Freight recession unlike any other in history

October 15, 2023

The rise of freight brokerages

In 2000, freight brokerage was a cottage industry, representing a small percentage of the trucking industry — 6%. Fast forward to 2023, and freight brokers handle more than 20% of all trucking freight.

Brokerages are ‘mainstream’ today

As freight brokerages have taken on a larger percentage of the market, they have reshaped the typical freight cycle.

In the early 2000s, it was uncommon to see a freight broker in the primary position of a shipper’s routing guide.

Back then, freight brokers usually handled freight that asset-based carriers didn’t want or that was priced too low for the carriers to make their margins. Freight brokers would also serve as a last resort if carriers had freight surges that they could not handle.

Since then, however, things have changed dramatically. As freight brokerages invested in technology and customer service, they began to offer a more compelling product than their asset-based competitors and took on a greater role in routing guides.

Today, it is common for multiple freight brokerages to be in primary positions in shippers’ routing guides, often as the top choice, beating out their asset-based competitors.

Moreover, the quality of freight that brokers handle now is far better than it was in 2000. In 2023, freight brokers often are assigned highly desirable, carrier-friendly freight.

Why? Shippers both large and small now rely on freight brokers’ deep databases of reliable carriers to ensure that their loads are shipped and delivered on time.

In addition, carriers — particularly small carriers — also need the leads and business that freight brokers can supply.

Why is that?

As of April 2023, there were more than 531,000 active trucking fleets that own or lease at least one tractor in the U.S., according to Carrier Details, which provides trucking authority intelligence using data from the Federal Motor Carrier Safety Administration (FMCSA) and insurance registrations (available on SONAR).

Contrast that with 1980, when there were fewer than 20,000 U.S. trucking companies.

Trucking deregulation led to the need for freight brokerages

The Motor Carrier Act of 1980 deregulated the trucking industry. In addition to all the other changes generated by trucking deregulation, it led to the development of the freight brokerage industry as we know it today.

Prior to deregulation, the trucking industry was highly regulated by the Interstate Commerce Commission, or ICC. From 1935 to 1980, the ICC set the rates and routes of interstate carriers. The ICC even mandated the types of freight trucking companies could haul. Also, in most circumstances backhauls were not allowed.

Therefore, there was little need for freight brokers during the reign of the ICC. But by the 1970s, many believed that competition was being strangled by the ICC and that freight rates were too high because the industry was so tightly regulated.

Those circumstances led to President Jimmy Carter and Congress working together to deregulate the trucking industry, as well as the airline and railroad industries.

The Motor Carrier Act of 1980 made the trucking industry much more competitive as the ICC yoke was removed. Of the 18,000 trucking companies in existence at that time, many went out of business in the newly competitive environment. However, thousands of new trucking companies were started.

The results were lower shipping rates and the start of a greater use of backhauls.

Among the first successful freight brokerages was American Backhaulers, which began operations in 1981. The company was acquired by C.H. Robinson in 1999.

Post-deregulation, motor carriers began to operate wherever they could find profitable freight, although rates were much lower because of increased competition. Many carriers needed backhaul freight to generate sufficient round-trip revenue — an issue brokers were able to assist the trucking fleets of the time.

Freight brokerages grew and evolved

As more carriers began using freight brokers, new and more professional freight brokerages started. Moreover, a number of the larger carriers started in-house brokerage divisions.

In most cases, these in-house brokerages provided an additional revenue stream for their carrier owners. The in-house brokerages also created a demand pool that was controlled by those trucking companies. The in-house brokerages supplied freight for the carriers’ trucks in lean times, and could sell excess freight to other carriers when their fleets were fully booked.

Brokerages assist small carriers

As the link between shippers and carriers, freight brokers are “traffic managers” for shippers as well as “sales agents” for carriers. Today, brokerages are responsible for thousands of daily freight transactions.

When they are at their most efficient, brokerages can decrease transportation costs for shippers and also increase carriers’ revenue.

As noted above, the number of motor carriers has exploded since deregulation. U.S. Department of Transportation statistics show that of the roughly 531,000 carriers, 99% operate 100 or fewer trucks — and almost 97% have fewer than 10 trucks.

Therefore, freight brokers often take on the sales and customer service roles that small carriers cannot afford. Most importantly, brokerages provide a continual stream of freight for many of the small carriers. Those small carriers that do not have relationships with at least one brokerage are at a distinct disadvantage.

