This commentary appeared in the print edition of the Jan. 6, 2020, Journal of Commerce Annual Review and Outlook.
The logistics space has always been a very cyclical market (the movie Groundhog Day comes to mind), and we have witnessed two extremes in 2018 and 2019.
Strengthened by tax cuts in 2017, a growing economy led to one of the hottest freight markets on record in 2018. Trucking companies were able to increase rates enough to invest in new equipment and stabilize the driver market through pay increases. Class 8 truck orders rose to record levels, leading to increased capacity in late 2018 and throughout 2019.
At the same time, tariffs led to some uncertainty for businesses. Combined with an increased truck supply and a more normalized economy, this resulted in higher year-over-year freight volumes. In 2019, however, shippers regained pricing leverage, as increased capacity offset the slower growth in volumes.
As the cycle continues, Class 8 orders are now at record lows, trucking failures are increasing, and transportation company profits are slipping or are nonexistent. Inevitably, rates will find a bottom and capacity will leave the marketplace, creating a tighter freight market and setting the stage for rate increases — beginning another cycle. Volatility in the last few years has been difficult for both shippers and transportation providers to manage.
Several policies can be implemented to provide consistency for both parties. For example, longer contract terms beyond a year can be negotiated to include annual rate adjustments (up or down) based on independent and transparent indexes. A more consistent network enables carriers to gain density, leading to lower costs by elimination of the cost of change on a portion of the network, increased driver retention, and greater productivity. The shipper gains visibility, more stabilized costs, and improved service. Both shippers and providers must have a long-term market view for sustainable service and success.