Why is it that some fleets continue to drown in a stream that's only about three feet deep? Recent conversations with carriers about how they determine profitability has provided some clues.
Most seem to use generally accepted accounting practices and rely on the financial statements generated every month that report revenue by type and expense by type. Profitability (or lack thereof) is determined by the difference between revenue and expenses.
The problem with this method, however, is that unless a carrier deals with a single account and routes that have identical load characteristics, profit numbers can be very misleading.
For example, most for-hire carriers have multiple clients, which means that load characteristics can be quite different. And even when there is only one client, load and lane characteristics can vary. Some loads will inevitably be more profitable than others, and if carriers aren't diligent they could find themselves saddled with the least profitable loads without realizing it.
Given the supply and demand situation the industry is experience right now, there is absolutely no reason to be handling freight that is not profitable.
Several years ago, I did an analysis of the tank-truck carrier financials. I found that out of 170 carriers, 9 had improved their absolute profit levels, 12 had improved operating ratios, and 15 had downsized their businesses. One of the downsized carriers had gone out of business altogether and another had sold its power units and returned to profitability by leasing its tank trailers.
When I presented my findings to a group of tank truck carriers, nearly all acknowledged that they had freight they wished they had not contracted for. This did not surprise me. In my years in the industry, I can't recall even one truckload carrier of any type that would not feel the same; they're all saddled with freight they wish they could get rid of.
The question we have to answer is, how does this unprofitable freight get into a carrier's system in the first place?
Sometimes it's the result of multi-year contracts where service requirements changed and/or costs increased, and carriers couldn't capture the increases through rate adjustments. In other instances, carriers accepted backhauls without assessing profitability over the long term. As a result, some of these loads crept into the system without ever being fully reviewed for their impact on costs, the erroneous assumption being that any load is better than none.
Now that carriers are better able to negotiate rates for their services, it is even more important to separate the wheat from the chaff. Over time, the more profitable freight will undoubtedly attract the competition and less desirable loads will be left dragging down the fleet's bottom line.
It's important to talk about these things now because we're entering a new era of for-hire trucking.
Fuel costs, insurance, hours-of-service enforcement, roadside checks, driver certification, etc., will all increase enough to ensure that a significant number of the marginal carriers will be culled out during the next three to five years.
Those left standing will be the ones who had the vision to understand how their costs impact each load opportunity uniquely, and who were careful to accept only those loads that added to the bottom line.
As the economy improves, carrier capacity will become tighter, making it easier for fleets to demand a fair rate for their services.
For sure, the market will remain fiercely competitive — but the swamp will have been drained a bit, too.