Trucking utilization improves while prices remain suppressed

Earlier in the week, we reported on how there was no driver shortage as all signs point to an oversupplied market on the capacity side. Looking at the numbers, this becomes very apparent as volumes averaged over 3% higher this August versus 2018, while base spot rates were down 18% on average compared to last year from $1.71 to $1.40 per mile. There were higher volumes on lower rates. Tender rejection rates averaged 17% last August versus 4% this year, indicating carriers were much more willing to honor their contracted rates this year.

As with an undersupplied freight market, as we saw in 2018, an oversupplied market takes time to correct. Utilization always leads rate changes, regardless of direction. As truck utilization improves, capacity tightens and vice versa.

Utilization is the lifeblood of any carrier operation. Trucks that do not generate revenue lose money. Once a carrier commits to the purchase of a truck, it can be several years before the cost of that truck is recovered.

Trucks are a depreciable asset. This means carriers can spread the cost of the truck over several years if it chooses. Many large capital expenditures are treated in this manner, so the costs do not make any single month look worse than they were. This also allows time for the truck to generate revenue to offset the cost of purchase. If the truck sits idle, the cost remains on the income statement while revenues do not grow reducing profit margins and operating ratios. Increasing utilization does not mean increasing rates every time, but it is a step in the direction of higher rates.

It is apparent the supply of trucks is being reduced as trucking failures continue to be at multi-year highs and growing. If volumes persist, there could be a slowing of supply side contraction in the fourth quarter.