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By Dean Croke, Principal Analyst,
DAT Freight & Analytics
Veteran truckers understand the ups and downs of the freight market. They know that demand for their services tracks ahead of the general economy, completing a full cycle every 18 to 24 months.
They make hay while the sun shines and set money aside for the inevitable stormy weather.
The trouble is, it’s been raining on truckers since the start of 2022. Rates on the spot market have been sliding. At the same time, operating costs are near all-time highs. The average price of diesel is around $4 a gallon. Insurance, tires, parts and service, food—virtually every item on the expense sheet has gone up.
There was a deluge of new entrants into trucking during 2021, when truckers’ pricing power was at its peak. That flood of carriers is receding now, but freight brokers and shippers still have no trouble finding capacity and negotiating better rates for themselves.
How long can small truck fleets and owner-operators keep their heads above water?
Tight squeeze
At the beginning of May, the typical highway tractor hauling long-haul van freight cost around $1.78 a mile to run, based on $4.08 a gallon for diesel and $2.06 a mile in revenue, the average spot van rate at the time.
Last September, running costs averaged $2.01, mainly because diesel was $5 a gallon. But rates were higher then, too—$2.45 a mile, which would put our typical carrier’s gross profit margin at around 16 cents a mile. That’s not great, but it was enough to help most small carriers and owner-operators survive one of the worst periods of inflation in recent memory.
Since then, profits are down by more than 50%. Most truckers are barely getting by, and few have the reserves to cover a significant repair or medical expense, let alone save for new equipment or retirement.
It’s worse for the thousands who rushed into the market during the good times, overpaid for used equipment, and were unprepared when rates hit the skids. With higher liability insurance premiums and a truck out of warranty, their operating costs could be as much as 15 cents a mile higher than a more typical, experienced carrier.
Cycling down
The current freight cycle feels like the 18 months from the second half of 2018 through all of 2019, when there was an oversupply of trucks in the market and weak demand from shippers.
There is one big difference, however.
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While the 18 months leading up to July 2018 were good for truckers, August 2020 through March 2022 was perhaps the best market they have ever seen. Spot rates shot up as supply chains had to adjust quickly to unprecedented consumer demand. By the start of 2022, the average spot rate for van freight topped $3 a mile.
Of course, the down-cycle was coming. Water finds its level, after all.
At DAT Freight & Analytics, starting in 2021, we began warning that the good times wouldn’t last. By the middle of 2022, we advised small fleets and owner-operators to have at least three months of truck and trailer payments in the bank by the start of 2023.
What’s next?
We’re only about 13 months into the current freight cycle, as defined as the start of negative year-over-year comparisons. In 2013, 2016, and 2019, the cycles lasted 17 to 20 months before the year-over-year comps turned positive. If the prior three freight cycles are anything to go by, we can expect tepid market conditions for another four to five months until the Fall peak shipping season.
Looking at conditions in the near term, it’s not unusual for truckload freight volumes to decline during the first four months of the year. In April, van volumes on the spot market were the lowest since February 2021, when the polar vortex disrupted logistics activity across large areas of the United States and Canada.
May will be a pivotal month. In 2016 and 2019, it was precisely the third week in May when the spot market entered a recovery phase after prolonged declines and stagnation. Seasonality kicked in, and shippers needed more trucks to move fresh produce, construction materials, imports, and summer and back-to-school retail goods.
If we see an uptick in demand around Memorial Day, it will be a welcome sign for owner-operators and small carriers as we head into the summer and fall.
If not, truckers can expect the bottom of the cycle to continue.
Dean Croke is the principal analyst at DAT Freight & Analytics, which operates the transportation industry’s largest marketplace for spot truckload freight and the DAT iQ freight-data analytics service.
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