As we move to the halfway point of the first quarter of 2024, one major factor that logistics and supply chain analysts are looking at when it comes to a potential recovery is freight exits. Freight exits refer to companies that have left - or are leaving - the industry. The two most heavily tracked are motor carrier exits and freight broker closures. It's something that happens even in the best of times, but also something that happens much more when the financial equation is unfavorable. And 2023 saw large numbers that are expected to persist at least part way through this year.
Why Are Freight Brokers and Trucking Companies Going Out of Business?
When it comes the to question of why freight brokers and trucking companies are going out of business, the simplistic answer is: the freight recession. The downturn in the transportation industry has been well-documented, with rates taking a dive for nearly two years now as shipping volume collapsed when consumer spending patterns shifted from goods to services and experiences.
Combining that volume collapse with the fact that an incredibly high number of new entrants to the market emerged during the heavy pandemic-related peak period of 2020 to early 2022, and the problem has been a tremendous imbalance, with supply of freight capacity dwarfing demand for it. That climate led to so-called "rate wars," where carriers and brokers had to bid (and re-bid) lower and lower for the shipments that were continuing.
And while winning those bids kept work coming, it also meant little to no (or even negative) margins. To illustrate that point, one study had the average cost per mile to operate a truck at $2.25, while even today, spot rates stand at $2.10. The longer that situation repeated, companies without enough in reserve no longer had the resources to continue - a factor only exacerbated for trucking companies particularly when diesel briefly spiked last year before retreating. Regardless, the exits have affected motor carriers and freight brokers alike, and the size of those businesses leaving the market was not limited to the smallest - though those felt the greatest pinch.
How Many Trucking Companies Closed in 2023?
The trucking industry has been hit especially hard by the freight recession, and the number of motor carrier closures backs that up. At year end, roughly 88,000 trucking companies were estimated to have closed in 2023. That number represents more than 10% of the approximately 750,000 motor carriers registered with the Department of Transportation as of last April.
There are of course high profile closures, like that of longtime less-than-truckload (LTL) carrier Yellow. But the overwhelming majority - as 99.7% - of trucking companies operate 100 or fewer trucks - with about 96% of all motor carriers owning 10 or fewer. That means the vast majority of motor carrier closures in 2023 came from smaller carriers. Those carrier exits were at their highest in December, and the trend is expected to continue through the first half of this year.
How Many Freight Brokers Closed in 2023?
Freight brokers have also been hurt by low rates impacting their margins, and many exited the market in 2023. As of October, roughly 1,500 freight brokers closed in 2023 according to FMCSA data. Other sources pegged that number significantly higher. Regardless, freight brokers - who serve as liaisons between the shipper and carrier, booking loads from origin to destination - have been heavily impacted by the market downturn as well.
Much like the trucking side, there are degrees of freight brokers, to small - even individual shops - to large companies. The highest profile closure in the past year was Convoy, a company that had a bit of an astronomical rise and fall - leaving 500 employees out of work in October. Other large freight brokers have persevered but have cut large numbers of jobs, including Uber Freight, Flexport, Coyote Logistics and more. These businesses had hired heavily to keep up with the peak demand period and found themselves looking to save on personnel costs during the downturn.
What Do Freight Exits Mean for the Market?
Particularly on the motor carrier side, freight exits make a legitimate impact on the market. There is the unfortunate loss of jobs for thousands of individuals that must be thought of first and foremost. But the secondary effect of fewer carriers is reduced capacity. When Yellow went bankrupt in the summer, LTL rates saw a bounce as other carriers picked up the slack and a major option was eliminated.
Freight market analysts look at carrier exits as a key factor in balancing the supply versus demand equation. With less supply of capacity, even if demand remains the same, rates are destined to rise. Once they go up to an acceptable level for carrier revenues, those exits will dissipate and rates will stabilize. The remaining question for a return to a truly healthy market then, will be when consumer demand rises. The sooner it happens, the sooner stability - and profitability - returns for trucking companies and freight brokers.
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