October 2019 The Roemer Report

Revenues up, but fleet closures up too, spot market blamed

The spot market for freight looked much different to trucking companies in 2018 than it does now. The future was much rosier then and many trucking companies felt flush and optimistic enough to upgrade equipment and replace their tired tractors with new equipment.

Others sought to attract drivers, offering better salaries and benefits. Recruiting is always tough and while these strategies may, or may not be effective, the combination of capital spending and increased operational spending was apparently too much to bear and the closures started piling up.

According to an article in Supply Chain Dive, Donald Broughton principal of Brought Capital, carriers could not trim operating expenses fast enough to respond to the falling spot market for freight.

640 trucking companies closed by July

By the first half of 2019 Broughton noted 640 trucking companies had closed their doors. A three-fold increase he said, from 2018 during the corresponding period. "So when your costs increase and the spot prices go down, to the extent that you're exposed to spot, you can go from being profitable to unprofitable very quickly," explained Broughton.

100% Operating ratios not sustainable

Operating ratios (ORs) during 2019 tell the story and explain to a certain extent the fallout. FreightWaves said that for motor carriers the average OR was hovering near 100%. What that means is that for every dollar of revenue, most all of it goes to cover day-to-day operational costs. Like any for-profit enterprise, a “no-profit” business model is not sustainable and there are 640 ex-trucking companies out there to explain how that works out in the real world.

Still, there is money to be made

American Trucking Associations (ATA) released the latest edition of its annual data compendium – ATA American Trucking Trends 2019 – reveals that the industry’s revenues jumped to $796.7 billion in 2018, up from $700.1 billion the previous year. “2018 was a year of dynamic growth for the trucking industry,” said ATA Chief Economist Bob Costello. “Trends is a simple, one-stop resource to see where our industry is so executives and policymakers can make informed decisions about where it is going.”

Among the other findings in ATA’s Trends:

  • In 2018, trucks moved 11.49 billion tons of freight, 71.4% of the nation’s tonnage freight.
  • Trucking’s revenues accounted for 80.3% of the nation’s freight bill.
  • Trade – especially with Mexico and Canada – is very important to trucking. Trucks moved 67.4% of surface freight between the U.S. and Canada – up 3.6% in 2018 – and 83.5% of cross-border trade with Mexico, up 10.2% from the previous year.
  • Most carriers are small companies – 91.3% of fleets operate six or fewer trucks and 97.4% operate 20 or fewer.

Smaller the fleet the less exposure

What explains the disconnect? Why are some companies doing well while other aren’t? According to a story posted on the Strategic Sorcerer, this seeming paradox might be attributable to the composition of the firms going under.

Smaller companies, says the report, with six trucks or fewer – and which account for 91.3% of fleets in the U.S. are doing well overall, while larger firms are experiencing adversity. Through the first half of 2019, the average size of firms that ceased operations was 30 trucks. In 2018, the average was nine.

Don’t ring the recession bell yet: ATA

American Trucking Associations’ latest report on all freight transported by trucking in August showed another decline, but at this point the organization believes it’s unlikely that the economy is slipping into a recession. The ATA’s advanced seasonally adjusted For-Hire Truck Tonnage Index declined by 3.2% in August, following a 6.2% increase in the month before.

In August, the index equaled 118.3, compared to a reading of 122.2 in July. Despite volatility in the ATA’s last few monthly truck tonnage reports, the overall trend line is still moving upward.

“While there is concern over economic growth, truck tonnage shows that it is unlikely that the economy is slipping into a recession,” said ATA’s Costello. “It is important to note that ATA’s tonnage data is dominated by contract freight, which is performing significantly better than the plunge in spot market freight this year.”

Compared to August 2018, the seasonally adjusted index increased by 4.1% and year-to-date, the truck tonnage index is up 4.2% year-to-date compared with the same period in 2018. And that’s good news.