Mr. Craig Fuller, CEO at FreightWaves, is not only pontificating the next freight rate recession, but likes to reiterate his past predictions, and the accuracy of those predictions. I believe his analysis has some credibility, but it does not point to a freight recession.
He states in his April 1 post “About that driver shortage” that there has been a large decline of the rejection rate over the past six to seven weeks, I agree. He feels the load-to-truck ratios are starting to decline in the favor of the shipper and the ultimate buyer of freight on the market today, I agree. But here is where we totally disagree.
These indicators are solely impacting the spot markets, not the contract markets. I believe the drop in spot market rates is simply the increased hauling capacity in the small spot market carrier. There has been a massive increase in the amount of new U.S. Department of Transportation (USDOT) licenses obtained in the past 18 months, leading to more independent contractors shifting out of the carriers thus “chasing the spot market.”
This small carrier group has enjoyed historic rates over the past two years, but now the headwinds they are ready to experience are daunting. Starting with the higher price of fuel, the higher cost of equipment over the past nine months, the higher insurance costs, and the impending doom if there is any kind of a maintenance problem with their singular units. These small businesses react by running harder to absorb these costs. The increased capacity, the higher costs, the need to run more, and the weather getting better has increased capacity significantly in the spot market leading to lower spot rates.
For most of the contract market, nothing has changed. First and foremost, we are not replacing our current capacity at a rate needed to keep the supply equalized. Equipment is being delayed or canceled for replacement and securing the 20,000-plus trucks needed has been a challenge. I believe this will continue throughout this and next year at the least.
Add in a driver shortage, which Mr. Fuller believes is a hoax, and we will compound our challenges with freight hauling capacity.
The carriers are already fighting equipment problems; not getting planned equipment replacements and running equipment longer with higher maintenance costs. The driver shortage is true, if it wasn’t all these carriers should quit giving driver pay increases. Most increases in pay are due to market conditions of scarcity. Currently, our data shows driver wages now absorb 35% to 37% of the carrier revenue, pre-pandemic it was 30%, thus the current rate increases haven’t even covered our wage increases. This increase in wages is not considering the high cost of driver training that many of the carriers have adopted over the past five years.
Everything I see by visiting fleets, watching the financial data, and engaging with my clients, leads me to the conclusion that the contract rates will rise above spot rates, capacity will remain tight, and there really is a driver shortage. I also believe that many of these independent contractors will leave the spot market and seek a home with a contract carrier in a power-only roll.