The largest TL carriers continue to add capacity at a faster rate then the next tier of carriers, taking advantage of a more favorable pricing and truck utilization market, and low interest rates. Excellent data from Avondale Partners indicates that in each year from 2008 through 2012, the four largest TL carriers (Hunt, Schneider, Swift, and Werner) reduced capacity more quickly than the next 7 largest carriers during the recession and then added capacity more slowly through the tepid post-recession recovery. That changed in 2013, with the largest carriers adding capacity at a significantly faster pace (10.2%) than the second-tier group (3.3%). In the first quarter of this year, that pattern continued, with the largest carriers growing by 1.9% over Q4 totals, while the next tier grew by only 0.4%.
Despite the addition of trucks, the largest TL carriers collectively have 5% fewer trucks on the road today than they did at the end of 2007. The second tier have added 3% to their collective capacity over that time frame, but have not added as many trucks as the largest carriers have cut.
The trucking industry is highly fragmented with an estimated 167,000 active for-hire carriers, and these 11 carriers operate less than 10% of the industry’s capacity so it is difficult to draw definitive conclusions about capacity additions going forward. It is also a highly entrepreneurial industry, with a history of small carriers becoming medium-sized and medium carriers becoming large. The biggest carriers behaved more conservatively during the contraction and the slow-growth recovery, but they have become more aggressive in the current tighter-capacity market as they have greater financial ability to add trucks. The addition of capacity may indicate a belief among industry executives that freight volumes should continue to steadily grow over the next few years, and that pricing power will remain with the carriers. That pricing power will be a requirement to fill the seats of the additional trucks through higher driver pay.
The lack of growth among the second-tier carriers may be a result of uncertainty over the effects of federal regulations like the Hours-of-Service rules and CSA. The largest carriers are most capable of absorbing regulatory shocks and the associated increased pressure on margins. Despite the recent large carrier capacity additions, shippers must continue to develop strong relationships with the second-tier of asset-based carriers because they will grow quickly once they gain more confidence that the pricing environment has tipped in their favor. Shippers should also be using one or two large 3PLs/brokers to gain access to the tens of thousands of small carriers that are always seeking to gain market share, but lack the sales resources and name recognition to do so directly.
In September 2012, we discussed the capacity growth trend for the largest TL carriers during and immediately after the recession. Excellent data from Avondale Partners showed that the largest TL carriers had cut capacity the most during the recession and were the slowest to add capacity back through the tepid recovery. A remarkable trend reversal has occurred this year: the four largest TL carriers (Hunt, Schneider, Swift, and Werner) increased capacity by 4% year-over-year in Q2 2013, whereas the group of 8 second-tier carriers cut capacity by 0.2% during the same period. The four largest TL carriers’ and the second-tier group’s respective average fleet sizes are 11,588 and 2,773.
The trucking industry is highly fragmented with an estimated 167,000 active for-hire carriers, and these 12 carriers operate less than 10% of the industry’s capacity so it is difficult to draw definitive conclusions about capacity additions going forward. It is also a highly entrepreneurial industry, with a history of small carriers becoming medium-sized and medium carriers becoming large. The biggest carriers behaved more conservatively during the contraction and the slow-growth recovery, but they may become more aggressive if stronger expansion occurs as they have the financial ability to add trucks. The recent trend reversal may indicate a belief among industry executives that freight volumes should continue to steadily grow over the next few years, and a belief that pricing power will return to the carriers.
The lack of growth among the second-tier carriers is likely a result of the recent stagnation of TL rates and uncertainty over the effects of federal regulations like the new Hours-of-Service rules. The largest carriers are most capable of absorbing regulatory shocks and increased pressure on margins. Despite the recent trend, shippers must continue to develop strong relationships with the second-tier of asset-based carriers because they will grow quickly once the pricing environment tips in their favor. Shippers should also be using one or two large 3PLs/brokers to gain access to the tens of thousands of small carriers that are always seeking to gain market share.
The largest TL carriers cut capacity the most during the recession and have been the slowest to add capacity back through the tepid recovery. The charts below summarize some data produced by Avondale Partners, an excellent source of trucking related data that produces the often-referenced trucking company failures information. The four largest TL carriers (Hunt, Schneider, Swift, and Werner) cut capacity by over 9% between Q4 2007 and Q4 2008 and an additional 6% by Q4 2009. These large carriers average over 10,000 trucks each. A group of 8 public and private TL carriers averaging around 2,750 trucks each were much slower to cut capacity and did not cut as deeply, cutting by less than 2% between ‘07 and ‘08 and an additional 5% by Q4 ‘09.
In the two years after Q4 ‘09, the second-tier (size not quality) TL carriers added capacity more quickly than their large brethren, adding 4.5% between ‘10 and ‘11 compared to less than 1% for the largest carriers. Both sets of carriers reduced truck counts between Q4 ‘11 and Q1 ‘12 as would be expected following the strong Q4 retail sales surge. It is interesting to note, when thinking about TL capacity, that these 12 large TL companies operate 9,000 fewer power units than they did in late 2006 representing a 12% capacity reduction after more than 5 years. The biggest four carriers represent about two-thirds of the trucks in the group but 90% of the capacity reduction. Large carriers are very reluctant to add equipment until they are sure that driver and freight availability and the pricing environment will provide an acceptable return on investment. The ATA reports that truck tonnage is up over this period so the implication is that smaller carriers have been picking up the slack.
