Trucking should plan for a “wild ride” over the next six months as industry watchers brace for a down cycle and potentially more bankruptcies.
Bryan Schulte, chief data janitor for Leaf Logistics Inc., warned of the slowdown further exacerbated by what he called a “broken” system for buying and selling capacity.
“In general, there’s a two- to three-year boom-bust cycle in the truckload world, where one stylized way to think about it is at the peak, where capacity is tight and rates are high, it’s pretty easy to hang a shingle as an owner-operator [of a trucking business],” Schulte told Sourcing Journal.
Leaf is a digital platform connecting shippers, carriers and brokers to coordinate freight and create greater transportation efficiencies.
As more owner-operators launch their own trucking businesses, capacity increases. Eventually, Schulte said, that capacity surpasses demand and bankruptcies are virtually inevitable as rates come crashing back to Earth.
“We are pretty clearly in the overcapacity part of the cycle at this point. We’re seeing a general peaking and falling of rates both in the spot and contract market for our customers,” Schulte said. “Along with those falling rates, tender rejects, which means not only are carriers proposing lower and lower rates, they’re actually accepting loads at these rates, which is a big difference from where we were six to nine months ago.”
Capacity for freight carried by truck is either secured through an annual request for proposal process that produces non-binding agreements on rates and volume. The RFP process typically include large and mid-sized carriers, with some smaller carriers getting access to the process through a broker. There’s also the spot market for freight ready to leave within two days, for example, or some other short-notice time period.
In the worst-case RFP scenario, carriers can’t plan against any particular freight volume if shippers pull away and obtain new bids when the market begins to fall, while shippers face the possibility of having rates or capacity change on them when the market is booming. Commitment is essentially lacking on both sides of the equation.
“The way we buy and sell trucking in this country is broken,” Schulte said. “It’s been broken for at least 20 years.”
Leaf’s pitch to the industry aims to create some semblance of certainty with clarity on available capacity so companies on both sides of the equation can plan more appropriately, while at the same time cutting carbon emissions.
Schulte said the company’s recently seen an increase in rebidding.
“When capacity is tight, carriers were frequently refusing to accept loads tendered at contract rates because they could do better in the spot market. As a shipper, your carrier of last resort is a broker,” he said. “A lot of those owner-operators have essentially been operating off of the [excess] created when the contracted carriers aren’t willing to move things. As soon as those larger carriers get hungry and are willing to move at their contracted rates, we’re seeing that the folks who have those contracts with the big shippers are honoring more and more. The more that dries up, the more the demand that the smaller market players were accessing through brokers does too.”
Given how many trucking companies operate off of lean balance sheets, bankruptcies could very well be on the horizon.
“If you look at the way the carriers work, they run pretty lean,” Schulte said. “So if you look at the balance sheet for a typical carrier, maybe 80, 90 percent of their current assets will be in the form of receivables. They don’t carry a lot of cash. A lot of it depends on payments from shippers coming in regularly and one of the first things that happens in a general economic downturn is that those shippers are looking to extend their payables.”
Bills that were payable in 45 days, turn into 60 or 90 days. During the Great Recession, the industry saw 120 days, Schulte said.
Fuel prices don’t help with the cash flow structure of the business, and with a shortage of diesel fuel on the East Coast, prices are rising even more dramatically, Schulte said.
Bank of America in late April warned investors of something similar, noting a falloff in demand.
The Cass Freight Index for April indicated a drop in U.S. freight volume from the prior month and the year-ago comparison, noting a “thud” in the trucking cycle. The firm, which helps companies manage their expenses and payments, went on to say “the prospect of a freight recession is now considerable, as substitution from goods back to services spending picks up pace, and as inflation slows overall spending, particularly via higher fuel prices and by pressing up interest rates.”
Schulte said Leaf is piloting a new product that aims to help carriers address the payment gap between the time an invoice is submitted and when it’s actually paid. At the same time, he recommends industry players be flexible to adapt to the volatility by knowing what their options are for contracting the different parts of their freight.
“I would say [bankruptcies are] likely to come rather than something that has arrived just yet. The last time I can think of a downturn in trucking coinciding with the economy was the 2008, 2009 era,” Schulte said of the financial crash, when thousands of trucking companies filed for bankruptcy. “We’re certainly not there yet, but it’s hard to take that off the table as something we might see over the course of however long the next downturn lasts.”