Rethinking Long-Haul Profitability: New Challenges in OTR Trucking

In the world of over-the-road (OTR) trucking, the dynamics of long-haul freight have been well understood as a straightforward equation: lower rates per mile were offset by the higher volume of miles, leading to higher relative profitability. However, recent research by KSMTA’s FreightMath^™ team suggests this traditional model may no longer hold true.

The trucking industry is currently in a prolonged freight recession, driving down rates across the board. This challenging environment, combined with rising costs, has introduced new obstacles that OTR trucking companies must now navigate.

A Shift in Profitability

Historically, the relationship between length of haul (LOH) and freight rates has been clear: the longer the haul, the lower the rate per mile, but larger overall revenue due to the sheer volume of miles along with a higher velocity. This made long-haul freight a reliable source of absolute margin for carriers. However, our client-specific research indicates a significant shift, and the profitability of long-haul freight is no longer a given.

One key factor is the rising cost structure in the industry. Over the past few years, the industry has seen significant increased expenses related to fuel, driver wages, insurance, and other operational costs. The higher costs have made it harder for carriers to maintain profitability by tightening margins in all LOH ranges. However, because of the naturally lower rates on long-haul lanes, prices are much closer to a carrier’s variable cost per mile. If a carrier fails to meet this breakeven point on a rate, the losses are exacerbated by every additional mile involved in long-haul operations.

Further, the states and provinces connected to long-haul movements can also have a meaningful impact. A client recently mentioned that it costs an additional $0.06 per mile to operate in California in fuel tax alone. This variance is so pronounced that KSMTA is now adjusting our activity-based costing model to account for non-toll miles traveled within each state.

Understanding the Trade-off Between Miles and Rates

The traditional belief that what is lost in rate per mile can be compensated with increased volume is being challenged. Today, understanding the rate per mile reduction that a carrier can absorb for an increase in mileage requires careful consideration. During one of our monthly reviews with a client, we observed a 66-mile month-over-month (MoM) increase in LOH, which resulted in an additional $46 in revenue per load. However, this mileage increase also led to $57 in extra costs per load, resulting in a net loss of $11 per load.

A sensitivity analysis revealed that the client could have afforded to drop their rate by $0.01 for every 11-mile increase in LOH and still maintain their current profitability. In this case, a 66-mile LOH increase could have sustained a $0.06 reduction in rate per mile. However, their average rate over that period dropped by $0.10. It’s important to note that this discrepancy wasn’t due to deliberate rate cuts but rather a consequence of shifting capacity to longer haul lanes. This example underscores the critical need for carriers to rely on sophisticated models, rather than instinct, when making pricing and freight decisions.

Impact of Operational Inefficiencies

Another factor contributing to the declining profitability of long-haul freight is the operational inefficiencies that have become more pronounced in recent years. Carriers are operating at slower speeds due to safety concerns, and the implementation of electronic logging devices (ELDs) has further reduced operational efficiency. These inefficiencies negate some of the traditional benefits associated with long-haul freight, such as higher velocity and less driver support requirements, and contribute to the overall tightening of margins.

Increased Competition and Changing Market Dynamics

Competition on long-haul lanes may also play a role in declining profitability. As shippers have implemented more hub-and-spoke operations, distribution centers closer to the end consumer, and more predictive inventory systems, the number of long-haul lanes available appears to have decreased. Carriers often bid on long-haul lanes simply because some drivers prefer them, leading to increased competition for these routes. This increased demand, coupled with a shrinking supply of long-haul opportunities, could be suppressing prices on these lanes and further squeezing carrier margins.

Rethinking Long-Haul Strategies

OTR trucking companies may need to rethink their traditional reliance on long-haul loads as a cornerstone of profitability. The macroeconomic factors influencing the industry have shifted, turning what was once a reliable source of revenue into a landscape fraught with complexities and challenges. The historical bias toward long-haul loads must be reevaluated in light of these new dynamics, and carriers must develop sophisticated models to better understand the trade-off between rate and miles. Accurately assessing a carrier’s variable cost per mile to stay above the breakeven point on these long-haul routes is paramount.

Without this strategic shift, the profitability of long-haul freight may continue to erode, leaving carriers in a precarious position. The industry is at a crossroads, and those who can adapt to the changing dynamics of long-haul freight will be better positioned to maintain their profitability in an increasingly competitive and costly environment

To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.