Not enough trucks leaving market to dent oversupply

Not enough trucks leaving market to dent oversupply

Two trucks on Interstate 95 in Maryland. Trucking overcapacity has driven down rates in 2019 and bankruptcies have made only a small dent in the imbalance. Photo credit: Ari Ashe.

Despite an uptick in truckload companies filing for bankruptcy, not enough capacity has been removed to fix the supply-demand imbalance in the spot market, according to logistics providers and trucking companies.

Trucking bankruptcies reportedly are creeping up after hitting a 20-year low in 2018, but they aren’t likely to approach the 3,065 trucking failures reported by Avondale Partners in 2008, when the United States economy was on the edge of the worst recession in decades.

Most truckload bankruptcies reported to-date have been fleets with fewer than 50 trucks. It would take an enormous wave of bankruptcies among carriers that size to make a dent in the truckload market. Falcon Transport, which folded in May, had a few hundred trucks. 

The high-profile bankruptcies of New England Motor Freight and Lakeville Motor Express involved less-than-truckload (LTL) carriers, an industry in which oversupply is not nearly as big an issue. Those bankruptcies had more to do with specific problems at those carriers than an overall malaise in the marketplace.

“On [the] carrier side where we've seen a decline in total carriers, that is really a function of not necessarily carriers leaving the market, but fewer loads to third-party boards,” Landstar CEO Jim Gattoni said on the company’s July 25 call. “But our active count is off less than 1 percent, about 300 carriers from prior. So that's what we come up with the comment that we're really not seeing evidence here that capacity is leaving the market.”

Third-party logistics provider Trinity Logistics told JOC.com it also has been able to easily cover loads within its existing carrier database and hasn’t had to use third-party boards frequently.

“The market is still overcorrected a little bit. There is still a lot of capacity in the market,” said Sarah Ruffcorn, Trinity’s COO. “We are seeing spot freight moving very easily right now. It’s incredibly competitive because there isn’t much freight available outside what’s under contract.” 

Bankruptcies, capacity not the same

Although several trucking executives have equated bankruptcies with tighter capacity, do bankruptcies really mean fewer trucks and drivers on the road? When trucking companies — small or large — fold, their truck and trailer assets typically are sold, often at auction.

That was the case when Estes Express Lines purchased the assets of Eastern Freightways and Carrier Industries, two subsidiaries of New England Motor Freight. Unless trucks are scrapped or shipped overseas, bankruptcies more often transfer capacity, rather than eliminate it.

The same is true with truck drivers. Freight demand may be slower than a year ago, but demand for drivers, especially well-qualified ones, remains high. Unless they have a string of truck accidents or alcohol and drug violations, truck drivers who lose their jobs in bankruptcies are likely to be hired quickly by other carriers, or at least offered jobs. 

New regulations being implemented over the next six months are more likely to tighten capacity for shippers, potentially boosting prices.

The rule requiring fleets to convert to electronic-logging devices (ELDs) from automatic on-board recording devices by mid-December could reduce productivity, and therefore available trucks per day, much as the ELD mandate did in late 2017 and early 2018. A drug and alcohol clearinghouse that will launch in early January — a database carriers will be required to check before hiring drivers — could reduce the number of employable over-the-road drivers.

Markets that cool will heat up again, but it’s often hard to predict either. Truckload spot rates in July dropped a little more than 2 percent sequentially, according to DAT Solutions and a JOC.com review of lanes in the proprietary US Domestic Intermodal Savings Index.

Is enough capacity coming out?

US Xpress Enterprises and Werner Enterprises, in their recent upbeat outlooks for the coming months, said trucks were exiting the market. US Xpress CEO Eric Fuller said shippers have been going deeper into their routing guides in recent weeks compared with earlier this year.

“A lot of customers are following a TMS [transportation management system] and so when the market is exceptionally weak, we get fewer offers because we may not be number one in that TMS, maybe we're number three, four, or five,” Fuller said on an Aug. 1 earnings call. “We're seeing more opportunities recently that maybe we're hitting that number in that TMS guide and so that leads us to believe that the market is tightening.”

C.H. Robinson Worldwide reported its average routing guide depth per tender was 1.2 in the second quarter, which means in most cases the first carrier contacted accepted the load. The company said it was among the lowest ratios in the past decade.

It’s also not clear how much capacity is still entering the market. US truck registrations increased by nearly 30 percent year over year in the first five months of 2019, as Class 8 tractors ordered in 2018 arrived at customer terminals and adding to existing capacity.

Even if those trucks represented replacements, rather than added capacity, the tractor-trailers they replaced simply moved to the used truck market and new owners.

Likewise, trucking employment numbers continue to climb. For-hire trucking companies increased their payrolls by 8,000 jobs from January through July, and by 36,300 jobs year over year in July, according to the latest monthly data from the US Bureau of Labor Statistics.

How soon will capacity re-balance?

Werner CEO Derek Leathers told JOC.com he disagreed with using active carrier counts in brokerage as a barometer. Leathers explained brokers add and subtract carriers all the time. He said capacity is leaving the market, citing bankruptcies such as Falcon Transport and other anecdotal evidence.

“We are six months out, if these current trends continue, of having us come back into balance. I think ELDs have the potential to accelerate that by a month and the drug clearinghouse could do the same,” Leathers said. “So, call it six months from August, but we could also see balance as soon as January.” 

Macroeconomic conditions are also a factor because they impact demand for trucks.

President Donald Trump said the US will levy a 10 percent tariff on $300 billion worth of Chinese goods — the so-called “List 4” — from Sept. 1. China devalued the yuan in response, which heightened tensions. The uncertainty has already caused shippers to stockpile inventory in warehouses, which is a negative for surface transportation. 

So, even if the supply of trucks dwindles in coming months, shipper demand will be a key in 2020.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.