Freight market needs lithium during rapid swing to bipolar bottom

Inconsistency is the only consistency in transportation over the past 4 years

Chart of the Week: Van Contracts Initial Report, Van Outbound Tender Rejection Index, Truckstop.com Van Average Spot Rate – US SONAR: VCRPM1.USA, VOTRI.USA, TSTOPVRPM. USA

Trucking contract rates continued to inflate in early March, according to FreightWaves’ Pickup Truck Contract Rate Index (VCRPM1), but tender and tender rejection rates are now free fall. The national average spot rate according to Truckstop.com has fallen 11.6%, or 44 cents per mile, over the past seven weeks, with the national average dry van tender rejection rate dropping more than 6 percentage points to its lowest value since June 2020. Is this just another link in the self-perpetuating cycle of ups and downs in transportation?

There is no doubt that the freight market is cooling after a period of unprecedented high activity, with spot rates falling and carrier compliance increasing at a record pace.

The fall was inevitable, while the timing was impossible to predict with precision. Even though many people knew this was coming, there will be those who are totally unprepared and who will suffer the greatest consequences.

Currently, consumer demand is finally eroding thanks in large part to inflation and a 180 degree turn in fiscal policy. The conflict in Ukraine seems to have been the proverbial straw that broke the camel’s back by aggravating inflationary pressures on several commodities, particularly oil.

COVID-19 and the war in Ukraine were not predictable events, but they are responsible for shaping the economy and disrupting supply chains over the past two years.

The consequence of free markets is volatility. While they may still try to head for balance, overcorrection is almost inevitable. This means that many shippers may try to aggressively lower rates on the contract side. What they may not realize is that it was also the shippers who drove the rates to where they are today, not the carriers.

Carriers set the lowest price after calculating their costs. Shippers secure the upper end by bidding against each other for capacity. Carriers have always been happy to achieve an operating margin of around 3-5%, which is almost a non-profit by many industry goals.

This low-end expectation has kept the space in the dark ages in terms of technology and innovation as there is no money left for investment. It’s also a pretty high barrier to entry for anyone with an entrepreneurial spirit.

Looking at data from the Truckload Carriers Association, which favors medium to small carriers, they are still averaging operating ratios (ORs) in the mid-90s in February. Larger fleets such as Knight-Swift (NYSE: KNX) recorded OR of 78.5% in Q4 2021. This suggests that the recent cargo market boom has benefited larger carriers far more than larger fleets. small.

The reasons for this are for another article, but the point of this comparison is to explain what a market downturn will really do to the carrier landscape as it sets up another pendulum swing.

A drop in rates will hurt smaller fleets more, reducing competition and causing rates to spike again when things get tighter. Less competitive units result in higher prices.

According to the FMCSA, 95% of operating fleets in the United States have fewer than 21 trucks. Larger fleets sold off much of their old equipment last year, while the price of used trucks soared.

Most of the used truck market is made up of small fleets and owner-operators, who now have the burden of having to bear the full cost of an asset that will lose value at an accelerated rate during a downturn. of the market.

FreightWaves CEO Craig Fuller’s article was just about the “bloodbath” that should be happening. But larger fleets will be more affected as they have accumulated cash and limited their efforts to expand the fleet as a whole. This is not to vilify large fleets, but to explain that what they have done is simply smart business in a highly competitive environment.

Shippers would be wise to understand what they are dealing with in terms of what is generating these wild swings as they are also participating in their perpetuation.

Fluid pricing models have seen increasing usage over the past 18 months. These can make capacity easier to reach when recovering, but can actually accelerate the push into an undersupplied market as margins erode faster. Each of the two previous freight market expansions was preceded by freight recessions (2016-17, 2019-20).

A more diverse approach to sourcing along with a dynamic pricing model with limits/triggers in place makes the most sense. To execute this, you need objective and reliable information. The carrier/shipper relationship will never be one of full trust, but it can be managed to be less volatile.

About the chart of the week

The FreightWaves chart of the week is a selection of charts from SONAR that provide an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week, a market expert will post a chart, along with commentary, live on the front page. After that, the chart for the week will be archived on FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in graphs and maps and providing feedback on what freight market experts want to know about the industry in real time.

FreightWaves’ data science and product teams release new datasets weekly and improve the customer experience.

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