Truckers reaped record profits in 2021, benefiting from surging freight volumes driven by an industrial economy on the mend from the pandemic, consumers’ continuing thirst for e-commerce purchases, and supply chains waiting for freight to come off ships and clear congested ports.
Shippers are scrambling for trucking capacity at nearly any price. As 2022’s first quarter comes to a close, demand for trucking services of all types—full truckload, less than truckload (LTL), and last mile—continues to race ahead, with capacity struggling to catch up, if at all. Rates are on the rise, a function of too much freight competing for too few trucks. And then there are increasing costs for fuel, driver pay, regulatory mandates, increasingly expensive equipment, and other rising operating expenses.
To a person, trucking executives and industry analysts interviewed for this story don’t see any letup in the tight market—and its challenges—with some expecting current market conditions to extend into 2023. The primary issues: a worsening driver shortage, continued port congestion and supply chain hiccups, and the inability of tractor and trailer manufacturers to meet demand for new units.
In a somewhat counterintuitive trend, all this has occurred against a backdrop of declining shipment volumes being handled by truck lines. U.S. Bank, in its fourth-quarter 2021 National Shipments Index, reported a decline in freight shipments of 2.4% from the third quarter of 2021 and a year-over-year drop of 5.1% from the fourth quarter of 2020. Yet for the same period, the bank’s National Spend Index, which measures freight expenditures, increased 8.4% from the third quarter and surged 20.2% from the fourth quarter a year ago.
Why are truck lines making more money hauling less freight? It all comes down to their inability to bring on enough new drivers and new equipment to meaningfully increase capacity. They simply can’t put more trucks on the road to meet demand. That’s tightened capacity even more, exacerbating pressure on already skyrocketing rates. The result: fleets running the same or fewer trucks and getting significantly more revenue for every hundred pounds of freight they carry. They are maxing out utilization of whatever capacity they have.
Truckload carrier Schneider’s recent fourth-quarter 2021 results clearly illustrate this dynamic: The company’s average weekly revenue per truck was $4,521, up 18% from last year, while the average number of trucks operating declined 5.3%.
“[Truck lines] have certainly started off the year hot,” observes Jason Seidl, managing director at investment firm Cowen and Co. “Demand will hold, barring any macroeconomic shocks. Shippers have been and continue to be burned by [inventory] stockouts,” and as a result, Seidl says, retailers are intent on building up inventories to levels surpassing last year’s. “That will continue the demand cycle for transportation,” he notes.
What’s the number one thing industry players are asking for? For shippers and 3PLs (third-party logistics service providers), it’s reliable capacity and warehouse space; for carriers, it’s trucks, trailers, and drivers. Seidl says industry contacts are telling him that trailers ordered now won’t be delivered until 2023. “And for certain Class 8 trucks, I had one client tell me the OEM told them its Class 8s are going to [cost] $35,000 more—but I can’t tell you when you’ll get them.” He adds, “I haven’t seen an equipment market like this in my entire career, and I started [in the industry] in 1993.”
In Seidl’s view, the biggest issue remains the driver market. “Pay will continue to go higher,” he predicts. “Some carriers last year raised pay multiple times. It’s like the old U2 song: You are running to stand still,” he remarks.
Kevin Sterling, senior market strategist at LTL carrier XPO Logistics, believes the industry is in a unique market cycle, driven by a number of factors that are underpinning solid demand that won’t weaken anytime soon. “I’ve been around the freight industry for over 20 years. I’ve never seen an environment like this in the LTL industry,” he says. “E-commerce is a tailwind, and shippers are building inventories. [They’re] focused on service and reliability, and as a result, are willing to pay a premium. So, we continue to see a firm pricing environment for LTL,” he notes.
In response, Sterling says, XPO Logistics, the nation’s third-largest LTL carrier, is investing—in expansion of dock-door capacity, its trailer fleet, and drivers. The company is “adding doors to our terminal footprint in the markets where we see higher customer demand,” with plans to add 450 doors this year and 450 more in 2023 at strategic locations across its network. Unique to its competitors, XPO also operates a company-owned trailer manufacturing facility and is “investing significantly to increase our production capacity. We expect to nearly double the number of trailers we will produce in 2022,” Sterling adds.
Lastly there is XPO’s in-house driver training school network, operating from 130 locations. Sterling says the training program takes dock workers and others who want to become drivers, “and within seven weeks, students can go from the classroom to the cab with a CDL [commercial driver’s license].” He says XPO graduated about 900 drivers from the program last year and is looking to double that in 2022.
John Hill, president of Pilot Freight Services, which is a major player in the last-mile market and is currently in the process of being acquired by containership giant A.P. Møller-Maersk, also sees little if any letup in demand for all types of trucking services. Consumers, still spending at strong levels, are driving “e-commerce that just does not stop,” he notes, adding that the marketplace continues to see more and more companies diving into online sales—and leveraging last-mile delivery to seal the deal.
While Hill thinks big e-commerce players might not match the accelerated growth rates of last year, enough new companies are coming in to pick up the slack. It seems like startup businesses today are taking a reverse approach—beginning with online sales at the outset, building a beachhead there, and then expanding into physical store sales.
