Trucking companies are reaping the rewards of a retail boom, but industry analysts warn another 'apocalyptic' bankruptcy wave could be on the way

  • Trucking rates have been rising for nearly a year amid supply-chain snarls and a spending comeback.
  • What goes up must come down, and trucking goes through a crunch every few years.
  • Analysts said structural changes to the industry will cause bankruptcies whenever the market cools.
  • See more stories on Insider’s business page.

Trucking is riding high, or as Morgan Stanley analysts recently put it, “soaking up the sun.” The sun, in this case, is hot, hot pricing, which is warming the balance sheets of nearly every kind of trucking company.

In April, spot rates — the price for a truck booked today as opposed to in advance — were the second highest ever recorded, reported DAT, the largest US load board, where shippers and brokers list loads for carriers to grab. At the same time, rates for precontracted trucks were at a 12-month high.

“Results continue to point to a positive freight environment with little to no signs of a slowdown,” Morgan Stanley analysts, led by Ravi Shanker, wrote in late May. But, Shanker told Insider, that doesn’t mean that trouble will stay away forever. A fall will follow the prolonged high, Shanker said. The question is when.

The trucking industry, analysts said, is slowly gliding toward a wave of bankruptcies and job losses that could resemble the “apocalyptic” conditions seen in 2019, when 640 trucking companies filed for bankruptcy in a six-month stretch. Cass Freight Index analysts said the growth in trucking rates is already slowing, possibly portending that downturn.

The good news for trucking companies — and what makes the timing here tricky to gauge — is that recent structural changes to the industry status quo should keep fleets from building the capacity and finding the drivers that would create the kind of excess of supply needed for a rapid decline.

But it’s only a matter of time, and those with the sharpest eyes for industry indicators are the most likely to escape unscathed.

Falling in slow motion

Like many markets, trucking runs in cycles. When the economy grows, demand increases, and prices go up since it takes time for trucking companies to see the demand and respond.

Truck drivers and fleets see the prices and jump into the market. At some point, capacity exceeds demand and the bullwhip cracks. The market drops, and truck drivers run out of work as some of the companies that hire them go bankrupt.

“It’s every three to five years. It goes through this ridiculous cycle,” said Dean Croke, the principal analyst at DAT.

The strange and unprecedented nature of the current sustained market high means the drop will be drawn out, analysts said. Plus, three major industry shifts make the coming 2022 or 2023 drop different from the last one in 2019, Shanker added.

First, federal regulation that mandates the electronic tracking of driver hours, which went into effect in 2017, took some capacity out of the market. Drivers could no longer get around the rules that restricted their driving time, as they’d done when logs consisted of pen and paper. This factor was in place in 2019, but the other two were not.

Second, increased scrutiny of driver drug use, starting in January 2020, has taken tens of thousands of drivers off the road. And third, insurance premiums for fleets rose for 12 years straight until 2019, the American Transportation Research Institute found. Insurance premiums landed among the top concerns for respondents to ATRI’s 2020 industry survey for the first time since 2005, and anecdotal evidence pointed to massive premium hikes (ATRI is studying the issue now).

Shanker said that “if you’re a small trucking company that has historically done 2% to 3% operating margin,” and your insurance line item “is going up by 100%, that will put you out of business immediately.”

All of these forces combined can keep new trucks from entering the market, even if drivers are willing. (Signs that California’s AB5 law may soon threaten the industry’s contract labor aren’t helping either.) Shanker predicted that capacity will stay short, and that a true fall won’t come until demand subsides.

Just a little bit of history repeating

The trucking industry may long remember 2018 and 2019. Factors such as a lapse in demand caused by tariffs and an industrial slowdown led trucking rates to take a nosedive, triggering a slew of high- and low-profile bankruptcies.

The pain kept going into 2020, until the uncertainty of the early weeks of the pandemic yielded to a flood of e-commerce purchasing and a resurgence of imports. Truck-driver pay and trucking revenue have been exploding ever since.

Analysts don’t expect imports and inventory restocking to cool significantly through the end of 2021 — maybe a few months into 2022, or even beyond. But, they said, some number of trucking companies will almost certainly go bankrupt as a result of that cooling.

“We never seem to learn from our mistakes,” Croke said. Carriers, especially small ones, don’t plan very far ahead, he said. “They don’t realize until it’s too late.”

This coming pain may be harder to spot than the 2019 crash. Seasonal trends that tend to repeat every year are usually an essential part of the prediction game. For example, business booms heading into the holidays and wanes in the new year. But since restocking is still in full force heading into the summer, and has been since January, those stalwart trends are out of whack. Retail stocks could top off earlier this year or keep flowing all the way to next spring.

“The crystal-ball part of this is very difficult given we’ve got very little seasonality,” Croke said.

Looking to the ports is likely the key to predicting the next cold shower, since imports drive significant demand for trucking services. Even before the ships stop coming in, Croke said, truckers should look to the skies.

“Watch air cargo yields and volumes, because the first thing to turn off is the most expensive form of freight,” he said. “It’s a long-term bellwether for global trade, and right now you can’t buy a seat on a cargo plane.”

There’s plenty more sunshine to soak up for trucking companies Morgan Stanley said, and the prolonged high is serving as a fascinating case study for even the most experienced industry vets. “It is a very interesting time to be in the transportation space,” Shanker said.

In fact, the coming cool-off may prove a strange comfort to industry players concerned that the stressful conditions of the past year are simply the new normal, said Jett McCandless, the CEO of freight-visibility platform Project44 and a former freight broker.

“Give it either two months or maybe two years and things will change,” McCandless said. “It’s always too much trucks or too much freight. That’s just the way it works.”

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