Stephens talks to TPP and concludes: Spot rates likely to rise

It may seem like the Paycheck Protection Program (PPP) just began. But for some early recipients, its flow of funds is going to start to end in less than two months and the impact of that could be a catalyst for tightening truckload capacity, just as its existence has led to keeping many drivers on the road.

That was the message that analysts from Stephens sent to its clients following a meeting they held with Chris Henry. Henry is Manager of the Truckload Carriers Association (TCA) Profitability Program (TPP) and TCA InGauge. FreightWaves is the exclusive benchmarking software provider for the TCA Profitability Program. Stephens published a report on Tuesday, May 19, regarding the discussion it held with Henry.

The discussion with Henry, Stephens analysts Jack Atkins and Wade Schaller wrote, “reinforced our view that material capacity attrition is looming for the truckload industry.” The money that has flowed into the industry from PPP to mid-sized truckload carriers “has allowed a number of operators to hang on and has subsidized very low spot rates.”

But with the PPP program designed to have a two-month shelf life, and the first money having been disbursed in April, the end of it for some carriers is not that far off. When that happens, the analysts wrote, it “should force capacity out of the market and help improve demand and rates for those carriers that survive.”

The situation for the smaller carriers whose financial reports aren’t public, but that are members of the TPP program, was challenging going into 2020 after a tough 2019,  according to data provided by Henry to the Stephens analysts. The roughly 240 carriers in TCAPP had an operating ratio (OR) in fiscal 2019 of about 99%, whereas the Stephens analysts pointed out that the average OR for the publicly traded carriers it follows was 91.6%, excluding fuel. 

“While the data isn’t final yet, Mr. Henry believes April and May 2020 will be the worst 60-day period in the seven-year history of TPP’s dataset,” the Stephens report said. Some of the“top” companies in TPP will be shown to have had an OR of between 100-120%, while the smaller carriers were probably around 130%.

The figures Henry provided to Stephens are stark. The average cost per mile among the group’s members is about $1.93/mile, and 40% to 50% of that are driver-related costs. “With an average weekly dry-van rate per loaded mile in the spot market since April 1, 2020,

of just $1.54, this would imply an OR of 125% for those carriers operating primarily in the spot market,” the Stephens analysts wrote of the picture painted by Henry.

The discussion yielded some other statistical points of interest from Henry that the Stephens analysts described. The members of TPP generally have spot market exposure of about 9-15%. “However, due to the slowdown in economic activity in April and May, it is our sense that spot market exposure as a percentage of revenue for smaller carriers has trended much higher in recent weeks,” Stephens said. “Due to many shippers throttling back on their tendered volumes due to COVID-19, many carriers have resorted to the spot market to supplement lost volumes.”

But an end to the capacity overhang might be on the horizon. For all the moaning about the shortcomings of the PPP, Henry told Stephens that between 65%-75% of the TPP members have received funds under PPP. Many other members of the program are either too big to qualify or are carriers with almost entirely independent owner-operators, who have to apply for assistance on their own, and who have (anecdotally) had difficulty receiving this aid. 

“It is our sense that the PPP funding has allowed many smaller carriers to remain in business where they might have otherwise been forced to cease operations or park trucks following what was an already highly challenging operating environment in 2019,” the Stephens analysts said. With the PPP funding in place, it has kept capacity on the road. “We believe many small carriers have made the decision to take unfavorably priced freight in the short-term in hopes of staying in business,” Stephens’ analysts wrote. 

That isn’t to say that many trucks haven’t been parked; TPP figures show 10% to 15% of its members choosing to park trucks “in some capacity in recent weeks.” 

But when the money dries up from PPP in the next four to six weeks, “this will serve as a catalyst for higher rates as either carriers will price their capacity to cover their operating costs or be forced to park equipment and/or cease operations,” Stephens wrote.

Two other cost items were cited by Henry to the Stephens analysts as significant going forward.

One is insurance, a significant factor already. Henry told the analysts that about half of TPP’s members were in captive insurance coverage, which have held their costs in check at a rate of about 9% in the last year. But others have faced jumps of 60% to 80%. As some of those carriers move into captive markets, it’s going to be even tougher for those in the “traditional” market, “driving up costs for those that remain,” Stephens wrote.

A second is maintenance costs. A greater reliance on out-of-network maintenance as the spot market grows means that maintenance costs per mile grow. The average cost of maintenance for a TPP member is $0.20 per mile. “Even in ‘normal’ conditions for a small fleet, maintenance costs of $0.20 per mile and effectively managing maintenance and repair relationships with vendors within a network can be the difference between profitability and losing money,” Stephens wrote.