Despite a positive rebound in inbound loaded containers handled at the Ports of Los Angeles and Long Beach that started in March 2023, many small drayage carriers are not getting their share of incoming cargo to keep their trucks and cash flow moving.
08/16/2023
Long Beach, California – By the end of August 2022, the slow decline in inbound loaded containers handled at the Ports of Los Angeles and Long Beach had begun. With the holiday season approaching, carriers and shippers alike anticipated a strong finish to 2022.
Few, however, could have forecasted the decline of loaded containers handled by both ports from August 2022 through February 2023, shaking Southern California in which 1 in 9 jobs, or 883,000 jobs depend on economic activity created by both ports per statistics published by the Port of Los Angeles.
That 7-month period alone saw a decline of 284,000 TEUs (twenty-foot equivalent units) handled by both ports, a decline that had not been seen since early 2020 when loaded import containers handled by both ports declined by 270,000 TEUs from January 2020 through March 2020 due to the beginning of the COVID-19 pandemic.
An increase in loaded inbound containers began in March 2023, but it has yet to resemble the volume seen during the pandemic years, causing strain on small drayage carriers' cash flow.
A Return to Pre-Pandemic Shipping Levels
As September 2022 came and went, alarm bells started to go off. Loaded inbound containers were at their lowest point compared to years prior, declining by 191,000 TEUs from September 2020, and by 71,000 TEUs pre-pandemic September 2019. Storage yards in the communities surrounding the ports were now filled with bare chassis instead of loaded containers.
The much-expected peak holiday shipping season might not arrive.
Carriers and shippers alike are accustomed to low and high-peak shipping seasons. Traditionally, July – January is known as “peak season”, while a drop-off can be seen beginning in February, most notably due to factory closures in Asia due to the Lunar New Year holiday.
The pandemic disrupted this traditional shipping cycle from 2021 through most of 2022. Loaded import containers kept arriving at both ports, keeping carrier’s trucks moving, cash flow and revenue at record levels, and warehouses throughout Southern California at peak capacity.
During this shipping boom, small and large drayage carriers alike made numerous investments such as hiring drivers, purchasing trucks, and purchasing chassis due to the near-zero availability of port-provided chassis (known as the chassis pool) at the various terminals.
Due to demand, scarcity because of supply chain issues, and increased material and labor costs, the cost to purchase brand-new and used equipment increased considerably during the pandemic years compared to pre-pandemic years, saddling carriers large and small with debt.
Used trucks increased in value by as much as 40% compared to pre-pandemic years, partly due to the unavailability of brand-new trucks to meet market demand. Brand-new chassis during this period ranged anywhere from $20,000 to $30,000 per chassis, requiring a large capital investment from carriers, usually in the hundreds of thousands of dollars, to ensure they had a large fleet of private chassis to keep their customer's containers moving. With chassis charges usually at the $50-$55 per day range during this time, carriers calculated they would recoup their investment sooner rather than later.
With inbound loaded cargo volumes declining again in October 2022, so did private chassis usage. Port-provided chassis from the pool became available again at the terminals, and no longer were carriers able to charge their customers $50-$55 per day for usage on their private chassis. They were now forced to accept the reality of paying third-party storage yards to store their bare chassis, usually ranging from $30-$40 per day per unit, due to a lack of cargo volume.
Beneficial cargo owners and shippers alike started asking for and receiving all-in rates from carriers, with some carriers agreeing to waive fees such as pre-pulls and storage fees in order to keep customers.
Changes to worker classification under California law AB5 that went into effect on January 1, 2020, uprooted the common business model of both large and small drayage carriers across California. Under AB 5, carriers are no longer able to use independent contractors to haul their containers, requiring them instead to become employee hourly drivers.
The high demand for drivers resulted in many small drayage carriers paying their new employee drivers higher wages and offering richer benefit plans to attract and keep drivers. During days of no work due to cargo volume, small drayage carriers would pay drivers to stay home to avoid losing them to larger competitors that managed to keep their trucks moving. To the benefit of their cash flow, pre-AB 5 this would not have been an issue since carriers would not have to pay independent contractors if there was no cargo to be moved.
Also on the horizon is the December 31, 2023, deadline to add cost-effective diesel and natural gas trucks to the carrier’s existing fleets.
Beginning on January 1, 2024, new trucks added to carrier’s fleets must be zero-emission, such as hydrogen and battery-electric trucks. Hydrogen trucks such as the Nikola Tre FCEV offer better diesel equivalent performance compared to battery electric trucks, but at a cost of $475,000 before incentives, its cost puts them out of reach to the numerous small drayage carriers that operate out of the ports that depend on their diesel and natural gas trucks for their livelihood.
For many small drayage carriers, it certainly feels like they are being pushed out of the industry altogether in favor of larger carriers. From the costs of investments made during the pandemic shipping boom to the increased operation costs from converting from an independent contractor to an hourly employee driver business model, it is more than likely a record number of small drayage carriers will decide to close for good due to increased operating costs and low cargo volume in our current shipping environment.
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