The state of the trucking industry is a crucial consideration for pallet industry operators and analysts. Trucking is an important component of pallet cost. Freight rates play a role in lumber sourcing and finished pallet market reach. And not only that, but the state of the trucking industry is a powerful indicator of overall economic health and a leading indicator of pallet demand.
Pallet Enterprise recently interviewed four thought leaders in the truck freight space. In alphabetical order, they include Balika Sonthalia, senior partner and practice leader – strategic operations in North America at Kearney and co-author of the 34th Annual State of Logistics Report; Norita Taylor, director of public relations for the Owner-Operator Independent Drivers Association; John Vaccaro, president at Bettaway Supply Chain Services and founder of PalletTrader; and Chad Wesbey, vice president for PLA’s Freight Brokerage Division.
1.) Besides the massive drop in freight volume recently, what are the three largest problems facing the trucking sector, and what are some possible solutions?
Sonthalia: The big problem facing the trucking sector right now is the oversupply of capacity in terms of assets that were added over the last few years. Domestic demand has significantly dropped, and it does not look like it is going to return to the levels we saw during the pandemic. In fact, in some segments of the truckload market it is not clear if demand will return to pre-pandemic levels. The supply imbalance is not helpful because trucking companies tend to use debt to fund the new asset purchase. That, combined with the fact that these companies have seen structural operating cost increases over the years driven by labor, has not helped.
Taylor: The biggest problems for truck drivers and small-business truckers are over-regulation, detention and a combination of other issues. Because they are paid mostly by the mile or piecemeal, there is little or no value placed on their time. Shippers and receivers have no disincentive to waste time, or incentive to value a driver’s time. There is also a serious lack of parking available for trucks, but fortunately, legislation has been proposed to address the problem. Our members are also concerned about the repeated narrative of a supposed driver “shortage” which is contrary to the numbers showing extremely high turnover in the long-haul sector. Such dialogue is usually accompanied by efforts to lower the age to get a commercial driver license or other agendas that benefit only larger carriers.
Vaccaro: Trucking has seen a steady stream of outside forces influencing how operators plan and run their fleets. Among these are new or updated regulations on an almost yearly basis from the EPA regarding truck emissions, new truck-safety technologies to enhance safe performance and driver retention, rising costs for parts and maintenance, and rising insurance costs, all of which have been going up every year, in some cases outpacing inflation.
Insurance costs in particular have skyrocketed, driven by nuclear verdicts and the constant bombardment by billboard and TV commercials of attorneys enticing motorists to not settle claims and go for the big one. Overnight, these verdicts have wiped out small to mid-size trucking companies that can no longer afford to operate their trucks. Many small truckers are driven out of business each year when they can’t afford their insurance renewals.
To mitigate these trends, Bettaway has doubled down on safety and passive accident prevention options in all new trucks. Additionally, we deployed in-cab cameras in all trucks, so we have our side of the story. Mandatory Electronic Logging Devices (ELDs) also forced bad operators out and further thinned the ranks of available drivers.
Wesbey: Long-term, the driver pipeline, or lack thereof, is a major issue. Over the next 10 years, the industry will need over one million new drivers to keep pace with demand and replace retiring drivers. With that large of a gap, it will take a mix of solutions, including being more flexible as employers, likely even higher wages, and embracing technologies that help take the burden off drivers and/or replace them in certain instances. Another major issue is rising costs, particularly insurance premiums. Of course, in the current inflationary period we’re in, costs are going up across the board for every industry, but insurance is a particular cost challenge for the trucking industry. Finally, increasing operating regulations add costs to already squeezed margins, requiring investments in technology and more administration.
2.) What is the short-term outlook for freight volumes and rates for the rest of 2023?
Sonthalia: As we have discussed during our 34th annual State of Logistics Report, the significant inventory correction led to a reduction in near-term domestic trucking demand. That combined with the move from home deliveries to buy-online-pickup-instore further impacted the domestic trucking needs driven by the last mile. We think domestic trucking rates have reached some level of stabilization, and unless there is an additional shock on the supply or demand side, we think the short-term outlook and rates for rest of 2023 should not change drastically. Starting next year when baby boomers retire that will add a wrinkle to labor availability and will play out in form of potential rate increases or service level implications. I’d recommend shippers to secure the rates they are sourcing right now for next couple of years.
