The pace of the capacity shakeout in trucking needs to increase before the industry can begin seeing healthier profits, according to one of the country’s largest freight brokers.
“We’ve seen capacity exits basically every single month in terms of net revocations since October of 2022,” said RXO Chief Strategy Officer Jared Weisfeld during a keynote discussion to kick off FreightWaves’ Domestic Supply Chain Summit on Wednesday.
“That’s encouraging, but not yet at the pace that’s required to bring that load-to-truck ratio above where it is right now, which is about 3-to-1. The long-term average is about 4-to-1. You’ll start seeing the spot market re-emerge when we start seeing that punch up above that. There’s still too much capacity in the market.”
Asked by FreightWaves carrier expert Thomas Wasson for a 2024 market prediction, Weisfeld, who is also responsible for analyzing growth opportunities and engaging with investors, said it’s difficult to predict a freight recovery in the context of an economic chart.
“Will it be a ‘V,’ a ‘U,’ an ‘L’? I think the shape of recovery, and how steep it is, will depend on the rate of carrier attrition heading into 2024, as well as impacts associated with higher interest rates, student debt repayments, and potentially higher unemployment on consumers and the related impact to aggregate demand.”
Weisfeld, an expert in technology-sector financial analysis, has been with RXO (NYSE: RXO) since the freight brokerage was spun off from LTL carrier XPO last year. He saw the company generate $1 billion in revenue in the third quarter of 2023 (compared with $1.1 billion in 3Q22), with full-truckload brokerage volume increasing 13% year-on-year in the quarter and LTL brokerage volume increasing 55%.
“When we look at our business, the one vertical that did show some deceleration on a year-on-year basis was industrial and manufacturing,” Weisfeld told Wasson, noting that the sector grew but at a lesser rate. “I think that’s consistent with the overall industrial economy, which was in contraction territory in 2023. That’s something to watch going into 2024 in terms of the health of the industrial economy.”
As a major player in freight brokerage, RXO’s customers also include major retail and ecommerce customers, many of which had elevated inventory levels at the start of 2023.
“When you think about the last three to four quarters and the largest retailers in North America, their revenue growth has outpaced the inventory dollar growth. So we’re entering 2024 with a significantly better inventory position,” Weisfeld said.
But that could change, he cautioned, depending on consumer demand. “The health of the consumer is particularly important — you can have reasonable inventory levels, but if aggregate demand lowers, those inventories can get bloated pretty quickly.”
Taking advantage of opportunities and trends
Weisfeld advised companies involved in the domestic supply chain to resist putting off investing during the current economic downturn while also using the time to build customer relationships.
“At the heart of our platform is significant technology investment that we made since day one of the business, leveraging pricing algorithms that we believe are best in class,” he said. “You have to use the soft part of the freight cycle to continue to invest and get closer to customers and servicing the freight, which is what we’ve been doing. That will allow for outperformance into 2024. By not doing that, you’re not going to be positioned for when the cycle inflects.”
A trend that Weisfeld believes will continue to gain traction is the influence of truck brokerage in the freight market.
“If you look at 3PL/brokerage penetration as a percentage of the for-hire truckload market, we estimate about a year ago it was around a low 20%,” he told Wasson, up from close to 10% a decade ago.
“If you’re a shipper and can get better access to technology, incredible service, more flexibility — we think that penetration can increase to 40-50% over the long-term, as a percentage of the $400 billion for-hire truckload market. We think RXO is going to be a winner in that trend.”
