How quickly the market turns

Tony MulveyFreight Market Blog

Earnings season is upon us and executives of publicly traded transportation companies are providing their results from the first quarter. They are also providing updates on current market conditions and what they see ahead. The first major player to report earnings was J.B. Hunt, the largest domestic intermodal player in the industry. As expected, earnings  were quite strong as revenues grew year-over-year on the heels of 7% volume growth in the intermodal segment of the business. Domestic loaded intermodal volumes, which is competition for the truckload market, have held up better, signaling many shippers to take advantage of the cheaper rate, as well as the slower service. At this point, much of the time-sensitive nature of freight is gone as consumers continue to slow spending on goods.

FreightWaves SONAR, Domestic loaded intermodal volumes were 6.7% higher than average 2021 levels

The intermodal segment of J.B. Hunt’s business, as well as Dedicated Contract Services and Integrated Capacity Solutions, the company’s brokerage arm, combine to represent 86% of the company’s revenue and 91% of its operating income. When asked about softening in the freight market, Shelley Simpson, Chief Commercial Officer, mentioned that the softening in the spot market is impacting small carrier capacity rather than the asset side of Hunt’s business.

The year started out strong, especially for smaller carriers that operate in the spot market as spot rates surged to record highs. Truckstop.com’s national dry van all-in rate per mile reached $3.83, the highest level in the dataset’s history. At the same time, rejection rates were continuing to hover around 20% and volume levels were strong. This backdrop presented a bright outlook for carriers during the first two months of 2022.

FreightWaves SONAR, Outbound tender volume levels downward decline accelerates

Then the calendar turned to March. March is traditionally one of the strongest shipping months of the year, but that changed this year. Tender volume levels dropped by more than 10% in the month, the largest decline in a non-holiday-affected month since the onset of the pandemic. The decline has continued into April, with tender volumes down another 9% since the beginning of the month. 

The Outbound Tender Reject Index, which measures relative capacity in the market through rejection rates, has plummeted as well – further indicating that the spot market is softening. Over the past 20 months, rejection rates have been above 20% as carriers flexed optionality, often opting to move loads from the spot market at higher rates. Rising contract rates caused the rejection rate to drop throughout 2021, as it fell from 26% in March, following the severe winter storm, to 19% by mid-December, ahead of the traditional tightening period around the holiday.

Contract rates increased by 15.7% from March through December 2021, which resulted in the 700 basis point decline in rejection rates. 

The decline in rejection rates in March and April of this year have accelerated the downward trend – despite contract rate flattening out in April. Since the beginning of the year contract rates have increased by nearly 6%, but rejection rates have plummeted by another 824 basis points since the beginning of March.

This indicates that the spot market that once presented fruitful opportunities for carriers is starting to dry up. 

The decline in rejection rates, volume levels and spot rates is one thing, but the rate at which the market turned is another. 

Traditionally, softening in the market takes a few months to take hold, but shippers essentially over-ordered, creating record-high inventory levels while consumer spending is slowing as real retail sales (retail sales adjusted for the inflation rate) turned negative on a yearly basis in March. 

Consumers are also shifting their spending habits back to experiences/services after spending on goods for the better part of two years. That is a headwind for freight demand, especially heading into the summer months. The time-sensitive nature of goods throughout the pandemic is dwindling, which circles back to the first point – that intermodal volume has held up relatively well compared to the truckload market.

So while the backdrop for trucking carriers looked good to begin the year, the past six weeks have placed tremendous headwinds on carriers, especially small carriers that operate in the spot market.

FreightWaves SONAR, Truckstop.com’s national spot rate (blue, right axis) and TCA’s Operating Ratio, dry van company and owner-operator (orange, left axis)

With the surge in spot rates, small carriers have been recording record revenue numbers, while also being able to improve their operating ratios, a pivotal metric for trucking companies. In 2019, the operating ratio for the small and mid-sized carriers that make up the TCA’s Profitability Program was around 100% as spot rate hovered around the $2/mi range.

Throughout 2021, operating ratios fell to around 96%, despite record revenue numbers. This was because operating expenses (including maintenance and insurance expenses) rose as well. So in one of the best operating environments for trucking companies, the small and mid-sized carriers were only generating $0.04 of operating income for every dollar of revenue earned. 

Because revenue numbers will likely decline (thanks to falling spot rates and the fact that smaller carriers will be unable to provide enough capacity for shippers to generate a network and operate under contract prices), the squeeze is on. Inflationary pressures on maintenance and insurance aren’t likely to disappear, so small carriers that are under-capitalized are going to be put under immense pressure, while larger carriers that are able to work under contract rates and add cash to their balance sheets are unlikely to face. 

Ultimately, what started out looking like it could be a strong year for truckload carriers turned quickly into what looks like a sour year in just a few weeks.

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