Buckle up. 2020 will look nothing like 2019 for shippers.
A Year of Bliss
Let’s face it, 2019 was the year of the shipper…
No one was talking about the capacity crunch.
As a result of strong carrier performance over the last two years, new truck orders were up 76% and this flooded the market with tens of thousands of additional trucks in 2019.
This excess capacity provided a glut of options for shippers resulting in a smooth peak last year and non-events for produce season and all other normal market squeezing periods.
Capacity was plentiful indeed in 2019. Shippers acknowledged the capacity glut in a September survey from Inbound Logistics that indicated 80% had no capacity problems in 2019.
The “driver’s shortage” was revealed to be more mythology than fact.
The driver's shortage talk track has been a favorite for the carrier and media pundits. But a closer look this year showed that the industry really has a pay and working conditions gap.
A lengthy study published by the federal Bureau of Labor Statistics concluded that there is little evidence of any driver’s shortage in the industry. And on the ground level, all those extra trucks found drivers this year.
There was no driver’s shortage in 2019.
There were no major acts of god or black swan events that disrupted supply chains.
Yes, blizzards… and wild fires… and inclement weather affected the movement of freight in 2019. And this included two catastrophic hurricane landfalls with Dorian and Barry.
But, it was nothing like the triple whammy of Harvey, Irma and Maria in 2017. It was a year of smooth operations relative to weather and black swans.
And rates… well… rates were historically low.
The excess capacity drove rates to four year lows by March. And the race to the bottom continued through September.
Most shippers attempted to bypass all rate volatility in 2019 by contracting a larger portion of their freight. Little did they know that spot rates would hover 20% less than contracted freight almost all year.
By summer it was clear that freight on demand via the spot could bring even more savings for shippers. If a picture says a thousand words, DATs Trendline chart for 2019 dry van rates says it all.
It was a year of shipper’s bliss.
But as the saying goes, all good things must come to an end. And the smoke signals on the horizon indicate that 2020 will usher in another era of volatility for the fragile freight market in North America.
That’s right, trouble is brewing for shippers.
So, what are the storm clouds bringing?… a confounding mix of regulations, fleet corrections, rising operating costs, and additional technology expenditure.
And the expected result… less capacity, higher prices, more volatility… and yes, more headaches for shippers.
The 7 Disruptors
Strap in, buckle up and put your headgear on. Here are the 7 key disruptors that will likely flip the North American Freight Market in 2020.
(1) Carrier bankruptcies continue at an unprecedented pace
In the first half of 2019, 640 freight companies closed their doors. This was double the amount for all of 2018 and represented more than 20,000 trucks pulled off the roads.
Since then, the blood bath hasn’t stopped. Even heading into full peak season, another 1,000 trucking jobs were lost in November. (And that’s without Celadon because they had… “other” issues).
What's behind this freight apocalypse? Plain and simple, the unit economics of running a facilities-based carrier are tough.
Cost inflation and operational pressures have creeped into every area of the business. Wage increases have hit double digits. Insurance costs are soaring (more on this below). Carriers have been forced to invest in ELDs. Fuel expenses are up. Truck costs are up.
Juxtapose all this against an out of balance supply and demand equation… and rates crater… and carriers are struggling to make it on low single digit margins.
Nothing changes as we head into 2020 and that means more companies will be going out of business at an alarming rate.
The result for shippers is fewer trucks and higher rates.
(2) ELDs cause more ruckus
If you thought ELDs were the story of 2018, well it’s going to sound like Groundhog Day. ELDs are set to disrupt the freight business again in 2020.
First, the FMCSA starts enforcement of ELD stateside December 17th. And while it’s estimated that that compliance is high… nearly 97%… there still will be trucks pulled off the road due to lack of readiness.
The FMCSA isn’t messing around. They’ve made several recent statements that there will be no “soft enforcement” grace period and inspectors will be fully enforcing the rule immediately.
The bigger issue is that Canadian truckers now face the ELD Mandate.
Canada will begin enforcing its ELD mandate on June 12, 2021. While it should be less of a shock compared to the U.S. ELD mandate, it is still expected to tighten the country's capacity by up to 30%. And even though cross-border drivers already use ELDs today, there are still 62,000 drivers who will need to make the switch.
The biggest challenge? Time-efficiency. From implementation to training and adaptation… there will be a major learning curve for Canadian drivers new to ELDs.
