We're In the Midst of Trucking Bloodbath 2.0

26:37So you'll start to see the tender rejection data will start to basically turn around and you'll see it accelerate if there was a situation in the market that suggested that capacity was starting to tighten. We're not seeing any indications of that. There's zero, even as volume has, we've seen in the last week, we've actually seen volume increase. We've seen some really sort of strange, I call it mini surges that look like there may be a directional change. It could be seasonality. We didn't see it at all in April, as Rachel mentions, as things heat up, gardening equipment, construction, all of that sort of drives beverages, sort of drive freight demand.

27:13So we've seen some level of seasonality in the last week, which sort of has broken that down cycle. But we've not seen anything in tender rejection data, which actually suggests that we're still in it for a while. And I think, Tracy, this is going to be, you know, I think if you listen to some of the larger carriers, they'll tell you it's probably going to get better in six months. The second half will be better. I don't buy it. I think this is a situation where it's going to take a while to get rid of all the excess capacity. And one of the things that's really hard to sort of identify is how much capacity has been added in the market.

27:44Because the government data, while it's accurate, it's very lagged. As Elon Musk would say, the government data that the Fed's looking at is all lagged. And it's right. And the same thing exists in trucking is it's not the cleanest data. So it takes a while to sort of figure out how much capacity has been added and how fast it evaporates. But one of the things that Rachel did in an article she did a week ago, it shows revocations. If you look at the chart of the peak cycle, sort of peak during the COVID cycle, how much higher those increases of fleets in terms of, you know, 8 ,000 to 9 ,000 new fleets entered the trucking market a month.

28:18We're only talking about 2 ,000 to 3 ,000 a month right now that have left. And that went on for as much as 14 to 18, you know, 14 to 16 months of sort of peak increases. So we have a while to sort of get rid of this capacity that's added. And that's assuming that the U.S. economy sort of stays at this level and doesn't take another downward leg. One thing that I'm looking at and really concerned about is what happens when those college loans and student financial aid payments resume. Because one of the real sensitivities of trucking and freight, particularly in the consumer side of the economy, is consumption.

28:53And the people that are consuming products tend to be those folks that, in terms of just the impact on the market, tend to be those folks that live, you know, that are younger and sort of live paycheck to paycheck. And so the sensitivities of that will really impact the freight market. And so we could see another downward leg in volume in the second half. And going back to your question on how bad this could be, we saw during the last earnings call, the first quarter earnings, Shelley Simpson, the president of J.B. Hunt, you know, one of the largest trucking companies in the U.S., She said, you know, this market is reminding us of 2009.

29:30And that's certainly not something that I've ever heard. I've never heard a 2008-2009 comparison in the six years or so that I've been covering the trucking industry. So to me, that's a pretty scary sign. I spoke to, you know, on the other side of the coin, I spoke to a truck driver last week who shut down his authority after 16 years of being in the industry. He also kind of agreed that, this could be a 2008, 2009 type situation or even worse, simply because parts are so expensive and so difficult to access even now. So yeah, just with that cost being incredibly high, that's certainly something that's concerning.

30:07Yeah, I was actually just going to ask you, so it's like, obviously, for the market to come into balance, there has to be a reduction in capacity and people have to tap out and say like, yeah, the economics isn't working for me. In the people that you speak to about why they're leaving the market, whether it's drivers, whether it's smaller fleets, et cetera, what are some of the reasons that they're saying? Or like, what are other commonalities? And they're like, yeah, I'm out of this. Well, diesel and fuel is certainly more affordable than it was last year. So that's a positive tailwind for these folks.

30:39But the parts is definitely an issue. Increasing regulations is a frustration. The fact that rates have greatly decreased. That's a big issue. A few of these companies, especially kind of like the midsize fleets, they're seeing their contracts either, you know, get pulled back or contract rates, you know, significantly lower. So it's both on the spot market that is tends to be more dominated by these smaller players, as well as the contract market, which tends to be dominated by larger, more established companies. So rates on both sides of the equation are certainly lowering. And that seems to be the big reason.