Taylor: In short, freight volumes and demand remain flat, and freights will continue to reflect those trends. There are too many trucks chasing freight while operating costs climb.
These newsletters might help: https://tinyurl.com/3ya7txp9, and https://tinyurl.com/yc22yc87
Vaccaro: All the indicators I see and monitor are showing a slow uptick in freight volumes as the economy continues to recover from the wind-down of excess inventory that has plagued the industry for the past 18 months. Although volume is recovering, rates are predicted to rebound and increase near the end of the 3rd quarter and into the 4th quarter as we enter the traditional seasonal period for holiday freight. I believe this will occur and is being driven by worked-off excess inventory and the need for new, refreshed holiday goods vs. old, discounted goods that have gone stale or missed their seasonal window. People want new things for back-to-school and the holidays. All signs show robust commerce is still occurring all around us. People are still traveling and spending. Airports just finished the Fourth of July period with the highest passenger numbers in several years.
Wesbey: Experts predict – and we’re certainly hoping – that we’re at or nearing the bottom of the cycle. Recent volatility, including CVSA Roadcheck Week and regional demand spikes, has helped to raise spot rates from their floor. Still, if we’re being somewhat optimistic, this is a return to normal seasonality rather than a fundamental shift in market conditions. The gap between spot and contract rates remains substantial and should persist through the end of 2023 as capacity has remained elevated against weak demand. Overall, capacity is still outpacing demand vs. last year, which will continue to depress both volumes and rates for at least the rest of 2023.
3.) The trucking sector has been in the dumps over the last year or so. When should the freight markets start to expect a recovery? What economic indicators need to change for this recovery to occur?
Sonthalia: I wouldn’t say that trucking has been in the dumps. I would say that certain sectors are underperforming. If you were a company that invested significantly in assets around the pandemic timeframe and you planned for that volume spike, then that is something to watch for. But if you were a provider with multimodal assets, where your assets could move from full truckload to less than truckload to provide intermodal shipment capability, then you probably are better off because the less than truckload market has not fallen significantly compared to the full truckload market. So, it depends on where you play in the trucking sector.
Another positive factor is reshoring. With reshoring taking place, or the rate at which companies are exploring moving manufacturing closer to the shore, we think that domestic transportation demand will benefit. We also think that as more single service point solution trucking providers either go out of business or get acquired by the bigger 3PLs, it will help balance capacity. So, we may start seeing a little bit more of a leveling between capacity and demand. But I wouldn’t say it’s been in the dumps.
Taylor: Some analysts predict upward rate movement toward the end of summer, when back-to-school shopping and the holiday season typically lift demand and thereby rates. According to DAT and ACT Research, the industry has been netting a loss of about 2,000 carriers per month, which will help alleviate the overcapacity issue that the market has been facing for the last several months. However, this, of course, is not something we enjoy seeing, as it means people might lose their business. Nevertheless, these items should come to a head at the end of summer, which could launch the industry into the next cycle. This definitely isn’t a guarantee. If manufacturing doesn’t pick up, it could be longer until we see the next upcycle. However, rates do appear to have hit their bottom, which is a good first step.
Vaccaro: One interesting barometer of trucking trends is the supply/demand metric for pallets. In this current demand down cycle, pallet demand is trending behind freight volumes. As a trailing indicator, pallets may not have hit bottom yet, whereas trucking has and is pivoting. Pallet companies still need to work through their excess inventory before equilibrium is reached and they start to go back to more balanced levels of day-to-day supply vs. demand. Once that level is reached, the uptick should occur. Watch trucking – if it spikes, pallets will follow in time.
