By Scott Simanek, Chief Commercial Officer, Unis Fulfillment and Transportation
The soft freight market of 2019 has caused the bankruptcy of 640 trucking companies, 11 of which are major carriers, accounting for the loss of over 3,000 jobs. For perspective, the whole of 2018 saw 318 carrier closures. The soft market and slowing global economy have been the nail in the coffin for some long-standing carriers like New England Motor Freight, Falcon Transport and LME.
One might ask why the state of the trucking industry is in one of the most perilous times in recent history.
Freight is a chess game. Pricing power shifts between the carrier and shipper, depending on current spot and contract rates, load volumes, rejection rates, economic policy and regulations. Right now, shippers have more power than carriers, but that pendulum has begun inching back towards an equilibrium, as seen in the chart below.
With more pricing power, shippers negotiate for the lowest cost, carriers negotiate for a fair operating margin and brokers price below market to win the deal. The brokers in this model are not at fault. Their employees are paid to make the highest margins possible by paying the lowest possible rate to the carrier.
Larger shippers must think beyond the short-term peaks and valleys. It is easy to select a broker that can promise large coverage at below market rates. This is not sustainable and takes margin away from the carrier base that so desperately needs it. That margin is likely the difference between profit and loss for the carrier.
Shippers must push their logistics teams to do their due diligence and make longer-term decisions in selecting asset-based providers for the core of their business. There is a place for brokers on smaller volume or disparate lanes where asset-based carriers cannot align their networks. Many brokers sell their ability to look at the bottom 20% of shipper’s lanes and aggregate those lanes. This is the ideal place in the supply chain for brokers.
Two of the largest publicly traded brokers reported expansive margins in the second quarter. The first company’s margins, for instance, were nearly 18% – an excess not reached since 2009. The second, too, widened its margin to 18.2% – a 134 basis point improvement over the second quarter of 2018.
Widening margins for freight brokers are a symptom of a soft freight market. At the beginning of an economic downturn, the spot rates fall much faster than contract prices, so while shippers’ revenue is stable, their costs drop. When the market goes up again, shippers’ margins will get squeezed.
Digital brokerages, which often employ as many people as traditional brokers, offer below-market freight rates to shippers in order to gain market share. Doing this, they won’t profit for the foreseeable future, which may be purposeful tactic to thin out the brokerage market. And while this option may be another easy way out for shippers (and even carriers), an app will never provide the quality of customer service that shippers need and asset-based carriers can deliver.
If shippers, when choosing transportation providers, allow their supply chain and transportation teams to allocate large percentages of their business to non-asset brokers, they are contributing to what’s causing carriers to go out of business, as well as decreasing the supply of available equipment.
In order to gain a long view of the freight market and consider the longevity of carriers, shippers need to choose asset-based or asset-heavy third-party logistics providers (3PLs) that offer a suite-of-services that extends to all segments of the supply chain.
Shippers must make their logistics teams accountable for onboarding asset-based companies that can add value, security and accountability to their networks. Using an asset-based company is the less risky approach to not only ensure the efficient delivery of freight, but also safeguard the carriers’ profit margins, which will allow our industry to thrive for decades to come.
Unis is an asset-based 3PL running 11 million square feet of warehousing and over 500 trucks in seven regional markets. Unis Transportation’s focus is on regional less-than-truckload, retail consolidation, drayage and dedicated fleets. Unis Fulfillment excels at e-commerce, retail distribution and transloading services at its 27 facilities nationwide.
