Trucking: How the Pandemic Affected this Vital Industry and What the Future Holds
Despite technological advances of the last 30 years, the transportation industry remains critical to our daily lives. Without commercial planes, ships, trucks and trains, the world we live in today would halt to a miserable standstill.
Just how vital is the transportation industry? Consider these key facts. In 2020 alone, the United States exported more than $360 billion and imported over $903 billion in consumer goods. On average, more than 55 million tons of freight are moved throughout the US daily—more than 60 percent of that by truck. The typical consumer does not realize the extent of the more recent hardships faced by this sector.
For most, 2020 was a year when time stood still; the impact of the pandemic could be felt everywhere. All the while, we figured out how to safely navigate the new terrain. Shutdowns around the world, including manufacturing facilities, ports, and airports, created ripple effects across the global supply chain. These interruptions caused stored goods to pile up, restricted trade flows and limited access for businesses to fill their inventory needs. Consequently, with more people staying home, consumer purchases spiked.
As consumer purchases exploded, commercial transportation became even more critical, resulting in soaring freight costs for businesses. As such, spot rates (typically 10-20 percent of the overall market) not only increased by 100 percent, but also rose to account for 50 percent of the commercial transportation market. New trucking companies flooded the industry to handle demand, taking advantage of increased spot rates. From July 2020 through early 2022, almost 195,000 new carriers launched, with roughly 70 percent of the new carriers being single-truck operations.
In this new, robust transportation market, smaller carriers had the upper hand, as the larger trucking companies focused on servicing their already assigned freight at contracted rates. During this time, we saw seven percent of capacity shift away from larger companies and passed through to the smaller trucking businesses.
Moving into 2022, the challenges faced by the industry have evolved into a different sort of crisis as there are more goods in the market, but consumer demands have changed, focusing on entertainment and experiences. These changes resulted in spot rates dropping. Many experts in the industry assumed the issues impacting this space would moderate moving into the second quarter of 2022 as rates and carriers adjusted. The Russia-Ukraine war continued fiscal policy-driven inflation, and prolonged lockdowns in China have racked the industry, leading to decreased ocean container orders by 20 percent and falling freight rates of more than 30 percent.
The combination of factors has made it extremely difficult for smaller carriers to survive. Between March and November 2022, diesel prices, which account for an estimated 30 percent of overall operational costs, have risen multiple times to more than $5 per gallon. Carriers are struggling to get profitable loads that also cover all their expenses. In addition, small carriers’ cash flow concerns have likely worsened since for many truck financing payments are increasing due to rising interest rates. It is now 51 percent more expensive to run a trucking company than it was last year. Consequently, as of October 2022, more than 3,000 truckers have filed for unemployment.
Many independent operators have closed their businesses or returned to drive for larger shops. However, even larger carriers are not completely immune to the changes that have occurred in the market and some have announced their own difficulties recently, with furloughs or reductions reported by FedEx, C.H. Robinson (over 600 workers) and Amazon (largest workforce cut in its 28-year history).
Unlike prior years, when the holiday season brings a peak in freight movement, most retailers already had sufficient inventories, stunting expectations for the end of the year. Moreover, even with manufacturing companies back up and running, due to the rising price of goods coupled with the unprecedented back log of new truck orders, it is highly unlikely that the purchase price for trucks and replacement parts will come down anytime soon.
The road back to a “pre-pandemic normal” has become a much longer and more tedious journey than anticipated.
Although there is not a crystal ball for the coming year, we expect to see a harder entry into 2023 and hopefully a better rebound moving through the year with:
- a reduction in contracted rates and little improvement until the last half of the year,
- continued restructuring in larger operators seeking efficiencies through technology, mergers, etc.,
- interest rates continuing to increase.
There is also always a potential for different types of supply chain disruption, such as the looming rail strike discussions. If you recall, 55 million tons of goods are moved each year, with seven percent of that via rail. This type of shift may create another inroad for small carriers.
The predictions for 2023 are not all bad. Many experts are hopeful that this new year will be a brighter one for the trucking industry, one that heads back in a more positive direction by the third quarter. Consumer spending is expected to flip back towards a goods versus experience focus, with truck fleets once again more in demand.
Whatever happens, 2023 will bring a new year of adjusting and learning—hopefully with a deeper appreciation for the contributions of the small trucking company who has played such an integral but understated part of our lives these last few years.