When you look at the truckload portion of the motor carrier industry as a single entity, you see the segment—the word segment hardly does it justice—that handles the vast majority of for-hire tonnage in the United States. According to the Truckload Carriers Association (TCA), the major trade association for the industry, truckload carriers handled 97 percent of the for-hire tonnage in 2002—the latest numbers available. That makes the truckload business, as fragmented as it is, a substantial part of the nation's economy.
But examine just a bit further, and you see one of the most fragmented portions of the industry, with thousands of carriers, big and small, and where even the giants, the best-known names, control only a small portion of the overall market. Thus, generalizations about the industry can be misleading. What is almost universally true, though, for truckload carriers big and small, is that business has been tough, but it is getting better.
Over the last four years, the industry has gone through substantial turmoil. Chris Burruss, president of TCA, describes it as a "perfect storm."
"The industry will face cost pressures at any time," he says. "It might be fuel or insurance, or new engines, or you might have to deal with drivers. Over the last four years, all of those have come to bear at once."
Lately, though, as the economy has recovered and trucking volumes have risen— and truckload rates along with them—truckload carriers, or at least the larger carriers, have shown strong signs of recovery. J.B. Hunt, for instance, the largest publicly traded truckload carrier, reported both record revenues and earnings in the first quarter of this year. Werner Enterprises, another large truckload carrier, reported its first-quarter revenues increased by 11 percent and profits by 31 percent over 2003's first quarter. (Schneider National, the nation's largest truckload carrier, is privately held and does not break out its financial results. However, for all of 2003, the company said its truckload services revenue grew by 6 percent.)
Rates on the rebound
For shippers, that opens several issues. First, rates are up and certain to rise. Carriers have had to absorb substantial increases in insurance and fuel costs; increase driver compensation; and take on the higher acquisition and maintenance costs of new cleaner-burning engines.With capacity tight, carriers will pass those costs on to customers and attempt to improve their margins as well. But with costs being particularly volatile, getting a grip on exactly how far rates will rise is difficult.
William Rennicke, a managing partner with Mercer Management Consulting's transportation practice, says, "While rates have gone up—most carriers have seen much higher rates and the rates are sticking—there's a built-in uncertainty in the cost structure. It gets hard for the carriers to find out if they are pricing the right way, or you end up with contingency-based pricing. "Many carriers have been successful in passing on at least a portion of the steep run-up in diesel fuel prices, but constant changes in rates can also cause tensions between shippers and carriers. Rennicke describes the pricing environment as "crazy and unsettled." (An example of the cost issues: Diesel fuel in early May averaged $1.71 a gallon across the country, 23 cents a gallon higher than a year earlier.)
Even with tight capacity, Rennicke believes that shippers still have most of the leverage because of the number of competing carriers in the truckload market.
The driver dilemma
Attracting and retaining drivers has long been an issue for truckload carriers, and the pool of available drivers may be as great or greater a restraint on capacity as equipment. "Drivers are as big a problem as before the downturn," Rennicke says. "The ability to serve the market is capped by the ability to attract drivers."
Speaking to the International Association of Refrigerated Warehouses conference in April, Lance Craig, chairman of TCA and president of Craig Transportation in Perrysburg, Ohio, said,"By every standard measurable, the issue of drivers is particularly worrisome."
Tight capacity and the issue of driver retention have led more carriers than ever to consider using rail intermodal services for linehauls. J.B. Hunt and Schneider National, the largest truckload carriers, have used intermodal for portions of their business for several years, but Rennicke says that even relatively small carriers are considering that option. But even intermodal capacity is getting tight, Craig warns.
Another factor whose consequences are still imperfectly understood: Carriers are also continuing to learn how the new driver hours-of-service rules that took effect in January will affect productivity. Already, major carriers have gotten more serious about imposing detention charges on shippers or receivers that tie up equipment.
Be late, get detention
Craig says detention billings by his company are more than double what they were before the rules came into effect.
"This is not a 'hurrah' thing," he says,"but it highlights for shippers and receivers that there is a cost to inefficiency."
Perhaps even more important heading into the peak shipping season is that capacity is getting tight. "There's definitely going to be a problem as we wind into the busy season," Craig says. Shippers without contracts with carriers may find trucks difficult to find as volume picks up—especially those shippers who carriers perceive as operating inefficient docks.
Craig says, "It's not a secret that it's swung back the other way. There's a much higher demand for trucking. It is more of a carrier's market now."
But the pain inflicted on the industry over the last four years—plus questions about driver availability—has caused many carriers to invest in new capacity cautiously, which suggests that capacity is not likely to expand in step with demand. "Expansion has to be done in a careful manner," Craig says. He says his own company could move as much as 50 percent more freight every day, based on the demand he's seeing. Yet major investments won't come quickly.
"Trucking companies have learned from the last recession what it takes to be a profitable company," Craig says. "They are going to be cautious about who they deal with and how they do business. A lot of carriers now have tools that tell them who their good customers are and who the bad customers are."
Shippers aware of the coming tight capacity have been making efforts to expand their base of contracted carriers. Craig reports a sharp increase in requests for bids from shippers. "They are trying to gain specific commitments knowing that things are ready to bust loose," he says. "The only way to gain capacity is to roll out those bids and issue awards for traffic."