April 12, 2023
Truck prices are ridiculously high now. Fuel prices, too. Inflation is making everything cost more — while freight rates continue to fall. Carriers are going out of business.
It’s a terrible time for trucking, right? Well … maybe it’s not so bad.
It’s true that conditions today aren’t as favorable as they were two years ago, when the economy was opening up after COVID-19 shutdowns and restrictions. It’s important to understand, however, that new records were being set for spot freight rates. Records were also being set for new carrier registrations as drivers bought trucks and obtained their own authority, to take advantage of the high freight rates. For a while, it was difficult NOT to make money in trucking.
Since then, fuel prices have risen and freight rates have dropped. In the last quarter of 2022 nearly 2,000 carriers per DAY were giving up their own authority, effectively closing their businesses. Some leased their trucks to larger carriers with steady rates, while some sold their trucks, becoming company drivers — if they stayed in the business at all.
Undoubtedly, it’s a tough time for small trucking businesses.
However, even though costs are up and freight rates are down, it wouldn’t be accurate to say it’s impossible to operate a profitable trucking business. The reality is that rates are down from a record-setting peak reached in 2022, but they’re still higher than they were pre-pandemic. The cost of trucks has risen, but so has the fuel economy they provide, and advanced driver assist systems, or ADAS, have made them safer than ever.
One telltale sign of trucking profitability is that when carriers are making money, they buy trucks. One reason for doing this is that profits invested in new equipment can be subtracted from the carrier’s taxable earnings. Another is simply that they expect to continue making money.
Well, carriers are still buying trucks. On the U.S. market, 254,574 Class 8 trucks were sold last year, according to Wards Intelligence. That’s an average of over 21,000 per month, or about 20,500 if December (typically the highest sales month of the year) is taken out of the equation. This year is starting strong: at the end of February (the most recent month for which data was available at the time of this writing), 40,068 trucks had been sold.
Truck manufacturers have received so many orders that, even if no more orders were received, it would take them more than nine months to build enough to clear the backlog. Clearly, large carriers are positioning themselves to profit in 2023.
However, large carriers make up a very small percentage of registered carriers. In fact, more than 90% of carriers have five trucks or less. The majority are one-truck operations. Small carriers have some market disadvantages, such as smaller or no volume discounts of fuel, tires and repairs. Another factor that can harm small trucking businesses is a reliance on brokered freight, commonly known as “spot market.”
Most large carriers sign contracts with customers, keeping freight rates at a particular level over the length of the contract. Not only does this help provide steady freight, but it also keeps rates from fluctuating wildly. Not so with spot rates, which can rise or fall much more quickly based on competition and other factors.
To be profitable in today’s market requires some judicious business management. Unfortunately, that’s an area in which some owner-operators fall short. Those are the ones that typically get weeded out quickly when conditions worsen.
To manage a business, the owner must know some key factors, beginning with cost per mile. That cost includes the driver/owner’s salary, fuel mileage and more. It’s nearly impossible to decide if an offered load is worth taking without knowing the cost per mile. Fuel mileage in miles per gallon is also important. Fuel prices can change daily, so knowing how many gallons will be needed for the load and any deadhead makes a difference. Spot freight often doesn’t include a fuel surcharge to compensate with prices rise, whereas many carriers provide one.
The source of the freight is important, too. Spot rates are great when the market is rising, and not so good when its falling. Some truck owners lease to carriers because they compensate at a set rate, avoiding market fluctuations. Those that pay contractors by percentage may still be more stable if they have contracts in place with their customers that keep rates from drastic ups and downs.
Truck owners sometimes run under their own authority when rates are high and then lease to carriers and running under the carrier’s authority when brokered freight rates are down.
But even small carriers can enter into contracts for freight so they don’t rely entirely on the spot market for all their loads. It doesn’t hurt to have a discussion with a potential customer, but remember that being obligated for certain loads must fit in your operational schedule. For example, if your contract is to pick up a load in Atlanta on Wednesday, you’ll need to find freight with a delivery that puts you nearby when empty. A 16 deadhead to get to the pickup quickly negates the advantages of a contract.
Knowing your market is also important. Rates differ in different areas of the country. The state of Florida could be the best example of this. You might be offered a great rate for a load going to Florida, but rates coming out of the state are notoriously low. That’s because Florida, with large numbers of tourists and retirees, consumes much more freight than it produces. Other areas of the U.S. have similar rate disparities, so before accepting a load, it pays to check the outbound rates for the delivery area.
Finally, managing your business also includes managing your pay. Truck owners who treat any cash left over after paying expenses as “personal money” soon run into financial trouble. Put yourself on a salary and leave any surplus from each settlement in the bank for future expenses. You can always pay yourself a bonus at year-end.
Treating your trucking operation as the business that it is, can help you remain profitable in the toughest of times.
Source: TheTrucker.com by Cliff Abbott