Fueling the flames of formations

Last week I wrote about hourly rates in trucking. I wanted to follow up with how the changes in wages and prices may reflect different realities for participants over time, even if on paper things look for better or worse.

Lets start by defining reality. If you made $20/hr and fuel was $2/gal, you could buy 10 gallons of fuel every hour. If fuel went up to $2.50 and you still made $20 you are now able to buy 8 or 20% less. Increase pay to $25 and you’re back where you started at 10gal/hr. Nominally you’re up $5/hr but really you can buy the same amount of stuff as before.

When we make $20 then $22 and prices go from $2 to $2.10 the changes nor contrast get felt. The slower ride of the post GFC era is a good example as the hourly rate increased by $5 over 12 years during the ZIRP or zero interest rate era. Contrast that to the next $5/hr gain between 2020 and 2022 during a high inflationary period.

Ask anyone if they felt that large gain by late 2022 and you’d get an eyebrow raise. The following chart shows how far our earned money leftover could stretch over time. Wallets everywhere clamped down as fuel prices reached decades highs. Increase feedstock prices and you get higher feed into higher food and so on. Once inflation settled in 2023, wages caught back up.

This is where we part with the broader economy, however, to zoom into the transportation sector where energy prices being the second highest cost of operations are felt more acutely.

Below is the same gain in hourly rates against US diesel pump prices over time in red. It’s not apparent right away, but the freight cycles run parallel to fuel prices based on the feedstock point earlier. Simply, when things get busier you need more energy to power it all.

The trucks run faster too. This point was made with the ATRI detention survey results but you can see it similarly in the ocean carrier environment. It becomes more about making already lagging orders versus rushing to the next opportunity. With it, fuel is a good proxy for what’s going on with freight demand and the general economy all together.

The summation of these prices moving and their affect on purchasing power, real or perceived, have great affect on the incentives for participants to stay with a larger operation or move towards independence.

2005 was one of the hottest periods in transportation, and with it, fuel prices rose from $1.50/gal to start 2004 and ended 2005 at $3.10. For those predominantly exposed to the spot market or watching others capitalize had little care for this rise as it was captured or downplayed by increases in the spot rates.

For the company employee, however, there’s the matter of FOMO on one end while their purchasing power would begin to squeeze on the other end. Even if the rise in inputs haven’t flowed downstream yet, it’s already real at the pump. And that’s enough to register.

Naturally, these impacts lead to an increase in formations and ventures that ride with the freight prices. For those that stuck it out, increases in wages begin to flow in. Unfortunately, this is usually when the market reaches it’s peak in the cycle and thus begins the downslide.

From here, the opposite story begins to unfold where revenues and take home fall with freight rates. On this end, the company employee sees wages increase with purchasing power from falling energy prices while the one exposed to the open market suffers low revenues and higher prices that finally arrived downstream, even if the price at the pump is lower. Stable work and higher pay incentivizes many back to old roles or the next big logo.

Think of the blue line below as the “how many gallons can I buy” trend like the example we started with in this piece. Notice how it moves opposite the red, which are general freight, long distance trucking prices. And the red line follows the green, our trend of prices at the pump over time.

When the blue line is high, there’s more consolidation. When it’s low, Landstar grows another BCO.