Owner-operator Gamina Oliver has worked in the trucking industry since 1994. She drove trucks for other carriers early in her career and even worked as a dispatcher for a bit. A few years ago, she decided to take her knowledge of both sides of the business and begin operations on her own. She invested in a small fleet of three trucks and a reliable crew of drivers.
Everything was going well – and then COVID hit.
“That was the beginning of what has become a very rough road for the trucking industry,” said Oliver.
The disruption to manufacturing and the global supply chain that COVID caused is only one of many potholes in the road for the trucking industry. Other factors turning those potholes into impassable sinkholes include high inflation and skyrocketing diesel prices that seem to have no end in sight.
“We’ve made it to 2024, but it has been a real struggle,” said Oliver. “Prices are still high. Interest rates are still high.”
The 10-year drop in Trucking Freight Rates
There’s never a good time for a pandemic. However, COVID couldn’t have come at a worse time, Oliver said. “Every 10 years, the prices are driven up from the cost of doing business and supply and demand,” she said. “So, freight prices get dropped on purpose so they can start over again. (Brokers) drop them down to a crashing low so they can inch back up slowly, then they do it all over again in another 10 years.”
This deliberate attempt to control freight rates typically works well, Oliver said, providing checks and balances within the industry. “But this time, it just so happened to fall at the same time as the pandemic, during an election year, and with sky-high fuel prices. All those factors combined caused the drop to last longer and be more severe.”
Other factors have contributed to the recent decline in freight rates. Rising costs for insurance, maintenance, and compliance with regulatory requirements can squeeze profit margins. To stay competitive, companies might lower freight rates, impacting drivers’ earnings.
Another pressure point is having more trucks available than loads to fill. “Some of the drivers who lost jobs with big companies during COVID went out and bought their own trucks,” said Oliver. “This sudden demand doubled the price of trucks and trailers, but the price of freight didn’t go up. It kept going down because there were more drivers than loads.”
To compensate for the continued low freight rates, Oliver sold one of her trucks, parked a second, and now operates a lone truck herself to keep her business going. “People are just trying to figure out how to make a living, but there’s only so much freight out there right now.”
Global Supply Chains are Still Playing Catch-up
“The pandemic had more of an impact on the supply chain than the average person realizes,” said Oliver. For nearly two years, the normal pipeline of products was interrupted, severely depleting the supply of everyday products manufactured globally.
Manufacturing facilities shut down in the early days of the pandemic to comply with global government mitigation strategies to control the spread of the disease. Even after those restrictions were lifted, manufacturers struggled with adequate staffing as people continued to get sick with COVID and need time off.
The result? Supply couldn’t keep up with demand because of the extended disruption in production.
“The way it works is products manufactured this year won’t ship until 2025,” Oliver said. “During COVID, everybody had to stop manufacturing and shipping, which created a deficit. That stifled the pipeline that we had going. Even though production is mostly back to normal now, we’re still playing catch-up trying to get product out that should already have been in the pipeline.”
Low Freight Rates Strain 3PL Operations
The trucking industry’s low freight rates are taking a toll on third-party logistics (3PL) providers and warehousing services, with customer retention emerging as a key challenge. According to recent data collected by WarehousingAndFulfillment.com, customer retention rates for 3PLs, once above 95%, have dropped to between 91.72% and 94.2% over the last 2 years.
Our data suggests the average length of time a customer stays with a 3PL has also declined, falling from 4 to 5 years to 2.5 to 3 years. Some clients continue to maintain longer 5-to-10-year relationships. However, the shortened customer lifecycle points to the strains 3PLs face in the current economic environment, as well as the broader negative impact that poor economic conditions are having on small businesses.
Multiple factors drive customers to seek new 3PL providers or bring logistics functions in-house. Performance issues remain one of the top reasons, followed by pricing pressures, as some 3PLs try to offset lower freight rates and higher operational costs by increasing the cost of doing business with them.
With pricing emerging as a strengthening incentive for customers to make a switch, 3PLs may face further retention battles if freight rates remain depressed.
The Road Ahead for Freight Rates
The future of freight rates and driver compensation remains uncertain. Some industry experts predict a period of adjustment as the market finds a new equilibrium. A decrease in interest rates later this year from the U.S. Federal Reserve could help with the transition. However, it’s still unclear if the fed plans to begin lowering rates or hold steady until inflation further cools.
Owner-operators like Oliver are a bit more skeptical about how soon – or even if – freight rates will rebound to pre-COVID levels.
“I think it’s still too early to tell if there is any relief on the horizon,” she said. “The government is predicting that by the end of 2025, things should start to look better. But I don’t see it ever going back to the booming economy we had before COVID.”
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