Whether you like the original folktale with “Henny Penny” or are more a fan of Disney’s 2005 version of “Chicken Little,” it seems appropriate to bring up that reference in this year’s state of trucking. As I read reports of industry experts and talk with trucking company owners, that seems to be the sentiment.
Whether you like the original folktale with “Henny Penny” or are more a fan of Disney’s 2005 version of “Chicken Little,” it seems appropriate to bring up that reference in this year’s state of trucking. As I read reports of industry experts and talk with trucking company owners, that seems to be the sentiment.
So what is happening with trucking in late summer of 2016?
Yes, rates are down. Trucking industry information website DAT (www.dat.com) tracks spot market freight rates, which is freight posted on a load board coming from a freight broker and hauled by small carriers and owner operators. While these rates are generally lower than contract rates, they give us a good indication of where the market is. Dry van rates were at $1.61 per mile last week compared to $1.76 the same time last year.
FTR, a consulting firm dedicated to the industry, publishes a Trucking Conditions Index each month which takes into consideration rates, capacity and overall sentiment of trucking company owners. The FTR Trucking Conditions Index (www.ftrintel.com) has been trending down all year. The most recent report from June has the index at 2.92 compared to 7.66 a year ago. December of 2015 had the index as high as 10.88. That is significant.
As a factoring company, Diversified Transportation Finance sees the lower rates manifest in the form of dollar amount of invoices we advance against. In our portfolio, the average invoice size was $1,337 in July compared to $1,501 in July of 2015. Some of that is due to rate and some of that is due to fuel surcharges. The average price of diesel fuel is $2.31 per gallon versus $2.61 a year ago. Most carriers pass along the cost of fuel to their customers, so higher fuel prices mean larger invoices.
Some of this can be attributed to fact that economy is still sluggish. The Producer Price Index (PPI) has gone up and down in the last 12 months, but is at 110.3 currently compared to 111.4 last year. On an even more macro level, GDP (gross domestic product) grew at only 1.2 percent last quarter compared to 2.6 percent in the second quarter of 2015.
Some of the rate deflation has contributed to the excess capacity in the marketplace. There are more trucks chasing less freight. Some of that excess capacity has come from the slowdown in the oil patches. Recently we added a few customers who were running for oil companies in the Bakken in North Dakota. Things dried up there and now the trucking companies are doing traditional long-haul freight and getting the majority of their loads from brokers. Other factoring companies I talk with are seeing similar activity coming from the Texas fields and other places. Trucking is still a commoditized business, so excess capacity (more trucks available to haul loads) will bring rates down.
Of course, we have to remember that we are coming off a historically good year in 2015.
What are the real issues?
While the above issues are a concern for truckers, most trucking companies I talk with have other concerns. Similar to last year, the biggest concerns for trucking companies is compliance with the Department of Transportation’s hours of service rules for drivers. As a part of this issue, I include the mandate for all trucks to use electronic log devices (ELDs) by December 2017. Driver shortage and retention will always be an issue for fleets.
Hours of Service and ELDs
According to a study by the American Transportation Research Institute in November 2013, trucking has been impacted by $1.6 billion to $3.9 billion in driver wages alone since hours of service were restricted in July 2013.
Added to this issue is the way truckers track their hours will change in the coming year. For decades, truck drivers have kept logs in their trucks to show authorities that they are in compliance with the hours they spend working and driving. With the enactment of MAP-21, all trucks will need to have these logs available through electronic means by December 2017.
Most of the large fleets have already started using electronic logs and have implemented them across their fleets. Many fleets I have talked with are already adjusting the way they pay drivers under the new format. With paper logs, many drivers wrote down stops or non-driving activity incorrectly. While most were not trying to be illegal, it just happened. With electronic logs, the activity is more accurate. Generally, this causes a driver to run fewer miles and get paid less. Drivers who get paid less generally look for another job. Fleets hat address this issue pro-actively will retain drivers. I am hearing of fleets changing to hourly pay with performance and safety bonuses or they are doing other compensation that moves from the traditional per-mile pay.
Most of the larger industry groups are embracing the ELDs as a positive move. However, OOIDA (Owner-Operator Independent Driver Association) has filed arguments challenging the rule. OOIDA represents small trucking companies and argues that the new rule does not promote safety and violates the Fourth Amendment against unreasonable searches.
Some in the industry feel these changes will cause some of the small fleets to go out of business as they won’t be able to — or want to — comply with the new regulations. Could this lead to a tightening of capacity and thus increase in rates? We shall see. My belief is it may have some affect, but generally the industry finds a way to compensate for changes and it will not be as intrusive as many think.
Driver Shortage and Retention
The American Trucking Association (ATA) estimates there is a shortage of at least 30,000 drivers right now. Some experts place that number even higher. As the economy improves and more freight is hauled, even more drivers will be needed. Additionally, as unemployment falls, improving sectors such as construction and manufacturing could eat into the potential driver pool. The average age of a commercial driver in the U.S. is 55, according to the Bureau of Labor Statistics — and tens of thousands will be retiring soon.
Industry groups had supported legislation that would allow implementation of a graduated Commercial Driver’s License program where drivers could enter the commercial driver pool as early as age 18. Proponents saw this as a way to get younger people into the career of trucking before they choose another profession. However, that piece of legislation was not part of the Fixing America’s Surface Transportation Act passed last December.
Through associations like the ATA and Truckload Carriers Association (TCA), fleets are sharing information on the best tactics for attracting and retaining drivers. Instead of losing drivers to each other, it seems fleets are getting serious about attracting drivers from other industries.
Outlook
This year seems to be like a lot of years in trucking. We know the sky is not falling. Freight will still get moved mostly on trucks throughout North America. The United States still has the best distributive systems in the world as most Americans can access just about anything they need within a few miles of where they live.
I believe there will be a few factors that tighten capacity in the coming months. The additional compliance will cause some trucking companies to shut their doors or sell their company. Some of that will be simple economics as they won’t be able to absorb the added costs. Some of that will be simply from demographics. As in many industries, baby boomers are retiring. People who started trucking companies in the 1980s after deregulation are getting to retirement age. Many of these companies do not have succession plans and will sell or shut their doors.
Trucking is still an industry with relatively low barrier to entry. If capacity tightens enough and rates increase enough, current companies will expand or new companies will open. The pendulum is always swinging in the trucking industry. It will be a few months, but I see it moving on a slow up swing.
Eric Myers is president of Diversified Transportation Finance in Park City. Diversified Transportation Finance works with trucking companies to provide working capital and equipment finance.