Cautious optimism rises as the trucking industry shows select signs of stabilization, but organizations must navigate several hurdles before declaring victory over the downturn.
Balaji Guntur is a vice president in the Global Transportation Practice of the management consultancy Kearney. Additionally, Guntur is a co-founder and chief executive officer of Hoptek, a Kearney company focused on the trucking industry with a suite of software-based products.
Sean Maharaj is a vice president in the Global Transportation Practice of the management consultancy Kearney. Additionally, Maharaj is a chief commercial officer of Kearney’s Hoptek.
The trucking industry has long been sensitive to economic fluctuations, and the past couple of years have seen a great deal of pain in the industry, with the recent folding of many fleets. Following 27 months of consistent rate declines, 2024 has finally seen a slight year-on-year increase of 0.2% in trucking rates. This modest rise has led some to speculate that the worst may be over, but this small uptick signals just a potential turning point. It is not yet an indication of full recovery. The industry won’t start to feel any true relief until it experiences one full quarter of positive gains, albeit accompanied by some turbulence.
The root cause of the industry’s ongoing struggles lie within the pandemic-driven imbalance between supply and demand. When demand surged during COVID-19, over 100,000 new trucking companies entered the market to capitalize on what was seen as a “hot” market. These new entrants purchased trucks at record-high prices, believing the pandemic-driven boom would last into the foreseeable future. But all good things end, and as demand tapered off in 2022, many were left with costly assets and loans they could no longer afford to maintain against a backdrop of rapidly falling rates. As a result, the trucking industry found itself awash in excess capacity, with rates plummeting accordingly.
Freight volumes are a key indicator of the industry’s health. After a steep decline in truck tonnage during spring 2023, there was a brief period of fragile stability, only for 2024 to kick off with another sharp downward spiral. The first half of 2024 was marked by volatile swings: a 4.3% rise from January to February, almost erased by a 3.2% drop through April. Then, a 3.6% rise in May was followed by a 1.6% drop in June. Despite the volatility, each dip has become seemingly less severe. If this pattern of incrementally higher lows continues, broader stabilization seems more likely, according to the data.
Spot rates for dry van shipping have fluctuated between $2.01 and $2.20 per mile, a stark contrast to the $3.28 peak of June 2022. Contract rates, which traditionally offer more stability, have similarly declined, hovering around $2.48 to $2.73 per mile. Today, anecdotal evidence suggests that contract rates have bottomed out and are on the rise, as more carriers voice concerns to shippers that low rates will no longer be tolerated or subsidized.
This persistent softness in rates has forced thousands of carriers out of the market. From December 2022 to March 2024, the Federal Motor Carrier Safety Administration reported a 7.6% reduction in carriers and a 10.7% reduction in brokers. The bankruptcy of Yellow, a major less-than-truckload (LTL) operator, sent shockwaves through the sector in August 2023. These ripples are still being felt today, as 10,000 carriers have ceased operation in the first half of 2024 alone.
However, there are more encouraging signs of life beyond the slight 0.2% year-on-year increase in shipping costs and the higher lows in month-to-month freight volume swings. For the first time since the pandemic, the number of revoked registrations has surpassed new ones, indicating that capacity is beginning to tighten up. In addition, the expiration or default of COVID-related loans could further bring about capacity reduction, serving as a market-clearing mechanism. While this is far from a full recovery, it does suggest that the industry is starting to balance out.
Looking ahead
The Cass Truckload Linehaul Index is a measure of the movement in linehaul rates. This index includes both spot and contract freight.
Cass Information Systems Inc.
The remainder of 2024 is expected to continue to be a transitional year for the trucking sector. The general sentiment in the market is that while we may have hit rock bottom, recovery will be gradual, uneven, and nonlinear. Many analysts are eyeing fall 2024 as the earliest sign of true improvement, though more cautious predictions push meaningful recovery into spring 2025.
The Cass Truckload Linehaul Index (see chart above) indicates that we’ve reached a floor in rates, but carriers are still struggling to find their footing. Frustrated by unsustainably low rates, many carriers are still turning down low-margin freight due to rising operational costs like fuel, labor, and maintenance, which has left them unable to maintain profitability or support operations at such thin margins. Inflation, fluctuating inventory levels, and construction activity will all influence how quickly demand recovers and whether carriers can emerge from this precarious situation.
While inflation is cooling and consumer demand is slowly picking up, the sector remains highly sensitive to external factors such as geopolitical tensions and broader economic health. Until demand recovers more robustly, trucking will remain in a state of flux.
Leveraging tech to fast-track recovery
The challenges facing the trucking industry also present an opportunity to innovate and transform. Digital transformation is increasingly being seen as a lifeline for carriers looking to weather the storm, while gaining a competitive advantage. The adoption of technology across various aspects of trucking—from logistics to operations—will play a critical role in reshaping the industry’s future.
