How the trucking industry can tackle freight rate deflation

Claude is the CEO of DAT Freight & Analysisthe largest truckload freight marketplace in North America.

Have both spot and contract freight shipping rates dropped across the board, even as inflation has increased in other sectors. That’s because the trucking industry (particularly the truckload industry) is subject to its own two- to three-year business cycle, alternating periods of inflation and deflation. Rarely is the truckload market stable in equilibrium – it is almost always a buyer’s or a seller’s market.

Interestingly, this cycle does not necessarily coincide with macroeconomic conditions. That means shippers, carriers and brokers must each adapt their strategies in response to a complex, ever-changing market. By strengthening interpersonal relationships and improving collaboration, I believe the industry can remain agile and thrive in both inflationary and deflationary markets.

Inflation and the trucking industry

Inflation has hit almost all industries; however, it has impacted the trucking industry differently than most others. During the pandemic, shippers had to pay much higher rates to secure truck capacity. This trend gave the impression that all carriers were financially prosperous; however, this was not always the case. Larger contract-based carriers generally benefited from market conditions during the pandemic, but many smaller carriers and owner-operators also benefited during that period. But smaller carriers, owner-operators and those who entered the industry during the pandemic and operated primarily in the spot market began to suffer from declining rates in early 2022.

Ironically, widespread consumer inflation has contributed to the deflation of liner truckload rates. Because consumers are less likely to purchase non-essential products when prices are higher, aggregate demand for products has declined. In addition, consumers have shifted their spending from products to services, further reducing overall demand for goods movements. By shipping fewer consumer goods, shippers need fewer carriers to transport those goods. As the number of owner-operators skyrocketed during the pandemic, carriers now often have to compete for lower paying shipments, while shippers have to pay outrageous fuel prices – a lose-lose scenario.

While shipper-carrier relationships can sometimes be contentious, both sides can improve their position if they work together to overcome these challenges. The improved connectivity between shippers and carriers means that both parties can better deal with changing circumstances.

How players in the transportation industry can prepare for lasting success

The transportation industry is notorious for it high turnover rate of drivers. Long working days and physical and mental stress take their toll on drivers. The good news is that both parties can take steps to eliminate layoffs in their operations and reduce unnecessary stress.

1. Develop stronger relationships with existing partners.

Regardless of the industry, buyers looking for a lower cost on a service will typically broaden their search parameters. But after struggling to do so during the pandemic, I see many shippers taking the opposite approach and investing in deeper relationships with their existing carriers. The question for both shippers and carriers is how to balance relationship building with financial decision-making.

For example, each party has different incentives depending on market conditions. In tight markets with more demand than available capacity, shippers must raise rates and offer other incentives to secure trucks. These roles are swapped in softer markets, with carriers lowering their rates accordingly.

A strong relationship can pay off here; however, to build one requires shippers and carriers to play an active role in each other’s operations, regardless of when the market is convenient. They need to understand each other’s business needs and communicate on how to navigate the market together.

In general, when the market is tight, shippers want to be carrier friendly and the shipper of choice. When the market is weak, carriers want to be friendly to the shipper and be the carrier of choice. Relationships are built based on who benefits from the current market. However, both parties must enter into these relationships for the long term to secure capacity. If a shipper stays with a carrier during a weak market rather than diverting to the spot market, the carrier is more likely to provide capacity to that shipper during a tight market period – at least to the level originally requested.

2. Take advantage of special capacity.

I’ve seen how building dedicated capacity benefits both carriers and shippers. According to the CSCMPs “State of Logistics Report,” (paywall) the industry saw a 39% increase in special truckload spending in 2021. Special contracts provide carriers with stable revenues, and by working with the same shippers on a regular basis, carriers can complete transactions more efficiently instead of finding loads locally market.

When it comes to the spot market, I think carriers can benefit the most by working with a brokerage. Brokers act as industry consolidators by connecting shippers and carriers in the spot market. Most carriers run small operations and don’t have time to build relationships with thousands of shippers. Instead, a brokerage can take advantage of high-paying spot opportunities without investing too many resources in the search process.

Ultimately, the transport industry is so much more than pick-up and drop-off. It’s about how players across the industry leverage these different relationships to create a cohesive ecosystem that works together.

The transportation industry is becoming more interconnected every year as shippers, carriers and brokers work to streamline their operations. Technology and enhanced collaboration will continue to play a major role in this evolution. Regardless of where a company falls in the industry, long-term success is only possible if it takes advantage of new technology to address the industry’s unique business challenges.

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