Spot Market Drives Carrier Revenues Higher In 2018

FREIGHTWAVES' SONAR CHART OF THE WEEK (Feb 24 - Mar 2, 2019) 

Chart of the Week: Revenue per Driver per Week vs DAT Van Freight Rate Index - National (SONAR:DRVREV.CFOO, DATVF.VNU)

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The freight market is coming down to Earth after riding high for the past 15 months. DATVF

Earlier in the week, FreightWaves associate editor, John Paul Hampstead, reported on the concept of "paper rates" in the trucking industry and how the spot market correlated with carrier revenues. This week's chart details and expands on that subject while showing a directional shift in rates and carrier revenues in the back halves of the past two years.

Think of the relationship between spot rates and contracted rates like the heating and cooling of your local lake or pool. As temperatures warm in the spring the water does not heat up right away. It takes a month or so, depending on your area of the country, for the water in your favorite swimming hole to reach temperatures comfortable enough to enjoy. This is because water warms and cools much slower than air. Contract rates are like the water, spot rates are like the air, and the amount of demand exceeding supply is the sun.

For the spot market to have a real impact on contracted rates, the peaks and valleys need to either both get higher or lower over long enough periods of time. In other words, supply and demand need to be out of balance for long enough to make a difference. In the chart above the DAT Van Freight Rate Index, illustrated in orange, starts having higher highs and lows in late 2017. Carrier revenues, illustrated by the increasing values of TCA's best practices group's revenue per driver per week, do not follow suit in earnest until early 2018 when new contracts are implemented.

Carriers that divert capacity to the spot market when rates are inflating will get the most near-term benefit. Many carriers like to keep their spot market exposure limited to under 20%, however, due to the volatile nature of the rate movements, as they will be overly exposed to market downturns. When the market cools, carriers that have moved their capacity to the spot market will have less contracted freight, which decreases their odds of finding consistent freight to keep their trucks moving.

For an asset-based carrier, low utilization is a double hit to the bottom line due to the fact it costs money to have the trucks whether they move or not. Not only are they not making money when a truck sits idle, but they are losing money as well in the form of operational expenses. There needs to be a large enough incentive for carriers to divert capacity to such a volatile market in earnest.  

The hesitancy for carriers to move capacity to the spot market and their limited exposure is why there is a lagging relationship between carrier revenues and spot market rates. Contract rates may be relatively flimsy in terms of guaranteeing much of anything by either shipper in terms of volume or carrier in terms of capacity, but they do establish a relationship between the two. Managing the balance between honoring contracts and taking advantage of near-term market conditions has become increasingly important as the market dynamic shifts again in 2019.

About Indices presented in this article

DATVF DRVREV.CFOO) DAT Van Freight Rate Index - National - DAT developed the van freight rate indices measuring the average spot rate for dry van freight in seven lanes and four buckets that measure the average spot price in regions. These rates do not include fuel or any assessorial charges due to the fact they will be used to settle freight futures releasing this March. The methodology has to be consistent and clean.

Revenue per Driver per Week - company and leased fleet - The Truckload Carrier's Association has a group of asset-based carriers that have agreed to be a part of their best practices group. This is a group that agrees to common methodology and reporting practices for the purpose of bench-marking their data against their peers. This makes comparison much more reliable. For this index they have taken total sales revenue for the month and divided it by active driver counts.

About Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry- in real time.

The FreightWaves data-science and product teams are releasing new data-sets each week and enhancing the client experience.

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