trucking market update 2020

It was a good year for shippers as freight rates plummeted for the majority of 2019, substantially backing off the historic highs the industry witnessed in 2018.

But much in the same way shippers had transportation difficulties in 2018, the past year was not easy on the other side of the industry — carriers.

An overall economic sluggishness hit freight particularly hard in 2019 leading to what many have labeled as a “freight recession.”

A swath of trucking companies were forced to close their door permanently in 2019 as their revenues were slashed and talk of recession intensified.

Industry incumbents like Celadon, New England Motor Freight, Falcon Transport, and HVH Transportation all shut down, some abruptly, after supply-side conditions did not improve.

Through just six months of 2019, approximately 640 trucking companies went bankrupt, according to data from Broughton Capital LLC. That half-year closure figure outpaces the entirety of 2018.

Carriers have felt the pinch because of falling freight rates, a result of failing demand for freight services.

“Loads on the spot market, in which retailers and manufacturers buy trucking capacity as they need it, rather than through a contract, have fallen by a chilling 62.6% (in 2019),” according to an article published by Business Insider.

The year’s struggles were pervasive and felt by most carriers, but as the year closes it leads us to the question, what is the logistics market outlook for 2020?

The question is unfortunately not straightforward nor easy to predict as there are many factors that will influence 2020 freight rates.

Tariffs’ Impacts on the Trucking Market

The continually escalating trade war between the United States and China could be easing slightly, after ramping up since President Donald Trump’s election in 2016.

Prior to year’s end, the two nations announced they have made slight progress in trade negotiations.

According to an article published in the Guardian on Dec. 30, “The White House has signaled that a trade agreement with China could come within the next week, amid speculation that a delegation from Beijing will travel to the US this weekend to sign a deal.”

The possible thawing of tense relations could spell an eventual welcomed change from the logistics world. The trade war, started in 2017, resulted in a threatened 25 percent tariff rate on $200 billion worth of Chinese goods.

As a result of the expensive duty, vendors and suppliers began importing goods ahead of the tariffs’ institution. It created an influx of demand for freight services in 2018 that has since quelled to a near standstill as companies have preemptively built their supply chains ahead of the hike.

This has led to tough conditions in the logistics sector, extending to both traditional over-the-road carriers and intermodal providers.

“The present economic backdrop is one of the most puzzling I have experienced in my career,” James Foote, CSX’s chief executive, told investors and analysts on a conference call. “Both global and US economic conditions have been unusual this year, to say the least, and have impacted our volumes.”

2019’s lessened shipping volume have driven down freight rates to combat falling demand thus cutting into many carriers’ revenue stream.

But with trade negotiations resuming and mildly progressing between the US and China, some relief could be on the way for the industry toward the latter half of 2020.

Despite any progress, however, the economy will take some time to rebound. Even if the two sides reach an ideal trade agreement, it will not result in a rapid uptick for the domestic economy.

According to a recent article published by Bloomberg, “Economists still expect a slowdown to about 1.8% for gross domestic product growth in 2020.”

This prediction comes in the face of any potential trade settlement. Declining overall economic conditions will most likely continue to extend to the freight market in 2020.

According to the International Monetary Fund, “The global economy is in a synchronized slowdown and we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions.”

Pervasive Carrier Difficulties Cause Trucking Market Issues 

Tariffs are just one piece of the puzzle that contributed to a down year for the transportation industry. And like the trade war, the remainder of conditions may not have an immediate solution to them either.

Let’s look at some of the largest factors affecting our 2020 freight outlook.

Drivers Tough to Hire, Keep

The trucking market is still plagued by labor difficulties and a driver shortage.

Carriers are having trouble attracting and retaining truckers, many of whom are opting for other equally well-paying blue-collar and localized delivery jobs.

This has driven up wages for the limited pool of remaining drivers, which is a cost that some small carriers cannot absorb.