When the alarm goes off… drivers making the switch from paper to electronic logs will be forced to operate within legal hours. And those short-hauls that could once be easily manipulated on paper logs simply won't fly anymore.
As U.S. shippers and carriers found out, ELDs will impact the frequency in which a truck is available and affect the time it takes to deliver shipments. Lanes that fall into 450-750-miles could now take two days instead of one, and 900-1200-mile hauls could take up to three days. There will also be more use of team drivers. Because of this, appointments and transit times will be critical when ELDs go into effect. Adjustments will need to be made.
Given the fragile nature of carrier finances, some Canadian carriers will likely decide to scale down their operations or get out of the business altogether. The Canadian trucking market is comprised of much smaller carriers than the U.S. and additional costs and regulation will force some out of the business.
The final ELD issue at play is with U.S. trucks entering the Canadian market. They will be subject to the Canadian ELD mandate, which is different than the U.S. mandate. This means they will need to have a Canadian-certified ELD that requires third-party certification.
So, what's this mean for shippers?… You guessed it. Fewer trucks, less capacity and higher rates.
(3) The Drug and Alcohol Clearinghouse creates a real driver’s shortage
The Drug & Alcohol Clearinghouse seems to be the white elephant in the room. Carriers say they already do background checks. Conventional wisdom and many safety advocates say it’s not enough.
When the Clearinghouse Implementation goes into effect, it will require carriers to report driver drug and alcohol violations. Employers will also be required to use the database to ensure that no current or prospective employee poses a safety risk while operating a commercial motor vehicle.
When the Clearinghouse goes through on January 6th, 2020, it will likely pull 300,000 drivers off the road next year.
And even though states received a three-year reprieve on December 12th, carriers and drivers did not. Fleet operators will still be required to query the database at least once annually for all drivers and all new employees will be required to be pre-screened.
Cue the driver’s shortage talk track… but this time it’s real.
The thought of 300,000 drivers off the road is almost unthinkable. This will have a major impact on the freight business.
(4) Gas & oil prices soar
The cost of gas and diesel will get much more expensive in 2020.
On December 6th, the OPEC Oil Cartel announced it is slashing oil production through Q1 2020. With Russia already reducing their rate by 500K barrels a day, OPEC hopes to increase existing cuts across its other member nations. Their stated goal is to, “support global energy prices.” In reality, it will serve to artificially inflate the price of oil and gas well into the first half of the year.
To make matters worse, on December 10th, the US Energy Information Administration released forecast data relative to global liquid fuels in 2020. If their 2020 forecast plays out it will result in an additional 5% increase in the price of diesel at the pump based on the current DOE diesel retail average.
While on the surface the 5% increase does not sound like much, when you compound this with the other operating cost increases outlined in this post, it’s another death sentence for carriers on the fringe.
Expect cost increases relative to the energy equation in 2020.
(5) Insurance costs skyrocket
Insurance premiums haven’t just creeped for carriers over the last year, they’ve skyrocketed.
Behind the increase are the insurance claims related to truck crashes. Claims have increased in frequency and severity over the last several years and until recently premiums paid to the insurance carriers have not kept pace.
This has resulted in a hardened truck insurance market – possibly the worst the industry has ever seen. Carriers are reporting that new insurance premiums are more than doubling.
And it's not just the insurance companies pushing for new premiums… there's legislation on the horizon as well. In an effort to keep people on the roads safer, new legislation is being passed that will increase the minimum liability insurance for carriers.
Motor carrier insurance minimums have been a controversial topic for years. Back in 2014 the FMCSA determined that current minimum insurance levels inadequately cover the full cost of some crashes when factoring in increased medical costs and revised value of statistical life estimates.
Fast forward to 2019… the U.S. House submitted the INSURANCE act which, if passed, will increase the minimum liability insurance for carriers from the current $750K to $4.8M. While the increase makes sense, the new premiums that go with it will be hard to swallow for carriers.
The net effect here?… Costs go up. Carriers go out of business. Fewer trucks. Less capacity. Higher rates.
(6) Independent Contractor laws make CA and NJ untenable
On January 1st, 2020, California will enforce its new AB-5 law… legislation that lowers the threshold for classifying a worker as an employee or an independent contractor. Following its footsteps, the state of New Jersey will be passing a similar bill called S-4204.
