Freight Market Update: 5 Signals Capacity Is Tight

Speaker 1 [0:08] Okay, today’s Sonar Update, I really want to talk about 5 key pillars that I’m seeing happening in the market and then back those up with sonar data and some information from recent releases we’ve been tracking and we’ll continue to talk about on the show as well. So the 5 capacity— the, the 5 pillars are: 1, capacity is leaving the market. We’ve been talking about that at length length and that carrier exits continue with regulatory enforcement and the FMCSA and DOT revoking invalid CDLs as well as shutting down non-compliant CDL schools. The second pillar is rates are strong and durable. We’re continuing to see spot rates particularly remain elevated and contract rates continuing to rise. Demand is steady even though it hasn’t been increasing and is the third pillar. The fourth pillar is shippers are moving towards asset-based and dedicated capacity. We’ve seen that in some of earnings calls, and that makes a ton of sense based on the current regulatory environment and liability concerns. And then the 5th pillar is that the tightness in the market and lack of available capacity, as well as the raise— the rise in rates and a healthier freight market, is making driver recruiting significantly harder. So to back that up with a little bit of evidence both from Sonar and earnings, so pillar 1, capacity is leaving the market. We can see that in the Sonar Truckload Rejection Index, stri.usa. Okay. On a national level at 14.36%, which is still well above the 6-month average of 10.9%. We’re seeing especially high continued tender rejection levels at 23.5% for flatbed and 19.46% for refrigerated. So, those 2 are running even hotter than the overall national average of all rejections, even though they’ve all cooled a bit from the early summer peak. And I’ll talk a little bit more about why I think some of that is happening in one of the other pillars. But really, we’ve seen elevated rejections sustained over months, not just a spike. So I think that that’s really good evidence the capacity is not self-correcting quickly. To talk about some earnings that, that also back up this thesis of mine, Knight-Swift specifically, their management in their call attributed rapid, rapid tightening to supply-driven dynamics with spot rates exceeding normal seasonality and tender rejections reaching levels that they’ve not seen since 2021. And that’s in their own data, their own tender rejections, not just Sonar. And we talked about that showing up in Sonar data as well. They also specifically called out the FMCSA and DOT efforts to revoke invalid CDLs and shut down noncompliant driving schools to remove some of that low-cost, noncompliant capacity from the market. Werner also pointed to regulatory pressures removing shadow capacity as ELD providers exit the market alongside driver and CDL school removals. So rejections aren’t just elevated. They’ve stayed elevated for months. And that’s backed up by our data as well as to the largest public carriers. Pillar 2 is rates are strong and durable. So the sonar evidence is that the NTI, our truckload National Truckload Index tracking spot rates, has remained incredibly high. It had a mid— a bit of a slump, which is still elevated in mid-June, but it’s beginning to rise again. Even when you back out fuel, which makes really the key durability check to ensure, you know, that the rates aren’t only rising based on fuel costs. We continue to see a strong spot rate and we’re not seeing those diesel prices and that NTI spot rate necessarily move in tandem, which to me speaks to the fact that spot rates are remaining elevated and moving based on lack of capacity and willingness to pay, not just based on diesel rates going up. Rates can rise even when diesel is falling, and we see that in the data and you’ll see that in the graphic. Pillar 3 is demand is steady even though it’s not increasing. In Sonar, you can see our OTVI or our STVI, either index of volume, our volume index, it’s remaining relatively flat to modest rather than surging. And then when we look at our actual Sonar Tender Volume Index of accepted volume, we can see that that’s remained steady. Acceptance is going up a bit, but I believe that is from new higher contract rates starting to come into play, leading to a little bit less rejections and better compliance for tender acceptance as contract rates have risen and new contracts have been put in place. Some evidence of this is that Knight-Swift’s own CEO called this cycle supply-driven rather than demand-driven. You can see in all of our data, you can see that intermodal, like for J.B. Hunt, their volume rose attributed to rising fuel costs and constrained truck blocking supply, which is pushing people towards rail. So where we are seeing the demand increase is intermodal, but again, I don’t believe that’s from massively increased volumes across overall demand. I think it’s from mode shift as supply has left the truckload market, forcing some of that volume onto the rails. The 4th pillar is shippers are moving towards asset-based and dedicated capacity. Um, this one leans more into earnings commentary than sonar data, but I think that it absolutely makes sense in our current regulatory environment with liability concerns. Uh, when we think about JB Hunt’s earnings, they mentioned their dedicated pipeline was at record levels. Um, they pointed to a tight driver market, regulatory pressures, customer demand for reliable capacity. So makes perfect sense. Werner, their CEO Derek Leathers said on their call that organic dedicated business is growing Not just with their first fleet acquisition driving margin improvement, but as a whole. So plenty of evidence there. And then the fifth pillar is driver recruiting is harder, compounded by the regulatory environment. Again, I’m going to lean more on earnings and what we’re hearing from all of those industry experts who we are talking to every day on this show. But Knight-Swift in their call again said spoke to the same CDL revocation and noncompliance plants, school shutdowns, commentary, um, the regulatory environment is shrinking the eligible driver pool. JB Hunt has spoken to the driver market tightening, leading to increased sign-on bonuses and targeted wage increases. They even flagged that as a potential margin pressure point going forward. We’ve heard it from a lot of our guests that recruiting has become harder. Drivers have more options in a healthy freight market and can chase higher pay. We’re seeing some wage improvement for drivers As some have announced driver pay increases. So really every one of these 5 pillars showed up almost verbatim in Q2 earnings calls from the biggest public carriers in the space. They’re describing their own market in the same terms that we’ve been using all year as we’ve been talking about the market. And again, also supported by Sonar data.