As shippers look for new ways to save money during the current freight recession, it affects more than one mode of transportation. The 18-wheeled elephant in the room is still the oversupply of trucking capacity. It's getting so bad that LTL is losing market share to full loads because it's cheaper. When rates are low, full truckload can usually compete with rail and intermodal. However, recent comments from LTL executives on their Q1 earnings show another way that trucking companies are trying to make up for lost business when other carriers drive down rates.
Kevin "Marty" Freeman, President and CEO of Old Dominion, said on the company's earnings call that "the truckload market in particular has been pretty weak." Because that industry is currently weak, I think some volumes have flowed into it, along with players who are willing to move freight and take some maybe big, heavy LTL shipments for free or for less than what it costs them to run, just to keep the trucks moving.
Saia, an LTL service, also talked about shippers who take advantage of low truckload rates. During the earnings call, Douglas Col, executive vice president and CFO of Saia, said, "But I do think the customer is taking advantage of this longer — lower-for-longer — environment and figuring out ways to consolidate and move more things to truckload before they break it down to a single pallet and move it."
It was announced on TFI International's Q1 earnings call that the company's plan to finally spin off Daseke through some cost restructuring had been updated. Daseke is the biggest flatbed company in North America, with a fleet of about 4,500 trucks and 11,000 flatbed and specialty trailers. Daseke is big in part because it is made up of several different business units that all do different things.
On the call, Alain Bedard, president and CEO of TFI International, said, "Daseke, as I said before, I mean, those eight or nine business units work really well." We'll have to work on the one or two that aren't up to par. Those are fine. Daseke's main office was the cancer; those guys were crazy expensive and didn't get any work done. So, we cleaned up that area. They did clean up, and Bedard cut Daseke's head office pay by $12 million.
Bedard liked some of Daseke's business groups, but he thinks that the head office was holding them back from getting better. He also says, "We have a few operating companies that are running below 90 OR, OK?" But you have one or two guys who are running closer to 100 OR, right? But I'd say that 23 is about average. OK, you think about 93 to 94 OR on average, right? Okay, so that's where we begin. After we took over, it was clear that the head office was the main reason why the OR was going in the wrong way, OK?"
On Tuesday, U.S. Bank, a freight audit and payments company, released its Q1 Freight Payment Index data. The data showed that truck freight continued to shrink. Freight costs went down 27.9% year over year and 16.8% quarter over quarter compared to Q1 2023. Shipment numbers also went down; they were 7.8% lower than in Q4 '23 and 21.6% lower year over year. Not only did shipments and spending go down across the country, but they also went down in every area except the Southwest. In the Southwest, traffic went up 8.9% from Q4 2023 to Q1 2024, but spending went down 16.5% during that same time. Spending and numbers fell 34.8% and 33.9% year over year in the Northeast, making it the worst-affected area.
In the study, Bobby Holland, director of freight business analytics at U.S. Bank, said, "There was hope for a freight market turnaround to start the year, but our data shows that the challenges continued." This was the eighth quarter in a row that year-over-year sales dropped, and the fifth straight quarter that spending fell.
When freight rates were lowered, spending dropped more than it should have compared to amounts. The report also says, "While motor carriers' freight volumes went down, the spend for those loads went down disproportionately more than volumes. This suggests that rates were under downward pressure during the quarter." In particular, the number of ships dropped 7.8% from the last quarter of 2023, and the amount spent on those loads dropped 16.8%. And while exports went down 21.6% year over year, the U.S. Bank National Spend Index went down 27.9% more.
As Q1 earnings season continues, one thing that trucking managers and leaders keep saying is that they don't want to see contracted rate cuts. It was J.B. Hunt and Knight-Swift who first said they were surprised by how competitive Q1 bid season was. On its earnings call, J.B. Hunt talked about lowering volumes with shippers that weren't as flexible and taking on more volumes from shippers that were more willing to negotiate rates. Knight-Swift, on the other hand, moved more capacity into the spot market and took losses on some contracted lanes because of cuts. Heartland Express talked about not lowering contracted rates and not depending on freight that was arranged by someone else. Marten Transport went even further and said in its earnings report, "We have not agreed to rate reductions since August of last year."
For people who follow truckers, earnings reports may not sound very loud, but they send a stronger message that contract rates are close to a market bottom. Shippers who keep asking for discounts risk getting worse service when the market gets better. The information about contract rates seems to back up the claim that carriers have hit the lowest price for contract rates. Based on information from the FreightWaves Van Contract Initial reporting of average base rate per mile (VCRPM1), the rate for Q1 2023 was mostly between $2.28 and $2.33 per mile. This was after the usual end-of-year spike that has been seen in previous years.
Initial contracted rate data can help you figure out how the market is moving, and it looks like the new higher price bottom is partly due to carriers' higher costs for things like equipment, wages, and insurance. Moving forward, changes in spot market rates will show us if carriers are able to get back on track with prices for Q2 and Q3 RFPs. This will stay hard to accurately guess because the market is currently driven by too much truckload capacity rather than too little truckload demand.
Wasson, T. (2024, May 2). Shippers move LTL freight to full truckload. FreightWaves. https://www.freightwaves.com/news/shippers-move-ltl-freight-to-full-truckload
