The Road Ahead: Transportation Market Outlook
Our experts discuss the current market, and what you and your clients can expect.
The transportation industry has bounced back strongly from the COVID-19 pandemic, but a difficult economic climate and fears of a recession have created some testing times — as well as a number of challenging headwinds. We cover four of those headwinds here — and one promising trend.
Rising inflation and the corresponding drop-off in the number of new homes being built is starting to apply downward pressure on freight rates, and while rates remain steady for now, Mark Gallagher, vice president, national Transportation practice leader for RPS, said that the current economic climate should be a cause for concern.
He added that falling rates could be particularly problematic for new entrants to the market that had built a business model based on the higher freight rates that had become the norm in the immediate aftermath of the Covid-19 pandemic.
"Building an entire business model on some of those higher rates rather than something more realistic for the longer term could potentially put some of those transportation companies in serious trouble," he said.
Operators across the U.S. are facing rising costs as the war in Ukraine continues to exacerbate the global fuel crisis that has led to soaring diesel prices. The average price of diesel was $4.96 as of September 19, 2022, up $1.58 from a year before.*
Smaller companies and new ventures are often disproportionately affected by rising fuel costs.
"Compared to larger fleets, smaller truckers don't have as much leverage or benefit as much from the economies of scale," Gallagher noted. "Those larger fleets can often get fuel surcharges that help to manage costs, which means that the new venture and non-fleet segments are finding things particularly tough at the moment.
"And if there is a long-term sustained economic downturn or inflationary period, then things are going to be very difficult for that sector of the market."
Rising repair costs are also hitting the transportation industry hard, with some reports saying increases to the price of parts and cost of labor are outpacing inflation.
Eden Hancock, RPS area senior vice president in Atlanta, said rising costs means many firms have been forced to downsize to improve the efficiency of their operations.
"Every cent matters to these operators as they look to make themselves more profitable," she said. "This could mean looking to make their vehicles more fuel efficient, or not having as many excess trucks or spare parts on hand.
"Inevitably this often leads to a reduction in the overall size of the business too," Hancock added.
Meanwhile, the cost of new vehicles is presenting an increased barrier for new entrants, as well as stifling growth, with supply chain issues reducing the availability of new vehicles.
This rise in operational costs has already led to an increase in consolidation in certain sectors of the industry, with larger firms buying up smaller operators as they struggle with the increased cost pressures.
Insurers are also facing rising costs, with social inflation — fueled by increased medical costs and higher levels of litigation — adding pressure to already rising insurance premiums.
The result of this social inflation is that nuclear verdicts — cases that exceed $10 million in payments — are becoming increasingly prevalent.
"There are certain large law firms out there that have the ability to obtain nuclear verdicts as a result of finding something egregious in the claim," noted Gallagher. "That is a concern for every transportation client out there, and they are increasingly coming under scrutiny every time a loss occurs."
All of these inflationary pressures are leading to rising insurance premiums across the transportation sector.
"We are going to see more disciplined underwriting in the future," noted Andrey Miterin, RPS area vice president for the Northeast/Mid-Atlantic region. "Insurers aren't just looking to add more premiums to their books for the sake of it; they are pushing for that business that's going to help them achieve underwriting profits."
Telematics, forward-facing and in-cab cameras are becoming more prevalent within the transportation industry, helping operators to better monitor driver performance.
The benefits of these technologies mean that some insurance carriers are now offering discounts to fleets that install telematics devices on their vehicles, whether that is on the installation of the telematics hardware or the insurance premium itself.
Some insurers are even mandating telematics devices or camera technology as a requirement of cover.
"Most new entrants require all vehicles to have forward-facing cameras at a minimum," noted Jeffrey Marks, RPS transportation program manager. "So adoption is growing, and it's something we think will become even more common across the industry over the next few years."
Learn more about what's next for the Transportation industry in the RPS 2022 U.S. Transportation Market Outlook.
"Gasoline and Diesel Fuel UpdateU.S Energy Information Administration, updated 19 Sept 2022.