E-commerce relies to a large degree on one- and two-day last-mile delivery, which to Pilot are two distinct services: full mile and final mile. Full mile is when “someone buys a canoe at an e-commerce giant. It goes from a DC in Ontario, California, to a home in Albuquerque. We pick it up at the DC, linehaul it into New Mexico, then cross-dock it for final-mile delivery to the home.”
A true final-mile shipment, in his view, is when “you buy a refrigerator at a big-box consumer appliance retailer in Oakland, then we pick it up there and deliver [and install] it in your home in San Francisco.”
Pilot also is investing to beef up its network capacity and resources, he says. The company last year bought American Linehaul, a truck line that participates in what Hill calls “the middle mile” segment. Pilot had previously outsourced that piece to another provider. “We folded that capacity into our network, so we’d have 100% control over the service,” he notes. “We’re controlling our own destiny: pricing, capacity, and visibility.”
Another interesting piece of the final-mile puzzle is the emergence of autonomous delivery vehicles (ADVs), those ubiquitous little self-driving delivery carts that motor around town on their own and show up at your doorstep with a takeout order, groceries, or a prescription drug refill.
Companies like ADV manufacturer Nuro are moving into the third generation of their vehicles, testing in many U.S. cities and on college campuses, and teaming up with the likes of FedEx, Chipotle, Domino’s Pizza, and 7-Eleven. Last April, Nuro started autonomous delivery of Domino’s pizzas in Houston and with 7-Eleven in Mountain View, the heart of California’s Silicon Valley.
“We are seeing demand for on-road autonomous delivery across all types of industries,” says a Nuro spokesperson, including “food, grocery, parcels, convenience, and prescriptions.”
According to the company, its third-generation vehicle is about 20% smaller in width than the average passenger car. That smaller footprint “gives bicyclists and pedestrians more room to maneuver alongside the bot,” said the spokesperson. The vehicle can fit about 24 bags of groceries and handle almost 500 pounds. It also has modular inserts that allow for cooling down to 22 degrees F and heating up to 116 degrees F, “which means sodas stay cool and pizza stays warm,” the company noted.
Nuro started construction on a $40 million “end of the line” manufacturing plant in Nevada last November, including a “world-class closed-course test track.” The facility is expected to be fully operational later this year.
How are the trucking markets reacting to higher inflation and the prospect of tighter credit as the Federal Reserve looks to raise interest rates? Does that foreshadow weaker volumes and softening demand?
Not likely, say most industry watchers. No matter what happens with inflation or interest rates, “we still have disruption in the supply chain all along the way, and [as an industry,] we are still short about 90,000 drivers,” notes Jim Fields, chief operating officer at LTL carrier Pitt Ohio. “We are all competing for the same people, whether drivers, dock workers, or warehouse workers, and today there just are not enough to fill the jobs we have. It’s extremely competitive.”
With inventories at all-time lows and the economy continuing to display sustained growth, Fields expects trucking demand to remain firm throughout the year. As an LTL carrier, Pitt Ohio’s drivers are home most every night, not spending weeks on the road. Fields says his focus is more on retention than recruiting new drivers.
“We are doing a lot of different things to achieve that, to be a preferred carrier. Competitive pay and benefits are important, but if you don’t back it up with a good workplace culture and communication, driver support, engagement, and respect, you’ll lose the battle. We have to take care of our employees,” he says. Shippers want responsiveness and consistency, and that comes from reliable employees who are recognized and celebrated for taking care of customers, he adds.
“It’s an extremely unique time in the trucking industry,” Fields remarks. “I’m not sure I see an end game to the current market of high demand and tight capacity [this year].”
There is no silver bullet that’s going to solve the capacity crunch, and no truck line is immune from the challenges of the driver market. The number of experienced drivers retiring continues to increase, and not enough younger drivers are entering the profession to fill the gap. By one industry estimate, some 25% of external driving schools that closed during the pandemic have not reopened.
“We’ve seen a higher-than-normal number of drivers choose early retirement during the pandemic, creating more driver openings than in recent years,” says Steve Sensing, president of global supply chain solutions for Ryder. “Wages have increased significantly, and the demand for e-commerce has created more opportunities for drivers.”
Sensing says Ryder is making additional investments in recruiting as well as taking some innovative approaches to engaging drivers. “We formed a council of our professional drivers to advise us on what is most important for recruiting and retention. We’re working with various organizations to recruit women and veterans,” he notes.
Like most carriers, Ryder also is evaluating its compensation and benefit packages to ensure they are competitive and attractive. Other initiatives include looking at flexible work schedules, routes that keep drivers closer to home, more time off, and “even things like equipment and technology designed to make the driver’s job easier and safer,” Sensing adds.
He notes as well that shippers evaluate 3PLs in terms of technology investments and “what’s going to keep them ahead of the game.” To address that need, the company launched RyderVentures, a venture capital fund that will invest $50 million over the next five years in “companies pushing the boundaries and creating solutions to the [supply chain] disruptions of today and the future,” Sensing says. The fund is focusing on technologies for e-commerce fulfillment, asset sharing, next-generation vehicles, supply chain automation, and data analytics.