To dilute the pool further, the online retail giant Amazon is building its own in-house fleet of truck drivers.

The e-commerce platform has recently begun creating its own branded tractors, which has led to speculation that the e-commerce giant will look to hire its own team of drivers rather than outsourcing the function to industry incumbents.

“The only time companies use branded tractors is if they’re used by their own employee drivers,”  SJ Consulting Group’s principal consultant Satish Jindel told Business Insider. “This is probably an indication that Amazon will have company drivers as opposed to independent drivers.”

It currently in-houses last-mile delivery and air transport, both of which have already cut into logistics companies’ profits and shrunk the number of available drivers.

Trucking Insurance Costs on the Rise

In addition to increasing pay to compete in a tight job market, carriers have had difficulty bearing increasing transportation insurance costs.

According to a report from NU Property Casualty 360, “Insurance premiums for long-haul trucks and trucking companies have increased dramatically in the past few years, doubling from an average between $6,000 and $7,000 in the beginning of the decade to between $12,000 and $14,000 today.”

Increased premiums are largely a result of unfavorable carrier verdicts in truck accident litigation. These costs are again difficult for smaller operations to absorb and have made the cost of doing business unfeasible for companies with a reduced revenue stream.

New Technology and the ELD Mandate

Increased insurance costs combined with larger capital requirements to purchase and upkeep technologically enabled tractor trailers have further strained many carriers.

The final phase of the electronic logging devices (ELD) mandate is now in effect. It requires all trucks that were previously using an AORBD system to now be equipped with an ELD.

While the mandate should prove to be beneficial to the industry in the long-term, getting all trucks in a carrier’s fleet technologically enabled has proven expensive.

Diesel Price Volatility

According to a recent report from the American Transportation Research Institute, the marginal, per-mile costs of a truck increased by 7.7 percent last year. A large portion of which can be attributed to a 17.7 percent increase in the price of fuel.

That increase is likely here to stay as a new sulfur-free marine rule will inflate prices for at least another year according to a report from Reuters. Refiners will pass increased production costs off to consumers while they shift to the new fuel formulas.

The Freight Market Outlook for 2020

When synthesized, all these factors have created a difficult environment for trucking companies to turn a profit or even remain operable. We have, as previously noted, seen many operations leave the marketplace in 2019 as a result.

Despite some optimistic perspectives about the state of the industry in 2020, there are too many unpredictable factors for us to say for certain how the entire year will look. This November, we will once again hold a presidential election, which are typical defined by uncertain economic conditions especially in the lead up and the immediacy following the election.

However, fewer carriers in the marketplace, paired with a decrease in overall demand for freight services, leads us to believe that 2020 will mostly be defined by a market in equilibrium, at least for the first six months of this year.  In the last few months of 2019, conditions have been slowly building momentum in the favor of carriers, bringing us closer to a balanced market.

According to data from FreightWaves, “Outbound tender rejections have been on a winning streak for five straight weeks. Currently, OTRI sits at 14.25%, the highest level it has reached in 2019. This represents a 170% increase in the national tender rejection rate over the past seven weeks since Nov. 1.”

Tender rejections indicate that carriers are seeing more volume and that demand for freight is up overall.

While this is likely an aberration caused by peak season demand, it is at least some good news for trucking companies.

The publication goes on to stress the importance of tender rejections as a key indicator to look to in the first few months of 2020. Their performance should more indicate the direction 2020 may head overall.

Current Van Rates

Van rates have spiked recently, and carriers have been doing their best to hold onto the increases as long as possible.

According to Peggy Dorf of DAT, “the national average rates for vans and reefers are now higher than they’ve been since January (2019) and they’re still increasing as we head into the new year.”

Dorf relates this to three main causes.

First, retail outlets rushed to re-stock their shelves as they began to prepare for post-holiday shopping.

According to the National Retail Federation a recent survey showed that 68% of holiday shoppers planned to continue shopping until New Year’s Day.

