How The Trucking Industry Can Address Freight Rate Deflation
Feb 09, 2023
Both spot and contract freight shipping rates have dropped across the board, even as inflation has climbed in other industries. That’s because the trucking industry (particularly its truckload sector) is subject to its own two- to three-year business cycle, alternating between periods of inflation and deflation. Rarely is the truckload market at a steady equilibrium—it is almost always either a buyer’s or a seller’s market.
Interestingly, this cycle doesn’t necessarily coincide with macroeconomic conditions. That means shippers, carriers and brokers must each adjust their strategies in response to a complex, ever-changing market. By strengthening interpersonal relationships and improving collaboration, I believe the industry can remain nimble and thrive in both inflationary and deflationary markets.
Inflation And The Trucking Industry
Inflation has affected almost all industries; however, it has impacted the trucking industry differently than most. During the pandemic, shippers were forced to pay much higher rates to secure trucking capacity. This trend gave the impression that all carriers were thriving financially; however, this was not always the case. Larger contract-based carriers generally benefited from the market conditions that occurred during the pandemic, many smaller carriers and owner-operators also benefitted during that period. But smaller carriers, owner-operators and those who entered the industry during the pandemic and operated primarily in the spot market began suffering from declining rates beginning early in 2022.
Ironically, widespread consumer inflation has contributed to the deflation of truckload linehaul rates. Because consumers are less likely to buy nonessential products when prices are higher, overall product demand has decreased. Additionally, consumers have shifted their spending from products to services, further dampening overall demand for the movement of goods. Shipping fewer consumer goods, shippers need fewer carriers to transport those goods. Because the number of owner-operators skyrocketed throughout the pandemic, carriers now often have to compete for lower-paying shipments while shippers must pay excessive fuel prices—a lose-lose scenario.
Although relationships between shippers and carriers can be contentious at times, both parties can improve their position if they cooperate to deal with these challenges. Moving forward, enhanced connectivity between shippers and carriers enables both parties to better deal with changing conditions.
How Trucking Industry Players Can Set Themselves Up For Continued Success
The trucking industry is notorious for high driver turnover rates. Long hours and physical and mental stress take their toll on drivers. The good news is that both parties can take steps to eliminate redundancies in their operations and reduce unnecessary stress.
1. Develop stronger relationships with existing partners.
Regardless of industry, buyers who seek lower costs for a service will typically broaden their search parameters. But after struggling to do this during the pandemic, I see many shippers taking the opposite approach and investing in deeper relationships with their existing carriers. The question for both shippers and carriers is how to balance relationship-building with financial decision making.
For example, each party has different incentives depending on market conditions. In tight markets with more demand than available capacity, shippers must increase rates and offer other incentives to secure trucks. These roles are swapped in softer markets, with carriers reducing their rates accordingly.
A strong relationship can pay dividends here; however, to build one, shippers and carriers need to play active roles in each other’s businesses regardless of when the market dictates it’s convenient. They should understand each other’s business needs and communicate about how they can navigate the market together.
Generally, when the market is tight, shippers want to be carrier friendly and the shipper of choice. When the market is soft, carriers want to be shipper friendly and be the carrier of choice. Relationships are built based on who is benefiting from the current market. However, both parties need to form these relationships for the long haul in order to secure capacity. If a shipper stays with a carrier during a soft market instead of diverting to the spot market, then the carrier is more likely to provide capacity to that shipper during a tight market period—at least to the level that was originally requested.
2. Take advantage of dedicated capacity.
I have seen how building dedicated capacity benefits carriers and shippers alike. According to the CSCMP's "State of Logistics Report," (paywall) the industry saw a 39% increase in dedicated truckload spending in 2021. Dedicated contracts provide carriers stable revenue, and working with the same shippers on a regular basis means carriers can complete transactions more efficiently rather than trying to find loads on the spot market.
When it comes to the spot market, I think carriers can benefit most by working with a brokerage. Brokers act as a consolidator in the industry by connecting shippers and carriers in the spot market. Most carriers run small operations and don’t have time to build relationships with thousands of shippers. Instead, a brokerage can capitalize on high-paying spot opportunities without overinvesting resources in the search process.
Ultimately, the transportation industry is so much more than pickups and drop-offs. It’s about how players throughout the industry leverage these different relationships to create a cohesive ecosystem that works together.
The transportation industry is becoming more interconnected every year as shippers, carriers and brokers work to streamline their operations. Technology and improved collaboration will continue to play a big role in this evolution. No matter where a company falls in the industry, long-term success will only come if they take advantage of new technology to address the industry’s unique business challenges.
Western Canada Highway News
Summer 2023 Issue
News, Profiles and Reports on Western Canada's Trucking Industry