Q2 2020: COVID-19’s toll on US trucking industry

Many trucking companies enjoyed a surge in cargo demand as consumers stockpiled basic goods at the height of lockdowns. But on the other end of the spectrum, consumer confidence was dampened by intensifying economic uncertainty, resulting in an overall nose-dive in spending as the months went on, particularly across big-ticket items such as furniture and cars. “The unemployment numbers are unprecedented in my lifetime… and it’s going to continue to get worse. It’s impacting our supply chain so dramatically,” a former VP at XPO Logistics, Inc. said. 

With many retailers’ doors closed and the economy in disarray, consumers by and large have been frugal throughout the pandemic. This has resulted in excess trucking capacity and, consequently, lower prices, with some drivers having no choice but to accept rates that they “wouldn’t even have looked at a year ago”, the aforementioned expert said. Indeed, the ATA’s seasonally adjusted For-Hire Truck Tonnage Index narrowed 1% in May, having fallen by 10.3% in April.¹https://www.trucking.org/news-insights/ata-truck-tonnage-index-fell-1-may Compared with May 2019, the index contracted 9.6%, the largest YoY decline since 2009. How quickly the industry recovers, it seems, is largely hinging on a rebound in consumer confidence and spending. “Where I think the certainty starts to balance out and people start to get comfortable is definitely going to be creeping into 2021 and I could see it going to the end of 2021,” the former VP at XPO said.  

The US trucking industry is made up of around four megacarriers, 10-15 large carriers and a “tremendous amount of medium to small companies”, a former Werner Enterprises, Inc. executive noted. Some experts have predicted that the challenging environment will trigger a shake-out of already struggling smaller owner-operators, pushing experienced drivers out of work and exacerbating existing talent shortage concerns, given that the average age of truck drivers is over 55. A further complication in such a scenario could emerge when prices inevitably soar because of capacity constraints. “That’s what I’m worried about two to three years down the road… you’re going to see much, much higher prices, because there are going to be fewer drivers out there to handle it,” the former XPO VP said. 

There are different classifications of truck in the US, ranging from class one to eight, taking into account weight and general use. For example, heavy-duty truck classification covers classes seven and eight, and are likely to have suffered the most during the pandemic because of the lower demand for goods such as furniture and cement. In the end, the carriers with the most diversified end markets will be better able to weather the pandemic, one of the aforementioned experts said. Equally, those that diversify across supply chain segments and offer warehouse and last-mile capabilities as a value-added service stand to gain an advantage. Those that go after more of the pie — even if the pie is shrinking — will see “big returns on that approach”. Being creative and proactive with clients will also yield “extremely loyal customers”. Long-term contracts will also be “essential”; however, knowing what the future looks like for a particular retailer is difficult in today’s environment. If companies can reduce their delivery expenses and forge deeper connections with their largest customers, they’ll be in a much stronger position when demand picks up and pricing recovers. “You’re going to make more money from those customers, because, as their line goes up, you’re now integrated and handling more of that business and it puts you in a much stronger position,” the former XPO VP said. 

Ultimately, the winners will also be the diversified players who can nimbly shift capacity from struggling end markets such as industrials and manufacturing to high-demand markets such as grocery. Many less-than-truckload players, which usually serve bulky items, are feeling the strain as they are forced to take on more e-commerce, which tends to be lighter parcels.

The state of play on the truck manufacturing and distribution side is also indicative of the broader health of the industry. It’s “not a pretty picture”, according to a former SVP at Navistar International Corp. Truck sales and orders have essentially ground to a halt. April class eight sales were down 23% from March, and 47% YoY. Class six and seven were “down substantially” while class four and five were “doing okay”. Meanwhile, rental utilisation “absolutely collapsed”, with trucks being returned “faster than dealers or leasing companies can process them”. As a result, dealers have been hesitant to restock inventories. “You are seeing the beginning of leases being returned because the company is going out of business,” the former SVP at Navistar International Corp said. Overall, the specialist predicts that the industry’s recovery will begin in 2022. “I do not expect any sense of a V recovery whatsoever, more of a stretched out U.” 

Industry consensus at the start of 2020 was that a “healthy volume of freight” would sustain profitability among the most efficient operating carriers, but that smaller, weaker players would struggle. Because of COVID-19, manufacturers went silent almost overnight while the food and beverage markets boomed. “That’s how I would categorise the beginning of the COVID phase: if you were a carrier tied to food and beverage, you had more freight than you could handle, if you were a carrier tied more to the manufacturing industry, you were looking to see how you could avoid lay-offs within your company,” the former Werner executive said. Considering the speed at which lockdowns were imposed, manufacturers have made “very impressive progress,” he added. The coordination between US-based companies and Mexico manufacturing has been particularly encouraging. Signs of recovery are emerging in southern California and Mexico, the beginning of the domestic supply chain, along with some eastern ports. “Right now, if you have a truck in Loreto ready to move, ready to pick up a load coming through the border from Mexico, that is a very expensive truck for a shipper to secure,” the expert said. “We know when we see loads there, that same product is going to be on two or three more of our trucks before it hits the final shelves.” However, there is still some way to go: according to the US Bureau of Transportation Statistics, USD 39.1bn of trans-border freight moved by trucks was down 43.2% in May 2020 versus a year earlier.²https://www.bts.dot.gov/newsroom/may-2020-north-american-transborder-freight-down-49-may-2019  

Nonetheless, broader signs of recovery are in sight, with the ATA’s For-Hire Truck Tonnage Index increasing by 8.7% in June, which is to be expected as more states lifted restrictions during the month. Although tonnage was robust, it’s not yet back to pre-pandemic levels. The ATA’s chief economist has warned that, despite “good anecdotal freight reports for July”, freight could slow as restrictions are reinstated in response to new COVID-19 cases. As another expert interviewed by Third Bridge Forum this month emphasised, the fate of not just the trucking industry but also many other industries will depend on how the pandemic continues to unfold, and how this impacts individual regions and end markets.

* As reported by the ATA