One area where technology is making a significant impact is in route optimization and digital freight matching. With excess capacity still a significant issue, digital freight platforms are helping carriers fill trucks by matching them with third-party shippers, thus minimizing deadhead miles and improving asset utilization. This technology helps level the playing field, enabling operators to compete more effectively, while keeping drivers happy and improving the bottom line.
Artificial intelligence (AI)-powered route planning and dispatch tools are also gaining significant traction. These tools leverage existing data sets and systems to analyze and suggest, in real-time, the most optimal plan in the context of a driver’s trip. These optimal plans limit judgment (and, therefore, offer less room for error, bias, and waste), miscalculations, unnecessary mileage, and fuel consumption. Through optimization and real-time dispatch, carriers can reduce empty miles and lower operating costs to achieve higher levels of performance.
Finally, transportation management systems (TMS) are essential for fleet managers, and modernization of these systems is underway. These systems provide end-to-end visibility over operations, allowing companies to monitor shipments, improve communication with shippers, and respond more dynamically to market changes. AI-driven analytics allow carriers to forecast demand more accurately and adjust their operations more proactively. These tech-driven improvements could be game changers, especially for operators struggling to compete in a turbulent market.
Shippers’ role in recovery
Shippers, too, have a role to play in the industry’s recovery. By diversifying their carrier networks and embracing technology, they can build more resilient supply chains. The pandemic exposed vulnerabilities in relying too heavily on a small pool of carriers. Now, by leveraging digital freight matching and analytics, shippers can not only find the best-fit carrier(s) but also build a robust network of backup options—safeguarding against supply chain disruptions caused by the next geopolitical or global health crisis. Savvy shippers will continue to look to carriers for improved efficiency and the reduction of cost and complexity, and technology will continue to be the enabler.
As we approach the final stretch of 2024, the rail industry is at a critical juncture, facing a convergence of long-standing challenges and emerging opportunities.
In recent years, the rail industry's story has been one of persistent headwinds: financial pressures, labor shortages, and heightened safety concerns following the East Palestine, Ohio, derailment, to name just a few. The shadows cast by these difficulties continue to loom large. These challenges, however, are symptoms of deeper, structural issues that have plagued the industry for over a decade.
Since the late 2000s, aggregate rail volumes have remained stubbornly stagnant. The initial gains from Precision Scheduled Railroading (PSR), once hailed as a revolutionary approach to operational efficiency, have largely been exhausted. The industry now grapples with this model's limitations, searching for new avenues to drive growth and profitability.
This pivotal moment demands a nuanced understanding of the sector's current state and potential trajectories.
The weight of history
In many ways, the root of today’s rail industry dilemma lies with coal. Coal was first used to generate electricity in the United States in 1882, and coal production, power plants, and railroads all grew together. In the 1970s, the development of the vast coal deposits of the Powder River Basin in Montana and Wyoming and their proximity to major rail lines fueled a massive nationwide railroad infrastructure investment cycle that lasted a decade. It was truly a bonanza.
In the early 2000s, however, advancements in hydraulic fracking and horizontal drilling led to a surge in natural gas production. As its prices fell, natural gas grew to be a titan competitor of coal for electricity generation. The impact of inexpensive and abundant natural gas has led to huge declines in coal production and coal’s share of electricity generation. According to the Energy Information Administration (EIA), coal’s share of U.S. electricity generation averaged 52% in the 1990s and fell to 16% in 2023. The natural gas share rose from 16% to 43% during that same time.
The impact on coal production, transportation, and consumption has been massive. In 2023, U.S. coal production was 577.5 million tons, representing a 51% decrease from 2008 volumes of 1.13 billion tons. During that same time, originated carloads of coal by U.S. Class I railroads peaked at 7.71 million in 2008 and plummeted to 3.43 million in 2023.
The short-term outlook is just as gloomy. According to the Association of American Railroads (AAR), coal carloads were down 17.1% from last year, the lowest January to June volume since the AAR began keeping records in 1988. Natural gas prices remain extremely low, and the cost of generating electricity from wind and solar farms has plunged. Coal’s share of U.S. electricity generation is expected to continue to decline in 2025. As a result, a significant amount of historical rail traffic will not return.
All factors considered, in the first half of 2024, U.S. railroads originated 4.17 million carloads, excluding coal and intermodal. That volume hasn’t changed much over the last 10 years, meaning that U.S. Class I’s have been unable to replace the diminished coal traffic with other carload traffic.
Filling the carload breach
Currently there are three AAR commodity segments that ship in enough volume to potentially offset the contracted coal volumes—grain, chemicals, and petroleum products. Of the three, do any provide a platform for volume growth?
Grain does offer some of the unit train economics of coal and represents about 12% of the first half of 2024 volume for U.S. railroads. However, for railroads, the grain market is divided into two very distinct sectors—domestic and international. Domestic grain demand has been relatively flat for the last 10 years, offering little opportunity for significant volume growth. The international market is quite different. While the United States is the world's largest grain exporter, volumes can swing wildly from year to year. The unpredictability of grain exports makes the entire segment risky as a growth strategy for Class I railroads.
