SONAR Indices & Insights: Monitor freight carrier operating ratio using SONAR’s Operating Ratio (OPRAT) index

Adam RobinsonFreight Market Blog

Each week, you’ll learn about another index found within SONAR, the freight forecasting platform from FreightWaves. This week, learn how freight market participants, especially freight carriers, rely on FreightWaves SONAR’s Operating Ratio (OPRAT) index to monitor and understand carrier operating ratios. In this article, you learn what is the OPRAT in SONAR, who in the freight market relies on this index, what the OPRAT index tells freight market participants and a freight market expert’s deeper insight that shows how the OPRAT is used to gain deeper clarity around freight carriers’ operations in the freight industry. 

What is the Operating Ratio (OPRAT) Index?

The Operating Ratio (OPRAT) index provides total operating costs divided by operating revenue, which is derived from the Truckload Carriers Association (TCA) members and is reported on a monthly basis. OPRAT is segmented into dry van, reefer and flatbed carriers. OPRAT is a measure of how much of every dollar received from customers is spent on moving the freight. Expenses include items such as driver wages, truck lease, insurance, maintenance, etc. Debt servicing is excluded from this calculation. High operating ratios (ORs) are indicative of lower profit margins and ineffective operations or competitive conditions. 

E.g.: An OR of 101 means a carrier is losing $1 for every $100 it receives from sales revenue. 

OPRAT is divided into the following granularities:

  • Dry van company fleet – VCF
  • Reefer company fleet – RCF
  • Flatbed company fleet – FCF
  • Dry van company and leased fleet – VCFOO
  • Reefer company and leased fleet – RCFOO
  • Flatbed company and leased fleet – FCFOO
  • Brokerage divisions for dry van, reefer and flatbed – VBR, RBR, FBR
  • Consolidated for dry van, reefer, and flatbed – VCNS, RCNS, FCNS
freight carriers OPRAT
In the chart above, you can see the average operating ratio for the company-owned fleet section of TCA’s dry van carriers.

Background on Truckload Carrier Association and freight carriers operating ratios

Now that you know what is the OPRAT index, let’s provide a bit more background on the Truckload Carrier Association (TCA) data and operating ratios and what they can tell a freight carrier. The TCA benchmarking program is the first and only program in the history of truckload that provides monthly benchmarking of hundreds of competitive truckload freight carriers, ranging from mid-size to enterprise (smallest fleet 75 trucks, largest is 7000). In total, 73,000 trucks are counted in the data sample, representing 8% of the total truck count of medium and large trucking fleets operating in the entire U.S.

The fleets submit monthly financial data into a benchmarking software program that compiles aggregated financial reports for the industry, sliced by a number of variables. While the truckload carriers submit 500+ points of data, only 31 are published in an aggregated basis inside of SONAR. With this data we can use data and not bias to determine how the industry as a whole are doing. Prior to the data being offered on an aggregated basis, the only data points non-insiders would get about the state of the market is through the public truckload carrier earnings reports that would come out quarterly and offer up 8-10 operational KPIs. Now we have over 30 and they come up out monthly from over 200 different fleet profiles.

How could freight carriers view operating ratios

Operating ratios are a measure of operational efficiency. The formula is operating costs/operating revenue. A 100 OR indicates that for every dollar made in revenue, 100% of it goes to funding the cost of doing business, leaving nothing for debt or investment. In freight carrier operating costs are things like driver wages, back-office support, and maintenance costs. Debt and interest payments are not included in these costs.

Most freight carriers carry some amount of debt in order to fund some of their growth as many trucking companies are low on cash. Purchasing equipment and buildings are some of the more commonly financed items. In general, many carriers consider making five to ten cents on the dollar a success, or a 90 to 95 OR.

Watching freight carrier ORs can be useful in identifying the health of the trucking sector. When ORs are too high (over 100), carriers may be more willing to take lower-priced freight but are at a higher risk of parking their trucks and leaving the space. Lower ORs are indicative of well-run carriers, but also stronger market conditions in which freight rates are elevated. Having insight into the trucking sector’s health allows you to see if you or your carriers are in a strong or soft market.

How freight market participants may use OPRAT to monitor the performance of freight carriers

The following participants who are interested in the freight market and freight carrier operating ratios are as follows:

  • Analysts: Analysts can utilize the OR benchmark to gauge how successful carriers are at navigating the current market. They will also be able to see how competitive the market is during the month. 
  • Carriers: Carriers can use the OR data to benchmark how effective they are in comparison to carriers with similar operations. If they see TCA members lowering their ORs while theirs is increasing, it is a sign they are not effectively navigating current market conditions. 
  • Brokers: Brokers can use the carrier OR numbers to see how stressed they are at that point. If the ORs are high, brokers will have less room to press for lower rates. If the ORs are higher, they can potentially use that as a sign that carriers have room to move on their rates.
  • Shippers: Similar to the brokers, shippers can use the ORs to see how stressed carriers are in the market. Pressing the carrier too far when OR numbers are lower will potentially damage relationships. On the other hand, carriers with elevated OR numbers can help shippers identify sector health and carrier willingness to negotiate. This can also be used in negotiating carrier compliance numbers.

Deeper market expert insights around OPRAT

The trucking industry is extremely competitive with relatively low barriers to entry. All it takes is a commercial driver’s license (CDL), a truck, and a willingness to drive to start a trucking company. Many drivers will quit larger operations to start their own venture after a time. 

Many of these drivers have developed relationships with shippers over the years, making them a reliable option. Smaller carriers have lower overhead costs and can drop rates under the larger carriers whose costs are filled with building leases and back-office costs. The influx of smaller carriers has a deflationary impact on both spot and contract rates.

In 2017, carrier ORs averaged 99%. Many of the contracted rates were made based on 2016 activity, which was the last freight recession. Seeing as most freight contracts are made on an annual cycle, these rates were in place throughout most of 2017 and early 2018, which kept profit margins low.

Late in 2017 into early 2018, carriers started falling out of their contracted obligations to service higher-paying spot market freight. Demand grew so fast that spot rates were well above contract. Carriers, at times, could get more than double the price of hauling for their contracted shippers. The spread between spot and contract was too much to ignore.

Capacity swung the other way in 2019, as carriers struggled to remain profitable and the industry saw over 600 trucking companies fail with a couple of larger carriers closing that made headlines.  The first carrier, HVH transportation, was owned by a private equity firm and had over 300 trucks. The second was a smaller 100 power unit operation in Georgia.

The issue for carriers in 2019 had been more about the oversupply than the lack of demand, although both were present. As carriers saw margins expand in 2018, they decided to invest in growing their fleets as was demonstrated by the record number of class 8 truck orders in that year. About the time that most of the orders were being placed the market started to cool. Daily truckload volumes averaged roughly 3% in 2019 under 2018 from March through July, but the most brutal hit came in May and June when they were over 4% under the previous year volumes.

Moving into 2020 as the COVID-19 pandemic hit the freight market, SONAR showed an OR over 100 most of the year, only dipping below 100 during the summer. But, as the chart shows above, as move into the fall and start seeing the capacity impacts due to peak season, the OR is moving near 100 again.

Keep ahead of the market and turn to SONAR to plan around freight carrier operating ratios

In uncertain times, freight market participants need certainty to stay ahead of the freight market and understand the freight demand occurring in each participant’s most important lanes. The premier freight forecasting engine, FreightWaves SONAR, allows participants to benchmark, analyze, monitor and forecast freight demand and costs.  SONAR ensures more proactive responses to the market, the ability to provide a solid customer experience by offering transparency, as well as to make faster, more informed decisions. Get a demo of SONAR to see what the platform can do for you.