The truckload capacity bubble is bursting

Chart of the Week: Carrier Details Total Trucking Authorities, Outbound Tender Volume Index – USA SONAR: CDTTA.USA, OTVI.USA

Operating authorities for motor carriers of property issued by the Federal Motor Carrier Safety Administration have grown 45% since July 2019, according to FreightWaves’ latest data released in partnership with Carrier Details. Truckload demand as measured by the Outbound Tender Volume Index is only up about 11% — supporting the view that there is still a significant buffer in the domestic truckload market.

Operating authorities are not a pure measure of capacity since one authority can be the equivalent of multiple trucks. However, capacity growth is centered around the increase in smaller operators who leave larger companies. 

Larger fleets, like several of the publicly traded companies, have generally not added capacity over the past few years. Rather, they purchased existing capacity in the form of smaller trucking companies or leased on new operators. Most of J.B. Hunt’s tractor growth earlier this year was in the form of leased-on operators, who could keep their existing authorities.

Earlier this week, FreightWaves CEO Craig Fuller wrote that the small carriers are still driving industry growth, which is contrary to conventional thought.

The data supports this concept. From August 2019 to now, tractor counts as reported by the FMCSA have grown by approximately 425,000 units. Roughly 42% of that growth came from carriers with one to six tractors. Carriers with 20-100 units came in second with 16%. 

The point being, the growth and decline in aggregate capacity has been largely a small operator’s game, with the larger fleets focused on acquiring existing capacity for growth. Knowing this, we can reasonably assume that authority contraction is a decent, albeit imperfect, proxy for capacity leaving the market.

Operating authorities have been contracting since last fall but have not come close to countering the pace of growth that occurred from July 2020 to July 2022. The rate of contraction tends to accelerate during the winter months and slow during spring and summer.

The truckload market has become more responsive, with tender rejection rates climbing back above 4% for the first time since last winter, topping the Fourth of July. While the current value is still historically low, suggesting abundant capacity, the trend is a sign of future disruption.

If capacity exits quickly, with the data suggesting this will most likely occur right around Christmas, the market will be caught off guard if demand continues to climb or spikes. The bare minimum expectation is for a much tighter holiday season and more than likely 2024.

Perhaps the biggest takeaway from the data is the increasing volatility of capacity changes. Normally, this has been a much smoother and slower process.  But the spiking growth during the pandemic has created a capacity bubble that is continuing to burst at an erratic and rapid pace.

This will be the biggest risk to transportation sourcing over the next 12 months. As carriers continue to bid contracts lower, the sustainability is becoming increasingly questionable.

About the Chart of the Week

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Source: freightwaves - The truckload capacity bubble is bursting
Editor: Zach Strickland, FW Market Expert & Market Analyst