31:16It's basically rates are too low to run. It's all cash flow at the end of the day. I mean, ultimately, we can talk about insurance increases. We can talk about maintenance expenses. We can talk about higher driver salaries. Think about just the cost of mechanics to hire those and how much more that has sort of flown through. And this is like that other 30%. 30 percent. So when you talk about like, okay, why is just even setting aside gasoline, operating trucks is 30 percent more costly than it was at the bottom in 2019. These are the different factors. That's right. So maintenance is a big increase.

31:47Parts are one side of it, but also just the fact that you can't get access to mechanics. There's a mechanic shortage across the country that can handle diesel and work on diesel trucks. That's a big problem. You look at the cost of capital. One of the things to remember is that trucking is an industry. It's a capital intensive industry. It actually has one of the lowest returns on capital of any industry on the planet, but it requires a lot of capital. A lot of these trucking companies finance their working capital and they finance their trucks. Well, we've seen a pretty dramatic increase in cost.

32:15One of the sort of crazy facts of this industry is even if you sort of average the operating ratio, which operating ratio reflects in the profitability. So it's an inverse of sort of operating profitability for a trucking company. So an operating ratio right now, or on average, is typically a 97 is sort of the average for a trucking company. That means they're generating, for every dollar, they generate three cents in profit. And that is across the industry in a normal sort of cycle. And so when you're talking about a situation where the cost of capital has gone up so much, many of these companies just aren't even able to basically pay the debt and service their debt on their equipment because their cash flow is down so far.

32:54And so that is what's causing them to basically go under. Now, one thing I would point out is the industry got really financially strong balance sheets got incredibly strong because of the real robust operating conditions over the last couple of years so we have not yet seen a situation where a large or mid-sized carriers are going out in mass a lot of the revocations that rachel's reported are really single operators they're the ones that are most sensitive to that but i don't think we can call a bottom or we'll call a bottom until we start to see some of these a real washout of very large companies.

33:31And we've seen a couple of bankruptcies. Started in March, we started to see some sort of increase in bankruptcies, a couple of hundred trucks at a time. I think there was at least seven or eight stories of companies that had more than 100 employees that just suddenly shut their doors. We're not seeing what I call wholesale. Back in 2019, we saw as many, at one time we were doing as many as 10 sizable bankruptcies a week. with the largest culminating with a company called Celadon, which is publicly traded, had 4 ,000 trucks and filed bankruptcy. And so we're not yet seeing a situation where there's been a wholesale washout, in my opinion.

34:10And until we see that, I think this is going to continue to exacerbate. I will sort of point out, not only has Shelley Simpson talked about the comparisons of 2009, I've heard people across the industry, both small and big, have said this matches what they experienced in 2009. And one of the things that did not happen in 2009 is not only the inflation, but the freight brokerage industry, the sort of cottage industry. It was a cottage industry back in 2009. It was a relatively small piece of freight. It has exploded in terms of its percent of market share. This was going to be my next question.

34:43What's going on with the freight brokers? Speaking of costs, and also this is one of the things we learned at your supply chain conference last year, the freight broker model, as far as I can tell, seems to be an extremely lucrative middleman industry with profit margins. I mean, we heard whispers of like 20 % when we were in Arkansas last year. I don't know if that's still true, but what's going on there? Well, so it depends on what part of the market they serve. So it's really interesting because freight brokers have one of the highest return on capital of any industry. So trucking asset has the lowest and freight brokerage and forwarding actually has one of the highest.

35:21And because they don't actually own anything outside of computers and maybe some real estate, they're not going to just suddenly go bankrupt. So they can downsize their operations. Their trading floors, just like you would see a trading floor at the Chicago Board of Trade in the old days, this is what a freight broker floor looks like. It looks like a trading floor of a commodity because it's effectively what they are. And so essentially, they depend on sort of two KPIs that are really important to freight brokers. One is what is the spread between spot and contract and that is actually as much as 90 cents a mile.

