K-Ratio Markets Newsletter | May 2020
Welcome back to marKets, K-Ratio’s monthly, “State of Freight”, newsletter. K-Ratio provides market research, dynamic pricing, and risk management services in conjunction with its award-winning Freight Intelligence platform. In last month’s edition, we advised on how best to prepare for the currently uncertain times in freight. If you did not receive last month’s marKets update or would like more information regarding K-Ratio, please reach out to your main point of contact. This month, an honest look at current conditions and what’s to come.
Let’s just rip this band-aid off; volumes are atrocious. Yes, they are getting better, 9% off the low watermark seen on April 16 as measured by FreightWaves’ Outbound Tender Volume Index, but nearly 10% lower than an average day. On the other side of the equilibrium, we do not have 10% less available capacity. In fact, according to FMCSA data, we have 0.03% less tractors for hire than last month. Naturally, spot RPMs have drastically dropped across the country. Adding to that, providers are accepting nearly every tendered load, resulting in national rejections sitting at an all time low of 2.6%. This lack of spot activity and low volumes has created a compounding negative effect on spot rates, bringing us to the lowest national longhaul rate since March 2013: $1.15 per mile. The national average linehaul for all loads, as reported by DAT, isn’t much better: $1.32 per mile. Both numbers sit comfortably below the American Transportation Research Institute’s operational cost to run a truck (ex-fuel): $1.39 per mile. This is a problem.
Now, all of those numbers are averages, which obviously means some companies are receiving higher revenues, paying lower expenses, or both, but conditions across the industry are painful: on average. Carriers with higher contract blends of business are fairing much better with the national average for dedicated loads at $1.69 per mile but many of those carriers require spot loads to get their trucks to their next destination. Still, right now it pays to be in the contract freight side of things. Unfortunately, not all carriers, namely smaller fleets and individual owner-operators, do not have access to enterprise-level shippers with higher-paying contract business. This aspect limits those carriers to sourcing loads in the spot market, and spot market load posts on DAT’s load board are off 54% YoY.
The sad but true reality of this environment is that it’s not sustainable for all carriers. Times like now are when the herd gets thinned, those less equipped to survive do not make it. If we think through this for a second, some of these aforementioned carriers without access to contract loads and only running on spot business have expenses higher than average and/or revenue below average. Both result in negative margins and now the conversation shifts to one being conducted in offices all across the country; how long can rates remain down here before truck companies go bankrupt? The answer is longer than you’d expect.
Access to capital will be constrained moving forward. Banks will deem small and medium sized businesses in need of financing most, as too risky while significantly larger companies tap deep lines of credit. This is now a cashflow game and those companies operating above average and with stronger balance sheets can stick around long enough to survive the culling. These financially sound companies can and will continue to run loads at prices below what many believe to be the rock bottom level for profitability.
Volumes will eventually comeback at some point, although to what extent remains to be seen as the longer-term impact to consumer demand remains questionable, and margins will remain compressed but market share growth for some will occur. Freight activity will persist but the same cannot be said for all companies. In depressed economic times, free market capitalism removes unfit businesses and rewards those better equipped. Which type is your business?