Authors: Chris Demetroulis Kevin Woods
In the first whitepaper in our US transportation series, we explore four trends shaping and influencing the sector, and perspectives on the anticipated future direction of travel.
With growing hopes of a resurgence of demand and the market anticipated to rebound in the opening half of 2024, business operators who have successfully navigated a more challenging market in 2023 could benefit from market exits, tightened capacity and pricing adjustments.
Consolidation and upscaling movements are likely to be seen, with large fleet operators snapping up independent and smaller operators to build breadth and capacity as the market continues to tighten. With their ability to absorb costs and hold greater negotiating power, larger operators can win a competitive advantage through pricing flexibility and the ability to ride out periods of reduced margin. Owner-operators are being squeezed out of their market. They are left with the choice of consolidating their business, changing operations, or raising investment capital to expand their fleet size. The rising expenses of operating and maintaining a truck (or small fleet) have added to the challenge.
Spot rates/freight brokerage trends
Falling demand and an oversaturated carrier market have seen spot rates fall to a low point of -9.9%YoY in Q3 2023 and are now on an upward trajectory.1 To navigate the fluctuating rate environment, proper planning is essential to identify (and respond) when the market approaches inflationary territory.
According to 2023 forecasts, freight rates on sea, air and highway routes are expected to drop from their pandemic high points during 2023/2024. Long-term contract rates are expected to return to more typical levels, but fewer shipping options may be available in the first half of the year due to a decrease in capacity.
Rates continue to be a moving picture, with an originally forecast freight trough in the first half of 2024 eventuating in mid-2023. This fact, coupled with a lower demand forecast and a higher-than-expected capacity increase, signals more change is on the horizon. However, a survey by the Owner-Operator Independent Drivers Association foundation found that 54% of respondents reported a negative forecast for 2023, citing concerns such as high fuel costs, increased regulation, inflation, overcapacity, and a cooling economy.2
FTR's pricing pressure index projects a slight recovery in rates through the end of the year, with contracted rates forecasted to finish 2023 at an average of -2.8% year-on-year. The railroads are still offering capacity in historically deficit markets.3
Truckload contract rates have trended upwards to -11.1% year over year, up from -13.9% in Q2 2023. Typically, contract rates will lag spot rate activity by two or three quarters, but the turn happened faster in this cycle, only lagging by one quarter. This trend was driven by the record decreases in contract rates, which saw the market hit a base point where no further downward rate movement was possible.
A freight recession, a market characterized by falling truckload shipping volumes, volatile fuel prices and lower new vehicle orders will influence rate trends further as we move into the first half of 2024. Spot rates will likely increase at a faster pace than contract in Q4, and spot and contract pricing rate trends will likely cross without creating considerable pricing and capacity pressure on shippers in the near term. However, as the two rates diverge further into 2024, we may see market adjustments to pricing and capacity bucking prior-year trends.4
Insolvency risk
Currently, brokers and freight forwarders are required to maintain a $75,000 surety bond to provide security for the payment of freight charges by motor carriers.5 If the claims against a broker exceed $75,000, the financial responsibility provider will submit the motor carrier claims to a court in an interpleader action to determine how the trust should be allocated amongst various motor carriers, which can be a costly and time-consuming process. The proposed changes are intended to address situations where a motor carrier provides transportation services but the broker or freight forwarder fails to pay what is owed.
The Federal Motor Carrier Safety Administration's (FMCSA) aim is to "mitigate the need to initiate interpleader proceedings and alleviate the concern of broker non-payment of claims."6 In response, five new changes have been put forward, including rules for drawdown on a freight broker or forwarder's surety bond or trust, and responsibilities in cases of broker/freight forwarder financial failure or insolvency.7
"The 2023 bankruptcy filing of an industry giant, one of the largest freight filings historically, left the taxpayer as the biggest creditor. Generally speaking, a big event like that could create a significant ripple effect and vocal concerns from transportation customers about the impact on their supply chain. While this may signal further market exits are on the way, the capacity appears to be there right now in the US marketplace, and that bumps and disruptions are being absorbed by third-party brokers and freight forwarders utilizing their partnerships to cover the instability.
With the higher cost of borrowing and interest rates remaining at a historic high point, even in the case of transportation operators targeted by private equity companies and venture capital funds, those investors are expecting a higher return to offset the higher risk exposure.
Consolidation and acquisition
Industry restructuring and consolidation has emerged as a key driver of transportation sector transformation in recent years.8 Driven by economies of scale and operational efficiencies, it offers fresh opportunities for operating efficiencies, market diversification and enhanced customer value.