Second, two of the last four business of the month/quarter fell on a Thursday and Friday which for a lot of companies marked the end of the fiscal year. As a result, many shippers planned for extra pickups to ensure that sales were on the books for end of year.

The increase in shipping strained capacity and drove rates up. The end of the month brought some intense weather with it “dumping snow and ice on the Midwest and Northeast, knocking out power lines and closing roads – including interstate highways in North Dakota, South Dakota, and Minnesota”.

In combination with the holidays, many drivers decided to take extra time off to avoid dangerous driving conditions which further reduced available capacity. Expect to see tightened capacity and higher average rates persist through most of January as we move slowly back to an equilibrium.

Zipline Logistics’ Regional Roundtable

Zipline operates with a unique carrier team setup, splitting our experts into four regions for optimal service. Each group oversees freight that enters their region and plans for specific market trends in their respective states. Here is what each region is seeing currently and for Q1 2020:

West Coast Logistics

Winter storms have caused road closures and transit delays along I-80 and throughout the Northwest in general. Carriers are starting to send their drivers along the Southern route to the West Coast to avoid bad weather; adding miles and increasing rates for shippers slightly on long hauls.

Capacity out of California has been tight through the holiday season and increased outbound rates have yet to return to their pre-holiday threshold.

With Christmas tree season ending there is little freight coming out of Washington. As a result, sending orders into the area is a challenge and rates have increased as a result.

The inverse is true for orders leaving the region. Carriers have an added incentive to take outbound freight due to the low order volume in the area.

Southeast Logistics

Capacity in the Southeast is still tight across the board due to the holidays, which means rates out of the area are still temporarily inflated.

Shippers appear to have a backlog of freight due to the seasonal rush and as a result capacity has shrunk, driving up rates. We expect that to return to normal in a few weeks, but for the time being shippers can expect to pay more for freight moving out of Florida, Texas, and Georgia.

In the Southeast, as well as the remainder of the country, reefer capacity continues to be strained. This has driven up refrigerated rates across the board as more shippers require protect from freeze through the winter months.

Midwest Logistics

Annual higher winter rates have hit the Upper Midwest as recent inclement weather has made freight into Minnesota and Wisconsin particularly difficult to cover. Because of the harsh winter weather that plagues these states, carriers are hesitant to send drivers into the area. As a result, capacity has diminished and rates have increased.

The outbound markets from the East Coast and Chicago have almost made their way back to pre-holiday norms and trucks are easier to find. Rates have normalized for the southern Midwestern states as winter weather has yet to make an impact there.

Northeast Logistics

Inbound capacity from the Midwest into the Northeast has stayed consistent and will likely continue that way as long as winter storms do not have an impact. This has resulted in a steadily available capacity and seasonally normal rates.

The influx of retail freight from of LA is over now that the holidays are passed. Shipments going into the Northeast from the West Coast will be easier to find and rates should return to pre-holiday prices.

Intra-Northeast freight has been difficult to move recently but we anticipate capacity to soften and rates to come back down throughout January barring any severe winter weather.

Choose Logistics Partners Based on Values

The trucking market is cyclical and whether we see conditions swing to favor carriers in 2020 or not, vendors focused on partnerships stand to win in the upcoming year.

Finding a logistics partner that is centered on partnership will prove to be an effective choice for an upward or downward trending market.

Working with a 3PL on a strategic level can unlock previously untapped profit, offer more visibility, and streamline overall operations.

It is critical in current market conditions to not chase rates. Carriers are presently price sensitive and can leave deliveries midstream in favor of other opportunities. This type of failure is currently prevalent and can only be circumvented by working with a logistics partner that works with service-oriented carrier partners.

With poor service, you can expect dropped orders, late deliveries, rate hikes, additional fines, fees, and headaches that don’t move your supply chain forward towards its goals.

Instead of chasing cheap trucks, work with Zipline to find a competitively priced carrier that best suits your delivery needs.

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