The topic of truck rates remains extremely hot for every transportation company in the US, including the largest ones, such as HMD Trucking. You can learn more about the work of OTR truckers by following this link: https://www.hmdtrucking.com/blog/what-is-an-otr-truck-driver. And in this article, we will make a quick review of the current trends in this sector.
The situation in the world market has recently become rather frustrating, so in view of recent world events, the truck rates tend to remain quite high.
The cost of transportation of goods by roads has been constantly growing since 2019. In the year 2022, based on expert estimates, the cost of services will be additionally affected by road fee increase, inflation, forex rate drops, restrictions, imports and exports misbalance (empty runs increase), etc.
Transport rates are unstable; they mostly remain growing. This situation is observed all over the world.
In our article, we will give a quick overview of the situation.
Table of Contents
Truck Freight Rate Definition
A truck freight rate is a price a shipper or broker will pay to the carrier for the goods transport.
Сalculation Algorithm
Trucking rates are calculated on a per-mile basis.
The algorithm is as follows:
- Take the distance in kilometers between the starting and destination points.
- Divide the total rate by the number of miles between destinations.
- Don’t forget to take into account fleet and driver availability, available routes, and the weight of the loads.
Factors that determine the class of freight:
- Product density;
- Liability;
- Product value;
- Handling needs;
- Stowability.
Together, these characteristics establish a commodity’s “transportability.”
What Do You Need to Consider When Calculating Trucking Rates
1. Distance
The rates for local and international transportation differ. Longer distance – upper price.
2. Weight of a load
This factor is one of the most significant factors for the cost of trucking per mile. Consider the average load weight.
3. Shipment density
In other words, it is a space that the goods will occupy in your truck.
4. Security of transit areas
Some extraordinary situations in the transit areas, for example, military operations, always affect the freight cost.
5. Freight classification
The factors that determine the freight classification are given above.
The most common question that worries all transportation company owners is: will the freight rate remain high? We will try to give an answer to this question below.
Freight rates have been growing for a long time, and according to expert opinions, they will continue to grow further. For example, U.S. freight rates increased 28% just over the year.
Top 4 Common Factors Affecting the Rates:
1. Demand increase
Growth in demand for international road transport is stimulated by the recovery of the market and, as a result, an increase in the volume of transported goods.
2. Transportation capacity shortage
- Increased transportation demand (up to 50% in some areas).
- The steady reduction of drivers.
- Queues at the borders reduce the amount of available free vehicles.
An excess of demand over supply always pushes the rates up. There are several reasons for the transportation capacity shortage growth nowadays:
3. Growth in shippers’ expenses
Actually, transport costs have been growing even faster if compared with the rate of growth. Over the past year, these expenses have risen so much that the market isn’t able to hold down the rates. The costs are increasing due to the following reasons:
- Fuel price increase. Free market price increases since May 2020 became the reason for the fuel costs skyrocketing. The fuel cost has been setting new records since October last year.
- Vehicle price increase. The sales price of trucks has doubled since 2019. This is the reason why new companies and drivers avoid entering the trucking market. The price increased due to the leasing and loan interest rates increase that is proportional to the key interest rate. The maintenance cost has increased significantly. Trucking stocks have benefitted from the pricing power and steady demand.
- Drivers’ salary increase. The lack of drivers leads to the constant salary increase in order to keep people in their working places. The salary has been increasing annually by at least 10 % during the past few years.
How Transportation Companies Determine the Cost of Providing Services
There are some variants of rate-setting policy:
- Adjustment to the market: carriers do not calculate tariffs on their own. They just monitor the average price level for certain transport services and offer the same ones. Even though such behavior is typical for individual entrepreneurs and small transport companies, absolutely everyone has to adjust to the average price level.
- Paying capacity evaluation of the specific client or focus on a specific situation on the market. The basic cost calculation principle, in this case, is to determine the maximum possible level of customer paying capacity and set the price that he is able to pay. In the ideal case, this approach is able to bring the maximum profit to the transport company, but it is extremely difficult and resource-consuming to apply it in practice in full: it is necessary to analyze not only the situation on the market in general but the situation of each specific client.
- Cost calculation, taking into account the expected profit. In this case, the carrier sets the rates, which for a certain period of time, should provide the expected income.
- Cost-volume-profit analysis. It is the most common and the fairest approach, as the direct transport costs are mostly taken into account.
The Importance of Tracking Rates
For every trucking company, the number one goal is to have a profitable trucking business, and keeping up with average trucking rates per mile is the best way to ensure that your business continues to grow. The key to this is having the right cost-per-mile rate so that you win tenders and earn a stable profit.
To summarize, the truck rates you use for your business can be influenced by the following:
- Distance between the starting point and the destination.
- Shipment weight and density.
- Type of freight truck being driven.
- Current fuel prices.
Conclusion
For every trucking CEO, it is very important to monitor information about trucking rates in order to have a prosperous business. So keep in mind that the most important factors that may influence the freight rates are: distance, shipment weight, type of freight, and fuel prices.
We have tried to give a brief overview of the most important points and hope that the article will be useful for you.
