Truckload: Easing back to normal?

Top trucking executives and analysts say that the $332 billon full-truckload (TL) market is showing signs of returning to normal levels of “seasonality” after three years of being whipsawed by COVID-affected demand levels.

“The truckload market is easing back to normal levels of growth,” says Avery Vise, vice president of trucking for Indianapolis-based research firm FTR. “We’re not seeing a glut of capacity. We’re heading back to stability, but stability at a level where shippers are happy about it.”

Vise predicts that truckload rates in 2023 will be “sticky” because of limitations on truck-building capacity. “We’re not producing as many trucks as we need. But that’s slowly getting better.”

Top carrier executives agreed with Vise’s assessment. However, they warn shippers to prepare for mid- to single-digit contractual rate increases in 2023 due to inflation’s relentless push on virtually every aspect of a truckload carrier’s operation.

“We’re continuing to see it every month from our vendors, suppliers, OEM’s [original equipment manufacturers], everybody,” says Greg Orr, president of CFI, which recently was sold to Heartland Express for $525 million to create the eight-largest TL carrier in the country. “I don’t see it inflation slowing down any time soon.”

At the same time, truck analysts say that they’re seeing positive signs in the full-truckload market, which has been buffeted by mergers and acquisitions—
especially in the second half of this year.

Vise says that TL market has “hit an inflection point,” meaning freight volume will grow slightly next year and capacity usage will bottom out above the 10-year average. “But this forecast doesn’t presume an economic recession, so downside risks are substantial,” he warns.

With that in mind, let’s take our annual late-year deep dive into factors affecting the truckload market—by far the largest sector of the $830 billion trucking industry—as we look ahead to 2023.

Capacity equations

In a perfect world, there are exactly the right number of trucks deployed around the nation to haul exactly the right amount of freight at the proper price levels so that both shippers and carriers are happy.

Ideally, yes. In reality, this is never the case. Especially in the post-pandemic era, where truckload capacity has been unevenly matched with freight levels. At first, during the economic shutdown in the spring of 2020, there was way too much capacity.

Then came an unexpected surge in demand for some supplies, leaving truck capacity buffeted and scrambling to meet demand amid crowded ports and freight piling up due to lack of drivers.

“Capacity is a lot looser than it was six months ago,” says CFI’s Orr. “We’re not turning down thousands of loads each week as we were early in 2022.” However, he says that the unevenness in demand among various sectors—both retail and industrial—has made it nearly impossible to predict freight demand levels with any degree of confidence.

“The weird thing is, it’s not consistent,” says Orr. “There may be a pocket in, say, the Pacific Northwest last week, but not this week. It just seems to be hit and miss every week.” He and others in the TL sector say that this is a holdover from the COVID era. For example, many shippers ordered product a year ago that’s still flowing through the supply chain.

“The unbridled chaos we’ve been dealing with for almost three years is moderating,” says Mark Rourke, CEO and president of Schneider. The Green Bay, Wis.-based carrier operates the fifth-largest truckload operation and is a huge intermodal operator in North America.

After softening a bit in mid-year, 2022 freight volumes generally settled to levels seen in July 2020 and 2019, according to Ken Adamo, chief of
analytics for DAT, a trucking information services firm. “After several years of volatility, truckload volumes for van and reefer freight followed a more typical summertime pattern,” he says.

“I think we’re getting closer to normal,” says Orr. “China is our largest importer and it just started opening up the pipeline three months or so ago. So, we’re getting imports back to where it used to be.”

Some North American manufacturers, tired of endless supply chain delays and outrageous trans-Pacific maritime rates during the pandemic, are moving plants closer to home in a phenomenon known as “in-shoring” or “nearshoring.” Whatever it’s called, it’s good for large TL carriers in and out of Mexico. CFI gets more than a third of its revenue in and out of Mexico.

“There’s a lot more freight down there than we have capacity,” adds Orr. “We could do double the amount of volume northbound out of Mexico if I had the ability southbound to get it. They’re begging us to take more, but I don’t have the return loads southbound.”

M&A market is hot

After a couple of quiet years, the mergers and acquisitions market in the truckload sector perked up in the second half of 2022.

By far, the largest acquisition was North Liberty, Iowa-based Heartland Express’s purchase of Contract Freighters Inc.’s (CFI) non-dedicated U.S. dry van and temperature-controlled TL business and its CFI Logistica operations in Mexico from Montreal-based TFI International, Inc. for $525 million.