35:51It's the widest it's ever been in a normal cycle. It should be about 35 to 50 cents a mile but it's 90 cents right now which means the spot rate's going to continue to pull down that contract rate but as long as that variance is so high, that delta is so high, then on a per transaction basis the freight brokers are actually making a lot of money. The problem is there isn't any volume for them. And when you look at what shippers, shippers being the customers of these trucking companies, the customers of freight brokers, big box retailers, manufacturers, et cetera, they want to do business with people who have assets.

36:23They want to know who is hauling their load and they want to make sure that it's not brokered out to somebody who's going to steal the cargo or you can't find the cargo. So what's happened is now with shippers is they're saying, I want to work with the asset-based carriers. So a lot of that excess volume, that overflow that went from the large carriers into the spot market and brokers sort of handled it, it's starting to dry up for a lot of the freight brokers. So it's a volume problem for them now. The spreads are incredibly high, but the volume of transactions is actually quite low. And just to sort of explain what the freight broker world looks like and how they managed to take these big margins, I actually shadowed a dispatcher slash broker last week.

37:00And so you were on the trading floor. I wasn't a trading floor. He was more of a dispatcher than a broker, but he has his broker license. So I was able to kind of look at that side of things as well. Basically, let's say Acme Clothing Company says someone needs to move my truck, my load, who can take it. A bunch of brokers bid, I'll take it for$1 ,000, I'll take it for$900, I'll take it for$899, I'll take it for$898. Lowest bidder wins. That broker then says, okay, I'm going to make$850 on this. They post on the load board saying who can take this load for$550. And then a truck driver is looking through the load board, trying to figure out their next job.

37:43They see this for$550. They call the broker. Maybe they ask, hey, can I take this for$650? The broker says, how about, you know,$600. And that's what they decide on. That's what the driver drives for, but that broker is taking that, what is it,$250 in profit. So that's what it looks like on the ground floor, I guess, of what this all looks like. Yeah, I remember when we were at y 'all's conference last year and we interviewed Matt Pyatt, the Arrive CEO. And then a few months later, I went to Arrive's offices in Austin. It really is like a trading floor. What is it called? The Chicago model of - It's the Chicago model.

38:18Of having the shipper side in one side of the room and the carrier side in another side of the room. and they're like sort of, you know, a wall between them. Well, so one of them, you know, one of them books the freight. Yeah, right. And then one of them buys the capacity. So it's one is sort of long in the market and one is short. And essentially a lot of the brokers, the reason Chicago has proliferated, there's a couple of reasons sort of foundational companies that sort of started the Chicago model. But really the reason that it has been so successful is the model is they have followed what the Chicago Board of Trade and the CME used to do is they would go hire people who would normally go to the CBOT or the CME and go on trading floors.

38:54And as those things went electronic, they realized, hey, this is the same batch of people. So they started recruiting the same way that somebody would normally go into the trading goods. They started recruiting the same types of folks to go onto freight brokerage floors. And that's exactly what they do. The difference is that a freight broker, Tracy, you mentioned the margins on it. The margins can be 12 % to 18 % in a normal cycle. Depends on sort of what part of the cycle we are. Some of those are as high as 20%, 20 % plus percent right now. That's why Joe and I went from joking about starting a trucking company to starting a freight broker.

39:24But I, you know, what were you going to say? That would be better. I know, but, you know, I got the impression from Matt that there's like a lot of like ex-Big Ten athletes. It is all. Oh, yeah. That's who they hire. Yeah, so it's like that's not me either, unfortunately. I also feel like the median freight broker is like 25. It's a freight bro. It's a very bro culture. Freight bros. Freight bros. It's a very bro culture. I mean, it's very dominated by men typically is what you'll see in these businesses. And it's a very bro culture. Freight brokers as an industry used to be a word that represented sort of a very small sort of cottage industry.

40:01And these have become massively big businesses. Yeah, they didn't exist just a few decades ago, essentially. Yeah, it was illegal to broker freight. C.H. Robinson was actually now the largest freight broker, was actually a produce broker that fought to allow, after trucking deregulated in 1980, they really fought to allow for brokers to exist in the market. And that really didn't happen until 1985.