The chemicals industry consists of thousands of producers throughout the United States, representing a material growth opportunity for Class I’s. The American Chemistry Council (ACC) reported that in 2022, 1.02 billion tons of chemicals were shipped in the United States at a cost of $79.0 billion. As a commodity segment, chemicals are the largest carload revenue source for U.S. Class I railroads. According to the ACC, rail represents 18% of total chemical tonnage while trucks led with 58%.
Like the chemicals segment, petroleum products represent a wide range of categories, including crude oil and refined products, including liquefied petroleum gases (LPGs), fuel oil, lubricating oils, aviation fuels, and other fuels. Together, they represent approximately 5% of U.S. rail-originating carload shipments.
A noteworthy structural opportunity that Class I’s can continue to nurture for growth in both the chemicals and petroleum products is south of the border. Today, Mexico’s ability to both produce and refine enough energy to meet its domestic needs is quite constrained, and that is reflected in the growth in imports from the United States. This export market represents a unique opportunity for Class I railroads.
Three things have driven this structural event. First, the Permian Basin in Texas and New Mexico creates a low-cost feedstock source for the world’s most sophisticated refining complex located in the U.S. Gulf Coast. Second, Mexico is a nearby market for both the feedstock and refining capacity. Finally, Mexico is facing a structural challenge in that its refining capacity has been operating below 50% for the last several years, and PEMEX, the Mexican state-owned petroleum company, is carrying massive debt. Railroads could serve as a vital link transporting feedstock.
The intermodal conundrum
Intermodal transport has long been considered the industry's golden ticket to growth, but in 2024, it presents a more complex picture. The segment saw a downturn in 2023, hitting its lowest volumes in three years. In June of this year, Class I railroads did report about an 8.7% volume growth in intermodal for the month over 2023. But even those numbers don't get them back to pre-pandemic levels.
However, we remain cautiously optimistic about intermodal’s long-term outlook. One way that Class I railroads could capture market share would be to target a significant volume of single-line traffic that travels between 700 and 1,500 miles and traverses only one railroad. That is a fairly sizable market for trucks right now, and if successfully converted to rail, it will add a significant amount of additional intermodal volume to the railroad’s portfolios.
To successfully compete, railroads will need to offer a compelling value proposition that can respond effectively to trucking’s current capacity surplus and low post-pandemic rates. This requires a delicate balance of pricing strategy, service reliability, and operational efficiency.
Path forward
Railroads have long faced criticism for their perceived inflexibility and reluctance to adapt to shipper needs. However, today's competitive landscape and changing customer expectations are driving rapid transformation in the industry. Class I railroads are actively working to enhance the customer experience, but they face significant challenges. To compete effectively with trucking, they must overcome deeply entrenched negative perceptions about rail shipping. This requires demonstrating unwavering commitment to their shippers and the markets they serve, as well as presenting comprehensive, forward-thinking strategies that showcase their long-term dedication to the industry.
For their part, shippers should reexamine the supply chain solutions they implemented to solve pandemic and post-pandemic challenges. They should take advantage of the current transportation market volatility to scrutinize the rates they currently pay and understand the trade-offs they can make in the marketplace to decrease overall transportation costs. Now's the time to start evaluating modal shifts. Railroads may be hungrier for traffic they didn't want to haul during the pandemic and post-pandemic years, and shippers can take advantage of a contracting truck market to inform their rail negotiations. In some cases, shippers may find that railroads have more appetite to commit to long-term contracts with fixed indices.
As we look to the future, railroads may never recover the bygone coal volumes, and their earnings profiles may be forever changed. Still, the industry's trajectory will be determined by its ability to address these interconnected challenges and opportunities brought about by the turbulence of being an integral part of the global economy. Success will require a multifaceted approach, and what worked for Class I’s in the past likely won’t help them be successful soon. All that said, it is a given that railroads will remain an integral part of North America’s industrial economy for a very long time.
Buoyed by a return to consistent decreases in fuel prices, business conditions in the trucking sector improved slightly in August but remain negative overall, according to a measure from transportation analysis group FTR.
FTR’s Trucking Conditions Index improved in August to -1.39 from the reading of -5.59 in July. The Bloomington, Indiana-based firm forecasts that its TCI readings will remain mostly negative-to-neutral through the beginning of 2025.
“Trucking is en route to more favorable conditions next year, but the road remains bumpy as both freight volume and capacity utilization are still soft, keeping rates weak. Our forecasts continue to show the truck freight market starting to favor carriers modestly before the second quarter of next year,” Avery Vise, FTR’s vice president of trucking, said in a release.
The TCI tracks the changes representing five major conditions in the U.S. truck market: freight volumes, freight rates, fleet capacity, fuel prices, and financing costs. Combined into a single index, a positive score represents good, optimistic conditions, and a negative score shows the opposite.
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.