Smaller Carriers are “Feeling the Heat” in the Truckload Market

Dr. Richard Mikes, Managing Partner of Transport Capital Partners (TCP) recently spoke on the subject of the Truckload Market on a conference call hosted by Stifel Nicolaus & Company.  Here are some excerpts from the survey results presented by Mr. Mikes. 

“The freight rate market as a whole started switching directions about a year ago. In other words, the share of the carriers reporting that their freight rates are increasing has just dropped from a high of about 80% to a low of about 10% this past month. Accordingly, we would classify rates as being stuck in neutral. Three quarters of the firms are now reporting that rates have remained the same, certainly a massive change from a year ago.”

The survey segmented carriers into two groups, those under $25 million and those over $25 million in revenue.  “Interestingly, the … (data) . . .  presents “a real divergence in rate changes. Though both large and small carriers are largely keeping rates the same, there is a spattering of smaller carriers reporting rate decreases of 5%, 10%, or even 15%. Those numbers total only 18%, but they still tell the story. The pressure is on the smaller carriers.”

The FTR survey asked carriers to indicate their expectations with respect to volume.  “After a nice bounce this quarter, about 52% of carriers expect volumes to increase over the next 12 months and a similar number expect them to remain the same. Very few say volumes will actually decrease.

The survey then looked at what carriers plan to do with respect to adding capacity in this predicted environment. “The number of carriers saying they will not add capacity remained largely constant with a temporary spike around the . . . (U.S.) . . . election. It jumped up to almost 50% around election time. Those were the feelings in the moment.

If we again split the data by the size of carrier . . .  we see the larger carriers have a larger percentage looking to add any sort of capacity. However, the smaller carriers who do plan on adding capacity have more ambitious plans than the larger ones. It is hard to pick up any trends beyond that. On a related note, the ATA says that since December 2007, both large and small fleet tractor counts are flat. In other words, capacity has not changed from the beginning of the recession. We are down from the peak capacity by 15%-20% depending on what metric you choose.”

Mr. Mikes then addressed the question of whether or not the carriers plan on adding the capacity (if they do). “There has been a steady increase in the use of financed or leased equipment as the means of adding capacity over the last two to three years. At the same time, the use of independent contractors has trended downward for the last two years, despite an increase in the most recent survey. What we hear from carriers is that drivers are scarce and independent contractors are even scarcer. As a result, there is a rebirth in trying to offer financing programs, or really anything to get a person interested in buying a tractor and leasing it to a carrier. This has added to the independent contractor method of adding capacity trickling down. If you look at the various numbers for independent contractors and what has happened to them, they were probably the hardest hit during the major recession and, accordingly, parked their trucks. A lot of those trucks hit the auction market after repossession.”

One of the other things that the survey tries to track is how carriers are marketing their business, acquiring loads, and how much they depend upon the spot market.  “We asked this at different times over the last three years and noticed that the amount firms relying on the spot market is going up constantly. This means there is less reliance on brokers by the entire industry, which meshes with what we are hearing from the carriers.”

The survey inquired into the use of brokers.  “We survey in the first and third quarters because the first quarter of every year is low freight time and is the time when carriers tend to look for freight from brokers. It is interesting that the numbers are about the same between 2012 and 2013.This is really the period of peak use and the numbers are about the same year over year. If we look at the ‘less use’ compared to ‘more use’ over time, our reporting base suggests that carriers are using less brokered loads than they had previously. That trend has held for every survey point since February 2011. Brokered freight accounts for less than 5% of volume for 50% of the carriers; in other words it truly is a spot-on spot-off market for a number of carriers.”

The survey segregated the responses by size and it shows the same general trend.  “Generally, carriers under $25 million are more reliant on brokers. Carriers under $25 million are clearly more dependent on loads from the spot market than the larger carriers are. Generally speaking, smaller carriers have a longer average length of haul compared to larger carriers. These smaller companies also do not have the same size of marketing departments that the larger carriers have nor as much freight in lanes. So they are, by nature, more dependent on brokers.

One of the big things on the horizon is electronic logging and the potential regulation requiring it. Mr. Mikes stated that “currently only some carriers use electronic logging, and no final date has been set for when you are going to be required to have elogs. There is also the question of, ‘Who will be required to have them?’  When we asked this question three quarters ago in May 2012, 44% of the carriers responding said that they had not utilized them yet but they were considering them. Today, that number is down to 32% and there has been a jump from 25% to 35% saying that all trucks use elogs. In other words, we have had a pretty fast transition to elogs and people tell us that elogs are helping them in many different ways, including driver management and compliance with CSA. Once again splitting the industry by size of carrier, carriers under $25 million in revenue are using elogs far less than their larger counterparts (12% versus 42% fully equipped). This is a big difference.”

The TCP survey examined what they call “voluntary sellers.”  Mr. Mikes indicated that “this question is slightly different, probing a carrier’s interest in selling the company in the next 18 months. Interest in selling was somewhat higher in 2011, but if you look at it year-over-year, we are at the same place we were a year ago. By size of carrier, the picture is unsurprisingly similar . . . and the conclusion is apparent, though not unexpected: smaller carriers are feeling more pressure.

In summary, the survey highlighted how smaller carriers are more dependent on long haul movements, are feeling more pressure to reduce rates, are more reliant on freight brokers for loads and are more interested in selling their companies than their larger competitors.  The small guys are feeling the heat.