Wesbey: At a macro level, the freight market is subject to the same economic factors as the pallet market: inflation and higher interest rates lead to lower consumer spending, which leads to lower manufacturing output, and imports, which lead to lower demand. A large-scale normalization towards pre-pandemic volume levels is underway, and in turn, we are forecasting greater downside risk in freight volumes through the end of 2023. While inflation and rising interest rates haven’t slowed consumer spending, global tensions, contraction in manufacturing and retail, and further interest rate increases (vs. stabilization) make a risk of recession increasingly likely as we head into late 2023/early 2024. Given the headwinds we’re facing, any meaningful recovery in freight volumes shouldn’t be expected for quite some time.
4.) How can pallet providers better work with trucking providers to optimize networks and reduce supply chain costs?
Sonthalia: Shippers can benefit with more flexibility in their loading and unloading operations with modular pallets. This will help drive more efficiencies within the four walls and on the logistics site operations. It helps the entire ecosystem in a way because it helps reduce the total system cost. Also, many carriers and even shippers have giant ESG (Environmental, Social and Governance) goals. So, making pallets that are more sustainable, also helps.
A great resource to help reduce, or automate activities that operators perform, would be to implement RFID scanning, which will allow warehouse management systems to be more dynamic and connected by absorbing the additional intelligence that the pallets can provide. In this manner, you’re taking true costs out because you’re taking activities out from the value chain.
Taylor: Stop wasting time loading or unloading thus contributing to detention. Oppose efforts that harm small-business truckers like speed limiters, insurance minimum increases, tolling, AB5. Support efforts like parking, restroom access, improved training standards and repealing the exemption in the Fair Labor Standards Act for truck drivers.
Vaccaro: Pallet providers may often view their role or opportunity as just a single leg in a supply chain rather than delivering their pallets as part of a continuous move. However, I see the opportunity for pallet providers who operate modern tractor-trailers to use their trucks and drivers to haul transactional or steady freight and create a new revenue stream for underutilized assets, especially in a strong week-to-week trucking demand cycle.
Pallet providers have an unrealized advantage in the freight space when they use existing under-utilized trucks and drivers. Pallet providers also have lower operating costs than a traditional for-hire trucking company. Pallet companies have profit and G&A (general and administrative expenses) in their pallet sales. The (pallet) trucking side does not carry all the overhead like a trucking company whose only revenue is that of regional or national line hauls or local pickup and delivery. Pallet companies in a 50- to 100-mile radius have an advantage and opportunity if they understand the need and are strategic in how they offer or leverage it.
Wesbey: The best way to reduce freight costs, improve service and optimize your network is to create a strategic partnership. Identify providers who have the capabilities to share and analyze your data, integrate with your systems, and provide flexibility in their approach to your supply chain challenges. Search for opportunities to create efficiencies in your network through drop trailer programs, dedicated fleets, and visibility tools. For pallet providers, having real-time visibility from their transport partners on pallet deliveries and core collections can help optimize day-to-day planning and improve overall service to customers. Additionally, while pallet networks can be volatile, creating lane consistency and/or market density can help to lower overall transport costs.
5.) How are new regulations making life harder or better for truck operators?
Taylor: They are making things harder. Often, proposals or mandates in the name of safety do nothing to improve safety but instead are simply burdensome. Hours of Service offer little flexibility, in combination with (truckers) having no control over schedules, detention, weather, traffic, etc. plus working with ELDs. We are working on legislation for restroom access for truckers. (https://landline.media/article/no-restroom-at-the-inn/).
Vaccaro: For the bad operators, it will become more and more difficult to get by if the investment has not been made in newer equipment with advanced safety systems and operations compliant with local and state safety and environmental regulations. The clock is ticking for them. Either an insurance renewal, DOT audit, or accident will close more companies this year, especially those who purchased overvalued used trucks at higher interest rates during the 2020/2021 boom.
Generally speaking, experts believe that the worst of the truck freight cycle is over, but recovery will be slow. Plants and distribution facilities can work with truckers to make them more efficient – such as by reducing detention, and providing parking spots and restrooms. As shippers and investors continue to implement ESG (Environmental, Social and Governance) policies, sustainability and greenhouse gas reduction activities will become an increasingly important part of the conversation, as will data capture. Pallet companies may also have opportunities to create new revenue streams from their underutilized truck fleets.
