hey guys, welcome back to another video. Well, the question on pretty much everyone's mind for the past year, at least, is why is the market not recovering faster? We have been drowning in this industry for the last 2 plus years, which is an exceptionally long time because downturns, historically speaking, usually last about 12 months. So what gives? Well, there is finally an answer to this, so let's chat about it. Ready, let's go. [Music] Well, of course, the easiest answer is there are too many trucks in the market compared to the amount of freight available. But the question now is why are there so many trucks in the market given the circumstances? Well, according to Freight Waves, rates bottomed in May of 2020 at $1.49 per mile excluding fuel, and they say truck and carrier executives expected the rest of the cycle to play out according to a familiar script. As rates fell below carrier operating costs and stayed there, small fleets and owner-operators would be forced out of the market. The overall amount of trucking capacity would

contract, the balance between supply and demand would be restored, and the rates would rise once more. And this is, of course, logical, and this is how many of us thought it would happen as rates went down. But the cost of operating went up, it would eventually lead to a huge chunk of capacity leaving the market. But that's not what happened, so Freight Waves continues. Instead, carriers hung around for far longer than anyone anticipated, keeping rates lower for longer. A full year after the market's bottom in May of 2023 when it was $1.49 per mile, excluding fuel, rates had only increased by about a dime to $1.60 per mile. So yeah, it makes no sense why this capacity is sticking, and theorists, analysts, experts, and people in the industry have been guessing what could be the culprit. Some say it's because these carriers were smart and saved up from the boom that happened during COVID times. Others say that it's because the broker's market share increased, which is making freight more accessible. But the problem is these theories do tend to fall apart when you

start considering just by how much rates have dropped, and how much costs have increased because of inflation and the Consumer Price Index. Everything shifted in the wrong way, yet carriers are still surviving well. Freight waves believes that they have finally found an answer as to why this is happening, and honestly, it makes complete sense. So according to this article, following a hunch, Freight waves corresponded with the Small Business Administration, also known as the SBA, which gave those loans, right? And the program they launched in the early days of the pandemic. The program was intended to alleviate the economic injury to small businesses caused by the pandemic and offered long-dated business loans at a very low interest rate. Beginning in March of 2020, small businesses could get loans of up to $500,000 on 30-year terms at a fixed interest rate of 3.75%. Given that the current yield on a 20-year Treasury bond is 4.57%, these loans were effectively free money, at least in the short term. In September of 2021, the ceiling was raised

from 500,000 to 2 million, and by January 1st of 2022, the program had run its course and stopped accepting new loan applications. So you might be wondering, how much did SBA inject into the economy? Well, it's over $390 billion. Now, Freight waves decided to find out. Out of that $390 billion, how much was actually injected into transportation companies? How much went to trucking and warehousing companies? And I quote, the answer came back, $37 billion was lent to the transportation and warehousing sector across 419,500 loans for an average loan amount of $88,200. The majority of the sector is composed of small businesses, and 58% of them received those covid business loans. Now, of course, all of this is significant, but now let's talk about the impact it had using math that was presented by Freight waves. So, let's say we have an owner-operator who drives 600 miles per day, 5 days per week. That is 3,000 miles per week. And if we take 50 weeks per year.

that comes out to 150,000 miles per year. Now, let's say that the spot rates at that time are around $2.25 with fuel surcharge. So, if we multiply $150,000 mi by $2.25, that's $337,500 in gross income per year for that owner operator. Now, let's say that the operating ratio of this particular owner operator is 95%, meaning that 95% of the gross income goes towards covering the expenses, including wages, and that comes out to a net of $6,850 per year. Now, as Freight Waves continues, they say let's add the wages back into the owner operator because let's say this is a person who works for him or herself 50 cents per mile or $75,000 per year. That means that the net is the $6,000 plus the $75,000, or around $91,000 per year net for this owner operator considering that the rates are always $2.25 per mile. Now, we already know that

the average loan amount in the transportation industry this SBA loan was around $88,000. So now using this owner operator who at $2.25 per mile was earning $91,000. Let's say that his income is cut in half to $45,500 because of the horrible rates and also the increased expenses. Now considering the fact that $88,000 is the average of these SBA Loans, that would mean he would be able to continue operating for 2 years without feeling any effect at all. If we divide $88,000 by 2 years, that's $44,000 per year plus the $45,000 he is making. Considering the market just slashed his income in half, he still has the $90,000 per year. Now let's talk about the macro level. Freight wave States Trucking costs in the United States total about $800 billion annually and approximately half of that is revenue to the four higher Trucking industry. If we take the four higher segments $400 billion in revenue and

assume the same 95% operating ratio. Then the four higher segments' total operating income comes to 20 billion. The Covid-19 loan money gave out $37 billion. And that math that we just talked about for the owner-operator works here. The industry's profits could be cut in half by a severe freight recession, and carrier balance sheet would remain unaffected for years. Now, of course, there are repayments of these loans. And according to Freight Waves in 201 23, the Biden Administration floated a policy proposal that would have kept the government from pursuing collection on the delinquent Covid loans less than $100,000. But the Inspector General of the Treasury Department objected, arguing that it would incentivize further delinquencies. So, in May of 2024, the Small Business Administration reversed course and said it would begin referring delinquent loans to the Treasury Department and IRS for collection. So, there's that clock that is ticking, right? It's time to repay those loans. But there is another clock that is called depreciation. From my personal experience.

I know that the moment you hit 400,000 miles on a Freightliner, right, because we operate Freightliners, or 3 to 5 years after you get that Freightliner, that's the moment everything starts turning to crap. You have to replace parts, you have to do expensive repairs, and as many of you know, this is part of the reason we ended up getting new equipment, because it became insane. The maintenance and repairs expenses were absolutely crazy. Now, Freightwave says there's a real possibility that the small fleets and owner-operators that kept afloat temporarily with an infusion of SBA cash will not be able to afford to replace their aging equipment. It's been four years since the beginning of the SBA COVID program, so the horizon for replacing trucks bought in 2020 is fast approaching, if not already here. Now, of course, this is just another theory of why capacity is sticking, but in my opinion, this one actually is making sense. Fortunately, we were not one of the companies that even applied for an SBA.

loan. And the reason I say, fortunately, is because I feel like if we had and if we were approved, we would no longer be in business right now. It sounds backwards, but I believe that loans like these can create this false positivity, a false sense of being safe. We were forced to operate, and we continue to operate on razor-thin margins, and that just teaches you how to plan everything, be very careful, and live lean. I don't know, that's the way I look at it, but then again, I'm one of those people who has an obsession at this point of becoming debt-free. What do you guys think? Did any of you get an SBA loan, and if so, did it help you stay afloat? Did it bring more damage than good? I'd be very curious to hear your experiences. Anyway, guys, thank you so much for joining me today and watching. I hope you have a fantastic weekend, stay safe, stay healthy, and keep learning. See you in the next video.

Truck Capacity Might Start Falling Off A Cliff in 2025

Truck Capacity Might Start Falling Off A Cliff in 2025