below those levels during the second quarter.

This type of softness indicates that carriers are still having a hard time charging sustainable rates, and that shippers continue to dictate the terms in the marketplace. Indeed, although the Cass Index initially forecast annual growth of 3.1 percent for long-distance freight in 2017, that number was revised downward at mid-year to no more than 2 percent.

All of this suggests that the truckload market is grappling with muted freight demand. Essentially, there's still too much capacity chasing too little cargo. This is one of the main reasons the truckload market will likely continue to experience turbulence, with rates remaining at historically low levels and more consolidations taking place. While this situation is a negative for motor carriers, it does translate into better opportunities for shippers to lock in favorable contract rates.

LTL: A bright spot
While the truckload market faces uncertainty and turbulence, the forecast is more positive for less-than-truckload (LTL) providers. LTL data hasn't yet been completely compiled, but initial evidence indicates the first half of 2017 turned out better than expected. That's primarily due to a robust second quarter that saw an increase in tonnage built on the back of several quarters of positive industrial economic data.

This growth in tonnage can be seen in ATA's seasonally adjusted Trucking Tonnage Index, which tracks the amount of freight moved by the for-hire trucking industry, including both truckload and LTL. (See Figure 1.) May saw a 6.5-percent bump over April and was up 4.8 percent compared to May 2016. This puts tonnage nearly back in line with volumes seen at the start of 2016. However, on a year-to-date basis, tonnage is only up nine-tenths of one percent.

While the single-month changes in May are not a concrete indication of a trend, they do seem to corroborate a general feeling across the industry that we will see low to moderate growth for the overall industry over the remainder of the year. Analysts anticipate that the truckload segment will remain sluggish and the LTL segment—an early indicator of economic activity such as construction—will see most of the growth. Only time will tell.

Disruptive technology and ongoing trends
Some of the unpredictability and rate softness we are witnessing in the trucking industry can be attributed to technological innovations and other disruptions, such as online trucking marketplaces, the growth of Amazon's business across a variety of sectors, and a growing propensity among consumers to shop online. For instance, Uber-like applications have promised to marry shippers with available freight capacity. One example is the startup Next Trucking, which is billed as a truck-centric online marketplace that will connect shippers and motor carriers in real time. Waiting in the wings are potential providers like Amazon that, given their sheer size and buying power, have the ability to create a similar marketplace for shippers to buy transportation services from them.

Driverless trucks are another disruptor to consider. Some believe this level of automation won't be realized on a wide scale until perhaps 10 years from now. But driverless solutions like Uber's Otto and others could come online faster than expected. Once they are widely available, they could dramatically change how trucking companies respond to some of the ongoing struggles of the last few years, such as driver shortages.

Depending on what type of shipper demand they serve, trucking companies will have dramatically different experiences and related economic considerations in the coming years. As we've seen, the LTL market is showing positive signs of life. The truckload market, meanwhile, will continue to deal with its own set of concerns for the foreseeable future. The resulting rate softness means that truckload is currently a buyer's market for shippers and is likely to remain so for a while.

Shippers who have been down this road before know that this rate window may not remain open forever, and that they have an opportunity to make good on some of their own cost-savings goals in the near term. From a business management perspective, meanwhile, truckload carrier executives will need to have a disciplined plan for realizing cost savings while paying attention to operational efficiencies and technological innovation. This implies making investments across a range of areas—something that has typically eluded players in this long-standing and indispensable service industry.

Sean Maharaj is a director in the transportation and logistics practice of AArete, a global consultancy specializing in data-informed performance improvement. Tim Lefkowicz is a managing director in the transportation and logistics practice of AArete, a global consultancy specializing in data-informed performance improvement.

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