40:39Hey, it's Rich Davis from Covino & Rich. The Toyota Tundra and Tacoma are designed to outlast and outlive, backed by Toyota's legendary reputation for reliability. So get in a Tundra with the available iForce Max hybrid engine, delivering exceptional torque and towing capacity. Or check out a Tacoma with available off-road features like crawl control. It could take you back to the trails. Toyota trucks are built to last, year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. Hey, Ryan Reynolds here for Mint Mobile. You know, one of the perks about having four kids that you know about is actually getting a direct line to the big man up north.

41:21And this year, he wants you to know the best gift that you can give someone is the gift of Mint Mobile's unlimited wireless for$15 a month. Now, you don't even need to wrap it. Give it a try at mintmobile.com slash switch. A front payment of$45 for a three-month plan equivalent to$15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. See mintmobile.com. All right. We have to wrap up almost, but I have one last question, and there's so many more questions I have. But last question, Craig, you tweeted something about load fraud in trucking and how AI is going to amplify it.

41:54And I'm sure, like, you know, this is the start of many things. But what was that about? I was going to say, we should just start a new segment. Every All Thoughts episode, we should just ask, how is AI going to make this worse? But real quickly, can you just explain your concern here? And one day this will be a separate episode, but what's going on? So load board fraud is a real problem in the industry. And what's happening is that the brokers, because of the proliferation of broker capacity, the load boards effectively are these marketplaces. But they're not really exchanges in the way you would think of them for financial exchanges.

42:26They're more like Craigslist where a broker will post a load and basically put it out into the marketplace. and ultimately a driver will, you know, drivers will call in because they don't even do it electronically mostly, but they will call in or email and say, hey, I want that load and they'll do this negotiation process on the phone. Well, they come up with a price and they pick it up. The problem is that the brokers that use those load boards, the load boards don't regulate who's actually on their load board. So really, much like Craigslist, it's a posting and you sort of, you know, you may get a legitimate trucking company and you may get a illegitimate trucking company.

42:59Well, there's been this proliferation of illegitimate trucking companies that basically have gone out and registered information that's fake with the government, and the government doesn't regulate it. And so essentially what happens is the person that is accepting that load has agreed to a price. They'll ask for what they call fuel advance, which means that the broker will advance the money. And in a market like this, fuel advances are really important because drivers need to pay for fuel, and they don't want to deal with the cash flow collection cycle. So they get an advance. And then basically that broker is fake and does not exist and will just take that fuel advance.

43:34So that's one form of fraud. One of the emerging forms of fraud in double brokering is that some – so the broker, the fake broker, will then broker it out to another broker. And what they'll do is a truck will pick up and basically there's no chain of custody. So nobody knows where that load went. It will pick up and go. Or you could have a situation where the broker is colluding with a fake trucking company to actually go and pick up the load and then walk out with the cargo so that the load never arrives at the destination and nobody actually knows what happened to that commodity. And it's sold on the black market.

44:09So freight brokerage fraud or load board fraud is a massive problem and it's emerging as a big issue. And AI is just going to proliferate that because now I'm no longer dependent upon humans to sort of execute this fraud. I can actually do it automatically. Train Jet Jet GBT. Exactly. Right now there's no oversight. And if there's already no oversight, that makes me worried for the future for sure. Well, the load boards have the only part. The government's never going to regulate this. And the problem is the fraud we're talking about is typically a couple hundred dollars to a thousand, unless they steal the cargo.

44:42When we're talking about sort of traditional load board fraud, it's so small and they're typically offshore operators that the government is never going to investigate these crimes. And so because it's just – it's happening so rampant that really it's the small carriers that end up really sort of taking it on the chin. So this is a new business model idea for us, Joe, instead of freight brokerage. Freight brokerage, AI-enabled fraud. It is a big, booming cottage industry, Tracy. You just have to live outside the U.S. Let's move overseas first, yeah. A lot of Eastern European. And I think it's also like a lot of the folks that are proliferating in actually used to be in trucking.

