Small to medium-sized trucking companies have all of the challenges that afflict their larger competition, and none of the advantages.
Smaller carriers must bear high capital and labor costs in the face of uncertain demand and seesawing rates, without the benefit of unit economies derived from scale.
The pain has been especially intense since the advent of COVID-19, with the soaring cost of gas, insurance and equipment. The price of a new semi truck today can range from $100,000 to $200,000, depending on features, and a trailer alone can cost up to $80,000, according to Drew Herpich, chief commercial officer with Transportation Insight and Nolan Transportation Group.
Operating costs for owner-operators entering the market over the last two years were in the range of $1.95 to $2.05 per mile, but by the beginning of 2022 had peaked in some cases to $3.50, Herpich says. The end of the that year, when demand started to drop, saw “some of the biggest bankruptcies of the last seven to eight years.” Consolidation has been especially evident in the less-than-truckload (LTL) sector, he says.
Drivers come and go, depending on demand. Peak seasons attract bigger numbers, but when the market slackens, many drivers opt instead for jobs in construction and other positions that keep them off the roads. That’s one reason why the U.S. is short an estimated 78,000 drivers, according to the American Trucking Associations.
Ironically, it was a boom in the housing market, a side-effect of the pandemic, that spurred the entry of drivers for smaller carriers. They were able to take out home equity loans that made it possible to obtain leases of tractors and trailers, Herpich says. But their good fortune didn’t last, thanks to a subsequent plummet in demand. “Too many times, carriers come into the market at the wrong point,” he says.
When drivers exit the market, their vehicles either get repossessed or sold on the second-hand market, especially those in other countries. Compensation might amount to “pennies on the dollar.”
One of the biggest mistakes that newcomers make is failing to take a broad enough view of their operation. A smaller owner-operator might focus on getting a one-way load without thinking ahead of time about booking the return run. By the time they start soliciting for it, it’s often too late. That raises the specter of deadhauling an empty trailer back to the origin point, incurring all of the usual costs without any offsetting revenue.
All of this is taking place amid an increasingly competitive market environment, with rates on the downswing. At the beginning of 2022, Herpich says, a 1,000-mile run for a truckload carrier might pay around $3,000. By the end of the year, it was down to about $2,000. And heading into 2023, with demand still soft, “tailwinds were becoming headwinds.”
Herpich was expecting carrier costs to bottom out by the end of the first quarter. And with large amounts of capacity having been taken out of the market over the prior six months, truckload spot rates should begin to rise.
The third quarter will likely bring “an inflection point,” with carriers’ business spurred by back-to-school purchasing, then experiencing a strong fourth quarter, Herpich says.
The wild card for forecasters is the ever-present prospect of recession. “We’re in one to a certain degree,” Herpich says, although most economists aren’t ready to use that word to describe the current economic environment.
Regardless of how the carrier market shapes up in terms of supply and demand over the remainder of this year, smaller players will continue to feel the most pain. It’s a chronic condition that threatens to undermine economic recovery, and frustrate efforts to achieve some degree of consistency in the industry’s labor force.
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