An altered freight cycle

The current freight cycle has been different. In previous cycles when freight rates have been low, many of the weakest carriers exited the industry. While some of the companies that went out of business in 2019 — the last major down cycle — were quite large, such as Celadon and New England Motor Freight, most were small “mom-and-pop” companies that lacked the resources to stay in business.

In 2023, many people, including me, expected that as before, many small carriers would roll over and quickly exit the freight market as conditions became difficult. After all, we thought, when the freight economy slowed, high-quality loads for small carriers would dry up. It wasn’t just rates, but also load counts that dropped.

FreightWaves’ Rachel Premack reported in an April 28 article that the “number of authorized interstate trucking fleets in the U.S. declined by nearly 9,000 in the first quarter of 2023 …”

So while companies have certainly left the industry, small carriers overall have held on for far longer than many of us expected. The reason is that even as rates have declined — in many cases lower than 2019 rates — freight brokerages have kept many small truckers supplied with quality load opportunities.

So much has changed in the past decade

In the 2008 freight recession, freight brokerages were a much smaller percentage of the overall trucking market, representing just 10% of the total freight in the market. This number has doubled since then, along with the quality of freight.

When I was working the freight desk at U.S. Xpress in the early 2000s, freight brokerages weren’t a part of many shippers’ routing guides.

Shippers preferred to do business only with asset-based trucking companies. They used freight brokers sparingly, mostly for low-quality loads that carriers didn’t want or in a pinch due to a surge of freight or unexpected rejection.

But over the past decade, freight brokerages have played a key role in routing guides. And since freight brokerages tend to rely on small carriers, their success in winning primary roles in routing guides has strongly benefitted the smallest carriers.

Small carriers have gained market share as a result.

Going back to the number of U.S. trucking companies, capacity has exploded. The number of trucking companies in the market grew by 28% from 2019 to 2022.

Nearly all of these new trucking companies are small, drawn to the market by pandemic-induced high rates.

‘What goes up, must come down’

Newton’s law of gravity, a fundamental rule in physics, is commonly cited in commodity markets like trucking.

When capacity tightens and drives up rates, new entrants enter the market, flooding it with capacity and driving down rates.

The same carriers that entered the trucking industry to take advantage of high rates are now being forced to take much lower rates to keep their trucks moving.

In past cycles, when the freight market softened, we would see a massive purge in capacity. While there have been reductions, it has happened much slower than anticipated.

A key reason it has been so slow to churn out capacity is because of the proliferation of freight brokers.

In past down cycles, freight brokers would lose a large percentage of their volume, as shippers kept to a small number of core carriers in their routing guides.

But over the past decade, freight brokerages have positioned themselves in the role as a core carrier, enabling them to maintain load volumes, even in down markets.

So in this down market, most freight brokerages have maintained to keep a high percentage of load volumes, even as rates fall.

The loads may not pay much, but brokers are able to supply carriers with loads that pay just enough to cover the monthly truck bill.

Carriers may be losing money, but that small amount of cash flow will keep them in the game longer than would be otherwise expected.

How long will it take before the market is in balance?

While there are many variables that impact the balance of supply and demand in the freight market, we can look to historical models for some guidance.

According to SONAR Carrier Details, from 2010 to August 2020, the trucking industry added an average of 199 new trucking fleets per week.

From August 2020 to September 2022, the number of new trucking fleets exploded by an average of 1,124 new fleets per week.

The trucking market currently has 63,000 more fleets than the 2010-2020 trend line would suggest.

Since September 2022, the market has churned an average of 435 fleets per week.

Unless there is an acceleration in revocations (i.e. trucking companies shuttering their authorities), FreightWaves models suggest the trucking market has 78 weeks to go before capacity is back in balance with historical trends.

To put that in perspective, I wrote an article on March 31, 2022, that warned about an imminent freight recession. That was 78 weeks ago.

This would suggest we are only about halfway through the worst trucking downturn since 2008.

While it is possible that freight rates could increase in anticipation of a capacity reset, FreightWaves and many other analysts don’t believe that freight rates will increase until at least the second quarter of 2024, and few predict large increases in rates even then. Therefore, it is likely that the attrition process will continue as the market slowly grinds out the weakest players.