State of Freight takeaways: From the floor of a very weak trucking market

As October is about to roll into November, the State of Freight webinar with FreightWaves CEO Craig Fuller surveyed a market just hit by the stunning collapse of digital brokerage pioneer Convoy and data sets that aren’t showing much of an upturn in the outlook for carriers.

Here are some of the highlights from this month’s session:

The brokerage shakeout developed over time and is now moving fast

Fuller said he cannot recall any previous time when so many brokerages have gone out of business. He cited at least four significant brokers that have shut their doors in the past four months, with Convoy leading the way. But while Convoy may have gotten most of the attention, Fuller said it is brokerages beyond the ones that are part of private equity or venture capital-backed that are seeing struggles. Many of those brokerages had used various debt financing tools “to grow their businesses aggressively,” but with interest rates rising and the businesses slowing down, many have found themselves in violation of loan covenants.

As far as Convoy, Fuller said there had been rumors in the market for many months about troubles at the digital brokerage. “But I think we were all surprised as to how fast that business deteriorated, or at least it looked from the outside like it had deteriorated much faster than expected,” he said.

Bounce back in freight markets still doesn’t seem imminent

Fuller said when times are tough for carriers or brokers, management at those companies often starts “using that as a baseline excuse and you start saying, ‘Hey, it’s OK.’ This isn’t as bad as it could be.” But eventually, when the weak market drags on, the realization comes that “there is something systematically wrong that we need to fix. And I think as a business owner, this is the time to do that.”

When freight markets weakened in early 2022, Fuller said, “I remember thinking that the downturn in freight was probably going to be at most a year.” After that duration, inventory clearing and the need to restock anew would arise. “But it has not happened yet,” he said.

There are more trucking bankruptcies to come

Fuller said the trucking industry “is starting to see the failures pile up. We are certainly reporting on a lot more bankruptcies than we have in the last six months.”

How much does the market have to fall? Fuller said he did not see truckload markets strengthening until another 20% of capacity comes out of the market.

But the capacity issue for the market was built on the fact that the number of trucking authorities granted by the Federal Motor Carrier Safety Administration surged, fueled by both the zero interest rate environment and the strong freight market. “You had a massive capacity expansion cycle unlike anything we’ve ever seen,” Fuller said. Some executives have told him that the current freight market is worse than in the Great Recession of 2008-2009.

Data from FreightWaves SONAR presented during the webinar showed that the net reduction in the number of approved authorities has been relatively muted given the weakness of the market.

The market is not ready to bounce back, Fuller said. “This is the reason the carriers feel the way they do. It is much more painful than what it was during the financial crisis.”

That is likely to be a factor with the start of bid season. “The carriers are looking at some pretty difficult operating conditions knowing they have to be more aggressive,” Fuller said. That will lead to contract rates coming down next year, and the challenging pricing market for carriers is likely to last into the second quarter.

Significant carriers are parking trucks

Capacity reductions are coming not just from independent owner-operators leaving the business. Instead, Fuller said he is hearing reports and seeing evidence in the latest round of earnings reports that larger carriers are taking trucks off the road given the market.

“They would rather have trucks set against the fence, which violates everything I knew about trucking,” Fuller said. “You’re not supposed to do that. The rules are, keep the equipment running, but they’re making the decision to not hire the drivers and not fill the trucks.”

Their conclusion: “We simply can’t make a profit now.”

Fuller and Zach Strickland, director of freight market intelligence at FreightWaves, talked about the third-quarter earnings numbers from Heartland Express (NASDAQ: HTLD), which lost money during the three months. 

“Heartland my whole life has been reputable and one of the best operators,” Fuller said. “And it was one of the most fantastic operators in terms of capital efficiency, profitability and operating ratio.” The fact that it is struggling “is just a testament to how difficult the market is right now,” Fuller added.

The rise of intermodal markets

Fuller and Strickland both cited data that showed intermodal rail traffic doing well. And as Strickland noted, that isn’t a sign of increased freight traffic overall. Rather it is intermodal capturing market share from trucks, “and this actually helps explain the dip” in truckload volume, he said. “The rail sector has really had a late blooming this year.”

Although diesel prices are now coming down, they moved up from a low of about $3.79 a gallon in June (per the weekly average retail diesel price from the Energy Information Administration) to a high of about $4.63 a gallon in mid-September. They have since retreated about 20-22 cents a gallon. That sharp rise is always seen as a potential boost for intermodal traffic. 

Fuller said part of the reason for the switch beyond the improved fuel efficiency inherent in that form of transportation is that “I have no urgency to move my freight.” The speed of the point-to-point nature of truckload has its advantages, but if a shipper can save 40 to 

50 cents per mile moving freight via rail intermodal, and the goods have a less-than-urgent timeline to get where they’re going, this gives a boost to train service. 

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