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KSM Blog | Katz, Sapper & Miller CPA

Asset Based Trucking During and After the COVID-19 Pandemic

Posted 7:25 PM by

This article originally appeared on FreightWaves.com on April 2, 2020.

At the end of the last century, when I owned and operated trucking companies, we used to daydream about how great it would be if some sort of capacity constraining event occurred and there were fewer trucking companies, and thereby trucks (capacity), available to the shipping public. We would finally find common ground with the shippers who held our rates down for so many years, pay the drivers what they were worth, and see big financial results. We could never have imagined – or wished for – the current circumstances we are experiencing with the COVID-19 pandemic.

Although the world is reeling, trucking has been recognized as an essential business and is on the front lines of delivering much needed medical supplies, food, and other necessities. There is little traffic, so transit times are compressed and, as a result, velocity has increased. Many trucking companies are running at or near capacity.

It is necessary for carriers to recognize that volume generates revenue and thereby cash; not necessarily margin and profit. The current rate environment is depressed as shippers have spent most of the last eighteen months reducing rates. Reputable shippers are compensating carriers for operational costs such as deadhead pay and trailer rental for increased direct operating costs in an inefficient and disrupted supply chain. Carriers need not be shy in communicating with their shippers.

Truck drivers are showing up to work with a common sentiment that it is their patriotic duty to keep the goods flowing. Consequently, drivers are getting the praise and press they deserve for putting themselves at risk so the population as a whole can better manage these tough times. Carriers need to over communicate with drivers using all available platforms (including personal calls) to celebrate wins, address issues, and provide support.

Our belief is that carriers need to do the tried and true: prepare for the worst and hope for the best. In the current environment, carriers must adjust from “revenue is vanity and profit is sanity” to “profit is vanity and cash is sanity.” Our firm has partnered with the Truckload Carriers Association (TCA) and the Truckload Profitability Program (TPP) to provide actionable advice to carriers during the COVID-19 crisis. Regular updates on important COVID-19-related information are posted daily on our website.

One of the biggest questions facing our economy is when will the COVID-19 bump end? When will the supply chains be full and the millions of people who are out of work be able to return to the workforce? Will the economy suffer a major hit or bounce back quickly based on the trillions of dollars in stimulus money being awarded by the government? The predictions are fluid and change weekly, daily, hourly. The bottom line is nobody knows, but one thing is almost certain: the carriers with strong balance sheets will have more opportunities than ever to gain market share and improve margins.

Before discussing the opportunities for financially stable carriers, let’s discuss the carriers that have been on the margin for years, or at least since the break of the 2018 freight bubble. Our view is that there will be a number of carriers in this category that will exit the industry; however, there will not be a wholesale exodus of this group. Many will fight to stay in business as financing, vendor, and government grants and loans help these carriers build cash reserves or stave off creditors. The world is in flux and the commotion and uncertainty provides a “fog of COVID-19” that protects these carriers. This being said, these carriers will struggle to survive, crisis or no crisis.

What might a post-COVID-19 crisis world look like for financially viable carriers that have managed through the uncertainty? Nobody knows for sure, as the shape and speed of the recovery are unknown. However, here are a few possible scenarios:

  • Scenario 1: The market is capacity-constrained but shippers need consistent and reliable capacity as a platform for their recovery buildout. The shippers turn to the strong carriers to fuel the buildout and provide rates and terms that are profitable for participating carriers. These carriers enjoy margins, operating efficiencies, and stability for the near and, hopefully, long term.
  • Scenario 2: Drivers reward the carriers that supported them during the crisis and those carriers have waiting lists, as drivers understand the benefit of working for strong carriers. This carrier-driven capacity surge then can be turned into a strategic advantage, as fleets grow based on actual drivers and shipper demand.
  • Scenario 3: Strong carriers grow by strategic acquisition of operationally sound, but financially challenged, carriers. This is a win for both sides as the acquiring target receives operationally rich resources and the seller receives financial support of operations or an exit path.

Having lived through many trucking economic cycles, the possible scenarios above are those that are most hoped for by carriers -- that carriers and shippers get on the same page and support each other. Unfortunately, looking back historically, the reality has always been short-lived as the fragmentation of the trucking industry drives tractor and trailer purchase and thereby added capacity, and the built-in adversarial objectives of shipper and carrier are manifested in the shippers forsaking the partnership formed during capacity-constrained times for lower rates. Maybe this time around, real lessons will be learned and a more symbiotic relationship will emerge as carriers and shippers craft the post COVID-19 reality.

VISIT THE KSM COVID-19 RESOURCE CENTER

About the Author
David Roush is president of KSM Transport Advisors, LLC, part of the Katz, Sapper & Miller Network. With 30-plus years of experience, David’s focus includes freight networks, financial management, operational metrics, and optimization strategies. Connect with him on LinkedIn.

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