It was one of the largest truckload acquisitions in the full-truckload market in this century, even without CFI’s dedicated and logistics U.S. brokerage operations, which were not included in the deal. It makes Heartland Express the eighth-largest TL operator in the country with 2022 revenue expected to top $1.3 billion.

“It’s been great,” CFI’s Orr says of new ownership. “We loved being part of TFI, and it was great for us. But Heartland’s purchase has allowed us to be entrepreneurial. We’re owned by a company that is similar to us.”

The attraction of low-cost, non-union operators such as CFI has drawn others to make their acquisitions in the TL market. Besides Heartland buying CFI, Fort Smith, Ark.-based USA Truck was bought by DB Schenker, the German logistics giant, for $425 million in an all-cash deal last summer.

USA Truck will bolster DB Schenker’s freight presence in the United States. The truckload company has approximately 2,100 employees with a fleet of 1,900 trucks. The carrier also has a strategic network of terminals across the Eastern half of the United States.

Among other TL acquisitions through June and July alone were KLLM Transport Services’ acquisition of Quest Global; P.A.M. bought Metropolitan Trucking; and up north, Fastfrate acquired Challenger Motor Freight in a major Canadian acquisition.

Before its CFI acquisition, Heartland Express picked up Roaring Spring, Pa.-based Smith Transport. And Schneider, in its second acquisition of the year, bought deBoer Transportation, a regional and dedicated carrier headquartered in Blenker, Wis.

But not everyone is growing or being acquired. U.S. Xpress Enterprises (USX), the ninth-largest TL carrier, announced a corporate restructuring. It expects to improve its over-the-road (OTR) operations and generate $25 million in annual cost savings beginning in fourth quarter of 2022. Most of the savings, an estimated $20 million, will come from layoffs announced last month, the company said.

After finding “certain successes” in its vision of building a digitally enabled OTR fleet, U.S. Xpress wants “to right-size its cost structure” in what it views as a softening freight market, president and CEO Eric Fuller said in a statement. The company plans less than $100 million in capital expenditures in 2023 after spending $150 million this year.

U.S. Xpress wants more contract business after finding itself overly exposed to the spot market, which has faced softening demand and plummeting rates in recent months. The high cost of diesel is a factor at U.S. Xpress because the company has been forced to take on more in fuel costs as fuel surcharges aren’t applied to the spot market.

A terminated lease for a property in Atlanta will also save U.S. Xpress $2 million per year, CFO Eric Peterson said on a recent webcast. And the carrier will cut costs by running its tractors 100,000 more miles annually beginning in 2023. That will raise the average age of its trucks from 22 months to 27 months by the end of next year.

Rates, rates, rates

Truckload shippers could be getting some breaks in their 2023 contract rates. However, analysts and carrier executives say that it’s not the same for everybody, and it varies greatly by lanes, city pairs, and industry and retail segments.

FTR’s Vise says that shippers will be marginally happy and carriers marginally less happy with their 2023 rate negotiations with truckload carriers. His forecast for 2023 TL contract rates will be about 4% lower overall in all segments, compared with a 14% drop in spot market TL rates next year. “We’re still going to have spot rates bottoming out above 2019 levels,” he says. “It’s still a reasonably healthy spot market.”

At CFI, 93% of freight moves under contract. Orr says he recently closed a deal with a shipper who’s among CFI’s five largest customers for a 7% rate increase in 2023. “I think they understood the reasons for it,” he says. “While they didn’t like it, getting that commitment to capacity is extremely important to them. We’re trying not to play the feast or famine game, and we’re not trying to take advantage of the situation.”

Schneider CEO Rourke says that actions to enlarge the carrier’s over-the-road fleet are nearly impossible. Besides a shortage of qualified drivers, Class 8 2023 model tractors are being allocated tightly by OEMs. “There’s absolutely no relief, and that puts constraints on the industry,” he says. “That’s one very much negating feature, along with inflationary pressures that come with that.”

Rourke says Schneider would buy 20% more new trucks—if they were available. As it is, Schneider has 11,650 company drivers, 10,120 company trucks and 33,830 trailers. “It’s a bit of a game of Whack-a-Mole,” he adds.