The trucking industry is highly fragmented with an estimated 167,000 active for-hire carriers and these 12 carriers operate less than 10% of the industry’s capacity. It is also a highly entrepreneurial industry, with a history of small carriers becoming medium sized and medium carriers becoming large. The biggest carriers seem to be the most conservative by ratcheting down capacity more quickly and adding capacity more slowly than smaller carriers in response to economic fluctuations. A key takeaway for shippers is the need to develop strong relationships with the next tier of asset-based carriers who are more likely to add capacity as the economy recovers. Shippers should also be using one or two large 3PLs/brokers to gain access to the tens of thousands of small carriers that appear to be growing already.
The USA Today once again featured the shortage of truck drivers, this time with a front page article quoting on of our own industry expert, Ben Cubitt, senior vice president of Transplace. As Ben points, out over-the-road truckers are retiring and the younger generation is not interested in a job that keeps them on the road, sleeping in the back of a truck for weeks at a time.
It is somewhat misleading to talk about a driver shortage without also focusing on the various sectors of the industry. UPS and FedEx have no problem finding package delivery drivers. Walmart, Tyson, Frito Lay and other private fleet operators also have plenty of drivers and very low turnover. The same is true for dedicated fleets that serve shippers that choose to outsource fleet operations. The LTL carriers have no problem finding drivers. Even in the lower paying intermodal drayage business, drivers are available. The shortage is specific to one sector, the over-the-road truckload driver. While there are two main issues – lifestyle and pay – it is the lifestyle issue that is predominantly responsible for the shortage. Over the road drivers make $40-50k per year on average, more than a drayage driver but well under the $60-70k a private fleet driver would earn. Even at $60k, there are simply not enough people who will spend 2-3 weeks at a time on the road, eating and showering at truck stops and sleeping in the back of their cab.
The article sites one factor being that would-be drivers can’t afford the $4-$6k for driver training school. Those would-be drivers want the jobs that are already filled, driving for Walmart or UPS. Even if the school was free, once that new driver is out on the road dealing with loading and unloading delays and wanting to get home, they will leave the TL sector of the industry. If TL carriers thought they could get a long-term driver out of a school they would happily cover the tuition cost.
While we certainly need to focus on the supply side of the problem, faster solutions are available on the demand side. Shifting truck freight to intermodal is ideal because that is precisely the longer haul freight that is specifically subject to the highway driver shortage. It also saves money and fuel. There remains a lot of long-haul refrigerated truck freight that can be converted to intermodal. Configuring supply chains to take advantage of intermodal and regional trucking also reduces the demand for long haul TL drivers and can lead to shorter lead times for customers. Private and dedicated fleets will grow as the TL driver shortage escalates. Shared regional dedicated fleets between groups of shippers are also an effective solution. Back in the late 1980’s a TL carrier called Overland Express attempted to set up a pony-express type of relay operation to handle long-haul TL freight with readily available regional drivers. They lacked the density, technology, and expertise to pull it off, but I think this is a great opportunity for the largest TL carriers to take advantage of economies of scale and operate in the TL environment in a space with significant barriers to entry.
What can be done on the supply side of the problem. Higher pay won’t fix the problem, but it may keep it from getting worse. The obvious need for shippers to make life easier for drivers by not tying up the driver at the loading or unloading dock is critical. Shippers also need to make sure facilities are driver friendly, providing restrooms for example. Figuring out a way to get 18 year olds into the industry without increasing highway accident frequency would help. The 21-year old CDL requirement prevents high school graduates who are not interested in college from pursuing driving jobs. Truck driving is a skilled labor position. In the technology industry we have the H-1B visa program to allow foreign nationals with computer science and engineering degrees to offset the shortage of such talent in the U.S. A similar program for skilled foreign truck drivers could be a big winner.
FTR Associates estimated there is a 100,000 driver shortage today and that it will grow to 250,000 (exacerbated by over-reaching regulatory initiatives) by late 2013. Everyone in the supply chain industry needs to have this issue on their radar screen and not get surprised when the capacity shortages of 2004 reappear as the economy recovers.
You can view an interview I did on this subject today with Fox Business at this link.
It was somewhat surprising to see truck driver shortages featured on the front page of the business section of the USA Today on September 9. The full article can be accessed through this link USA Today. The article points out that despite a less than robust economic recovery and nearly 10% unemployment there are already shortages of trucking capacity that are driving up freight prices and causing missed deliveries. The article also points to a 4% increase in contract rates and as much as a 40% increase in spot rates in 2010. I agree that there has been some pressure on TL rates this year, but we are typically not seeing 4% increases in professionally managed transportation procurement events. On the other hand, we are definitely seeing requests for much more than 4% increases when transportation rates are negotiated the old-fashioned way; one carrier at a time. Spot rates have increased this year, and in some areas of the country there are double digit increases, but 40% seems a little extreme, unless it is a last minute situation. Overall I think the author jumps the gun in saying the sky is falling at this time.
The article does correctly point out that when the economy recovers and new regulations come into effect the TL capacity shortage will be severe. The dark clouds on the horizon include CSA 2010, which many estimate will take 5-10% of the capacity off the road, hours of service reductions, electronic on-board recorder mandates, and speed limit reductions. Despite the tremendous safety record of the trucking industry, the federal government just can’t resist the urge to appear to do something useful without any regard to the economic cost of their actions.
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