45:18There's been this emergence of offshore dispatch operations and offshore carriers. Oh, interesting. Yeah, so they know the system. And so what's happened is the market's gotten so soft that they can't find legitimate forms of making money. And they realize, hey, this is a really lucrative way to make money, and I'm not going to get prosecuted. because frankly it's an fbi's it's the fbi's domain to sort of investigate these crimes that are overseas and the crimes are a miss so misunderstood anyone who can actually understand how all this stuff works has got to be in the industry for many years even even as much as i know i still learn something almost every day about how the how different things work in the industry so it's hard for the regular for the authorities to sort of understand it much less investigate it and the crimes are so small in terms of the dollar value they just don't care And so this crime is going to proliferate until the load boards, the parties that manage these marketplaces, until they actually put real systems in place, it's going to proliferate.

46:12Very quickly, is there anything that could be done to reduce the cyclicality of the trucking industry? And would it be desirable to reduce the cyclicality of the trucking industry? Because on the one hand, it sounds bad if we're talking about trucking bloodbath 2.0. But on the other hand, maybe it's a good thing that, you know, truckers can sort of rapidly build up capacity and then rapidly wind it down as needed. The number one thing that I think would reduce cyclicality in this three would be making it harder to open one's own trucking company. This is not a point that will make me very popular among my readers.

46:50Actually, I think, Rachel, the folks that are in it would actually really appreciate it. This myth of a driver shortage proliferates because you read about that and you're like, oh, I'm going to go start my own trucking company because it's always there. But I think to Rachel's point, you have to cut off the supply of new entrants. And the only folks that can do that are the banks. So when the banks stop lending money and stop financing new carriers to get in the industry, that will restrict capacity. But let's just be frank here. When the market turns back around and it's lucrative, the banks will again resume lending money.

47:22So Tracy, at one point, trucking, like all transportation was regulated. Pricing was regulated. Amazon's business model JIT freight e-commerce would not be possible without deregulation. I remember, Rachel, we had you on to talk about this exact point. Yeah. So it is a situation where unless we were to see a re-regulation, which nobody wants, it's just going to be a boom and bust cycle. We're just all going to watch this from afar. Or if you're in the industry, you're going to unfortunately be exposed to it. Well, there's so much going on and there's such a fascinating time. I mean, it's one thing to hear 2019.

47:58It's another thing to hear 2008, 2009, which I was not expecting. Rachel and Craig, thank you so much to both of you for coming back on online. Thanks for having us.

48:20Tracy, always like talking trucking. I think one thing that, you know, in addition to that sort of mega cyclicality, the sort of the persistent inflation in the space. And so the fact that, like, OK, we're back to 2019 levels in some measures. but 2019 nominally, you know, is like, yeah, parts, mechanics, et cetera. It seems pretty brutal. Yeah. I was also thinking we need to put together some of the data points that they both mentioned, get like a series of charts going and take a look at that. I do think going back to the big question, the sort of macro versus micro, it does feel to me like there are some specific things about trucking, including the fact that the barriers for entry are still quite low, that make what's happening maybe not entirely indicative of what's happening in the real economy.

49:11But also when you hear people talk about 2008, 2009, the slowdown in volume, which Craig mentioned, I mean, that is a real thing that is happening. Yeah. I mean, it seems like it's obviously real economy rooted, and there are issues with demand. It's just that it feels so magnified. Yeah. It's like the bullwhip effect on the bullwhip effect, kind of. I think that's really well put. And then, you know, to Craig's point, it's like we have seen some departures apparently from the industry, but they're still at the small level where past cycles bottomed with like serious like sort of medium-sized carriers, including one publicly traded company a few years ago going bankrupt.

49:48So maybe there's more to go. Yeah, for sure. Shall we leave it there for now, though? Let's leave it there. All right. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Weisenthal. You can follow me on Twitter at The Stalwart. Follow Craig Fuller on Twitter at Freight Alley and Rachel Premack on Twitter at RRPRE. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashiell Bennett at Dashbot and find all of the Bloomberg podcasts under the handle at podcasts. And for more OddLots content, go to Bloomberg.com slash OddLots, where we blog.

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