Influenced by rate decline, economic uncertainty and a higher cost of borrowing, 2023 saw a dampening of deal value and volume compared to 2021 and 2022 market activity; however, the emerging trend of on-shoring and supply-chain restructuring is likely to restore investor appetite and bring players back to the deal-making table. In addition, investment in technology and the push into market adjacencies look set to disrupt the market further.9
As the least consolidated transportation modes, road freight and trucking are tightly held markets with a higher entry price. It's also arguably a higher-risk segment due to the fluctuating rate environment and aggressive competition for larger accounts and more profitable routes.
Merger and acquisition (M&A) deal volumes have been fueled by larger businesses drawing on capital reserves to absorb smaller players through rounds of consolidation, as well as growing interest from equity capital and institutional investors. Smaller operators (including independent single truck owner-operators) have faced increasing challenges as inflation and declining rates have driven up operating costs while pushing down margins, making them a prime target for larger operators looking to scale up and grow market share.
At the same time, smaller operators have remained critical to businesses during periods of market volatility, and it remains important for brokers and shippers to prioritize their relationships with carriers through proactive communication and supply chain visibility to prevent avoidable disruptions and delays.10
Relationships and continuity are at the core of market adjustments, including M&A and consolidation. Industry consolidation poses the risk of reduced competition, regulatory compliance issues and operating model integration challenges.
New market entrants and diversification
Market entries from high-volume shippers are transforming the sector. During recent periods of high congestion in US ports, these companies have been chartering smaller container ships, enabling them to bargain down the freight rates, leaving the smaller-volume shippers to pay more.
Freight transportation sector resilience in the US can be partly attributed to the traditional owner-operator model. The low barrier of entry to becoming an owner-operator carrier and the ease of exiting business in difficult times continue to enable the expansion of the small carrier community. Plenty of people seem to want to drive trucks. However, a meaningful percentage of those drivers would prefer to own and operate their own businesses. The market offers a variety of ways for an owner-operator to work and to survive challenging market cycles, from business operators running independently with their own trailers to being an independent contractor for a fleet.
Market entrants include digitization, with new technology and increased application of IoT and digital platforms adapting or innovating business models to meet new demands and opportunities. GPS navigation devices and route-planning software are two examples of the rapid pace of innovation and transformation. Starting out as hand-held GPS devices, the transition to onboard, integrated technology has hacked away at the original market, leading original market entrants to diversify into fitness, outdoor and marine spaces to remain profitable. As with many industries, digitization stands still for no one.
Perspectives on 2024-2025
In 2024, the US transportation sector looks set for transformative change. The drive for efficiency, margin and opportunities for diversification will continue to play a central role in the sector's response to emerging opportunities and ongoing uncertainty. Further ahead to 2025, long-distance freight trucking in the US is expected to experience positive growth through 2025, due to rising trade volumes and increased shipments to and from US ports that require trucking services.11
The ongoing digitization of operations has equipped carriers and brokers with real-time route tracking, improved fleet maintenance and supply chain visibility.12 A need for a robust cybersecurity has also gained prominence.
Sustainability initiatives, market consolidation and restructuring of journey distances, along with an ongoing supply chain resilience focus, are equipping the industry to face the next era of trading. A strong competitive environment and a hustle for business will remain, particularly between trucking and railroad transportation modes.
Perspectives on growth in the sector in 2024 vary. The 2024 CNBC Supply Chain Survey presents a bearish outlook for the supplies industry and connected transportation modes in the year ahead, with an anticipated soft freight trucking market marked by marginal pricing increases, reduced demands and relatively stable rates.13 However, expectations of a market turnaround in the second half of the year provide room for optimism and the potential for further market restructuring. The potential of rising insolvency and bankruptcy filings may further dampen any hope for a market rebound in the opening half of 2024.14
Data from FreightWaves SONAR Outbound Tender Rejection Index (OTRI) presents a moving picture, with the freight market hitting a low point in May 2023.15 Current data projections indicate a shift in favor of trucking fleets, correlating with 2019 market conditions. Overcapacity and expectations of further market corrections in the coming months have led freight experts to anticipate an acceleration in the freight rate cycle, potentially resulting in higher carrier rates and challenges for shippers. However, freight brokerages may face challenges, especially those with debt tied to operating margins.
Labor market movements could impact job stability for truck drivers and potentially influence consumer prices. Employment in the office and administrative support side of the trucking business is expected to be good. The field has considerable turnover. and beginners are able to find many openings. Competition will remain strong for the more desirable jobs, such as those with large companies or the easiest routes.
Ultimately, 2024 looks set to be a period of market adjustment and calibration to meet evolving demand and face ongoing economic uncertainty. The US transportation sector's historic track record of rising to the challenge provides room for optimism. A number of positives are already in the mix that will take the industry forward into the next era of transformation and disruption.