While these laws were originally aimed at gig employers such as Uber and Lyft, trucking companies using an independent contractor model will be affected as well.
Re-classifying independent contractors as employees will come with a big price tag for carriers. Costs could increase by as much as 35% as they tag on new wages, sick leave, worker's compensation, not to mention any protections from state and federal civil rights laws.
Due to looming new costs major carriers are telling their owner-operators to leave or commit to hauling freight outside the state.
While no one knows the true impact of removing all independent drivers from a state like CA… a look at Prime provides a glimpse. They currently have 6,000 owner operators in CA that will need to move or quit. Given these numbers, you can only imagine what it’s going to be like getting a reefer in CA during produce season next year.
Shipping in CA and NJ is about to get a lot more difficult… and a lot more expensive.
(7) Software eats the freight industry
If software is eating the world, then it seems the freight industry is next on the menu.
Given the boom cycle of the past few years, money has gushed into every facet of the freight business.
One of the most notable areas has been technology where VC investors dumped $19.3 billion into freight tech in 2018… and another $11.7 billion through the first three quarters of 2019.
The result has been a cornucopia of new systems and tools.
Top of the list are new TMS and visibility solutions, but it doesn’t stop there.
The digitization of freight is everywhere… robotic warehouse systems, last mile delivery solutions, pricing tools, RFID tags, dynamic routing, analytic tools, freeze control, block chain, AI, IoT, apps… apps… and more apps.
And the industry needs these tools.
The freight business has long been a technology laggard with decidedly manual processes. But all this digital transformation comes at a cost… to shippers, carriers and brokers alike.
Everyone in the supply chain is modernizing systems… and the result?… Increased costs.
So, there you have it. The doom and gloom report for 2020. These 7 disruptors will drain capacity out of the market and usher in a new era of volatility for shippers.
How quick will this happen and how bad will it get?
Well, that’s the magic question.
There aren't too many people arguing against these events. They will likely occur.
Oh… and to add a bit more bad news to the pile… notice… we didn't even mention trade wars or an economic recession. These could compound the situation.
Shippers should take heed to follow these 7 disruptors closely and prepare for capacity to tighten, rates to go up… and for the era of comfortability to come to an end.
What’s a shipper to do?
There are 3 clear things shippers should do to prepare for the 2020 freight market.
(1) Take heed to the shipper of choice movement.
When the dust kicks up shippers are going to need those crucial carrier and broker relationships again.
While the shipper of choice movement got a lot of publicity in 2017 and 2018 when trucks were hard to find, this seems to have disappeared in the era of comfortability.
Be sure to heed the advice and start hugging your brokers and carriers a little tighter and being a good partner ahead of the market flip.
(2) Plan quarterly RFPs
Shippers used to do annual RFPs, but the current best practice is to leverage quarterly RFPs.
Quarterly RFPs provide a couple benefits.
First, shippers are ensured they always have a fresh roster of carriers of and brokers. It will allow you to build depth in your roster by rotating in and out new providers. This means when you need a broader base to pull from, you already have the relationships.
Second, it keeps everyone honest. If a carrier or broker know they are evaluated quarterly, service levels will naturally stay high.
Having a world-class process and system to execute an RFP is essential in logistics.
If you don’t have a world-class RFP, be sure to check out The Ultimate RFP Checklist for Shippers. It’s the most complete guide ever written for creating and managing a shipping RFP.
It provides an RFP framework that includes the 13 critical components of best in class RFPs. It also offers a step by step guide to executing your RFP. Simply put, it's the blueprint for building your RFP.
You can get a copy here:
(3) Budget for increases
Even though it was a smooth year for capacity, the #1 unanimous challenge for shippers in 2019 was reducing transport costs.
A survey from Inbound Logistics on industry perspectives quantified this in September showing that 57% of shippers said costs were the top challenge.
Well, this gets a lot worse in 2020. So, budget for increases.
Hopefully, the industry doesn’t repeat the capacity crunch and volatility created in the 2017 & 2018 cycle, but the clouds on the horizon say we’re in for quite a storm.
Of course, if FLS can help you move your freight in 2020, please reach out. Our network of 54,000 carriers and 400,000 trucks is a great asset to any shipper… and our service levels are impeccable.
Need help moving freight in North America? Get a quote today!