Is the freight market already turning for 2020?
With low rates and high capacity, 2019 was, generally, a good year for many shippers and brokers. But with a new year comes new changes and we find ourselves asking: Will the freight market change in 2020, and has it already turned? Many signs point to yes.
It’s hard to predict demand, but several sources are indicating the market will favor carriers by the end of the first half of the year. The DAT expects the next turn to “take effect by mid-2020,” according to their 2020 Freight Focus report. The Cass Freight Truckload Linehaul Index follows a similar trajectory, suggesting a “couple more quarters of downward rate pressure ahead due to soft demand and excess supply.”
Coyote Logistics, however, believes that the market has already begun to flip, as spot rates, though still weak, are trending back toward normal, with contract rates soon to follow. The company’s Q4 2019 Market Update and Forecast predicts that the “spot market will likely reach an inflationary environment by Q1 2020, then continue heading up from there.”
But how accurate are these forecasts?
The actual time frame of these predictions is up for debate, but the likelihood that we’ll see the market noticeably change within the first half of 2020 is relatively high.
We’ve identified several key factors that align with these predictions.
1. Overall capacity levels off
In 2019, we saw much more capacity flooding the market. Demand, however, didn’t rise to meet it, resulting in over supply.
And a surprising number of trucking companies — more than double — closed in comparison to the previous year, according to several news reports and industry data from Broughton Capital and the U.S. Bank Freight Payment Index.
Some, like Celadon, were unable to keep doors open after being hit by legal fees or expenses (more on this below), while others simply overestimated demand, made fleet and expansion investments, but were unable to meet expense and maintenance costs. Increasing or continued driver pay rates and compliance costs also compounded on this effect.
As more carriers leave the industry, regardless of the reason, we should expect to see a shortage in capacity.
2. ELD mandate out in full force
In addition to hours-of-service restrictions on truck drivers, the FMCSA’s electronic logging device (ELD) mandate went into full effect on December 17, 2019, moving out of its “soft enforcement” two-year period.
According to a press release by the Commercial Vehicle Safety Alliance (CVSA), previously grandfathered-in automatic onboard recording devices (AOBRDs) are no longer allowed and any drivers with vehicles without a registered, compliant ELD are “considered to have no record of duty status” and will be placed out of service.
Adoption rates are still not at 100 percent — capacity will likely be affected as inspectors crack down and displace trucks and drivers.
3. Federal Drug and Alcohol Clearinghouse puts on the pressure
The Clearinghouse, a centralized, federal database for drivers’ drug and alcohol test results, requires FMCSA-regulated employers, medical review officers, substance abuse professionals, and third-party administrators to report any violations in hopes of catching and removing unsafe drivers from the road. Employers are also required to query new drivers prior to hiring and existing drivers annually.
It’s too early to tell how many drivers will be put out of commission after the January 6, 2020 implementation, but industry executives have been quoting a three to 10 percent total workforce reduction, which will further put a strain on capacity.
4. Carriers face increased legal woes
2019 was a tough year for carriers in court, as judges handed out hefty settlement rulings for labor disputes, vehicle accidents, and more.
A couple notable ones included:
LME which shuttered soon after being required to pay $1.25 million to former employees of Lakeview Motor Express, a company they previously owned and closed without notice.
Celadon filed for Chapter 11 bankruptcy shortly after the SEC charged two former executives with accounting fraud and the company was required to pay $42.5 million in fines. Additionally, the ruling caused their stock to drop below $0.50 per share.
We also saw a landmark $42 million judgment awarded for an underride accident involving a New Mexico teenager. Although both the carrier (Barkandhi Express) and trailer company (Utility Trailer Manufacturing Co.) involved are still active, this sets a precedent for future sizable settlements that could easily force a carrier out of business, further reducing capacity.
Similarly, carriers are also facing rising insurance premiums that will increase per-mile operating costs.
5. Private equity funding throws curveball
In 2019, we saw increased private equity funding for brokerages — both digital and traditional — and trends toward strong investments in technology. In order to achieve short-term hypergrowth, however, many private equity groups encouraged brokerages to offer low rates and operate at a loss, which the firms were able to absorb.
To what degree did this affect accelerating rate reductions? The impact is still unclear. What’s more: We expect that investors will not tolerate these losses long term and start requiring these brokers to show profits.
Could we see a more severe rebound in rates than expected as a result?
Given the above factors, we believe we’ll see moderate to deep effects on total truckload capacity, which will increase rates and lower tender acceptance in 2020, unless demand drops dramatically.
To prepare for any market changes, we suggest you:
Reinforce relationships with trusted carriers. This will help mitigate reductions in tender acceptance and/or ensure continued, quality service to clients. When spot needs arise, you’ll ideally be able to turn to these carriers to pick up a load.
Make efforts to forecast your needs to prebook your freight. The more dedicated freight you have, the more time you can devote to spot, when it inevitably occurs. Awarding contracts to quality partners can also help strengthen those ties.
Have you seen the market effects already?
Get ahead of your competition and stay in front of the market by implementing a procurement solution that lets you build relationships with trusted carriers and find capacity without relying on public load boards.