Prices, Market Structure, and Sustainability in the Trucking Industry

Summary:

• Market size (annual):

  • Transportation markets: $1.5 trn

  • Trucking market: $800b

  • For-hire tricking market: $300b

• For-hire trucking

  • Spillovers to other markets

  • Asset-based (own trucks, sell transport)

  • Brokers (markets that connect trucking companies to customers)

    • 30k brokers (from huge to tiny)

    • Many carrier companies that own trucks (from huge to tiny)

• Contracting methods

  • Dedicated fleets owned by shippers (e.g. coca cola, walmart)

  • Contract freight

    • 80-90% of loads move this way

    • Temporary contracts

    • Non-binding

      • Carriers are free to reject loads when they want to

      • Shippers can choose to not actually offer loads under the contract

  • Spot freight: 

    • Negotiated live on markets

    • Good measure of market value of transport: responsive to supply/demand events

    • Prices tend to be higher than in contract freight

• Visibility into the spot market:

  • Can observe:

    • Lane (origin/destination)

    • Lead time (from price request to load pickup): stable after few days ahead

    • Time/day effects

    • Weather effects

    • Carrier effects

  • Use these to estimate market conditions

    • Spot price premium = operational characteristics (observed) + market status (estimated)

    • Bid premium = spot price / contract price

  • Data

    • 2012-2015 loads from a large manufacturer with simple dry-van loads

    • 3.4m invitations

    • 425k bids from >100 carriers/brokers

    • >100k auctions

  • Insights:

    • Spot price index correlated with other truckload market

      • Morgan Stanley market sentiment index (1 month-lagged survey)

      • Rejections of contract prices correlated to spot prices (spot prices go up -> rejections go up)

        • There’s a cost for carriers to reject loads

        • But they do if the spot price is significantly higher than the contract

    • Wide range of bidding strategies for carriers

      • Asset-based carriers: 

        • Few bids, price relatively low on market (apparently not aware of market price)

        • Their win percentage rises as market price increases

      • Brokers: 

        • Many more bids, somewhat higher price (take advantage of the lower price charged by asset-based carriers)

        • Bid percentage is static since they adapt to market

    • Bids correlated with each other despite no central market (except small asset-based carriers)

    • Regional prices correlate with each other (e.g. Northeast vs Midwest)

      • So the market is national since trucks move easily

      • Further markets are less correlated due to

        • Distance of moving trucks across country

        • Many carriers operate regionally

        • Difference in weather patterns (e.g. slow-downs, agricultural production schedule)

  • While there is no central market, large brokers effectively act as a market

    • Process is largely automated

    • Shippers and carriers are matched and deal with each other

• Potential contract improvements

  • Binding contract

  • Rejected option: Carrier agrees to accept 100% of offered loads: risky to carrier if price moves higher

  • Preferred Option: Price of contract tied to market price

    • Piloted this with a broker and a shipper

    • Broker agreed to accept 100% of shipments on problematic lanes

    • The agreed prices depended on the DAT spot price index

• Futures market

  • There could be a centralized market

  • Provides hedge against price volatility

  • Freightwaves tried this in 2018-2019

  • Didn’t succeed but no information about why

  • Challenges:

    • Can’t inventory truck capacity

    • Customer takes delivery of “product”, so harder for intermediaries to trade smoothly

    • Highly dispersed market with significant inertia

  • Cost of providing service depends on load/unload characteristics, optimal shipping horse, appointment flexibility, etc. : highly idiosyncratic

• Similar challenges:

  • New York Shipping Exchange: binding contracts in ocean shipping industry

  • Baltic Exchange: index of pricing in ocean freight

• Sustainability

  • Commercial freight accounts for 16% of greenhouse gas emissions

  • The equipment matters this most: trucks have been getting cleaner over time in greenhouse gases and local pollution

    • E.g. Port of LA/Long Beach limits age of trucks used in port to reduce pollution in city

  • Challenge: shippers can’t choose carriers based on their sustainability

  • SmartWay program

    • Voluntary 

    • Standardized reporting of emissions

    • Small carriers don’t participate in this because of complexity (99% don’t)

    • Many new, clean trucks are not considered clean because of lack of participation

    • Trucks are not in SmartWay program

      • 69% of clean ones

      • 81% of dirty ones

  • Alternative score: look at model year of trucks used by carriers

    • Convert SmartWay data about fleets in the program to fleets outside the program

    • Attributes: engine, model year, etc.