Trucking in 2012 is an increasingly divided industry, not along lines such as truckload or less-than-truckload or dry van or flatbed, but by size and scale.
Large and small trucking operators face the same rising costs and must comply with the same federal regulations, but smaller carriers and owner-operators are finding it more difficult to cope with rising costs and to secure rate increases.
It’s as if the industry were on a divided highway, with an express lane speeding larger carriers toward a stronger recovery, and smaller carriers moving slowly in more congested local lanes, with some gaining ground and others stalling.
At the heart of the growing gap is the flexibility, scalability and pricing power that comes with higher levels of revenue and a larger operational footprint. Companies that have the kind of scope and capacity that Fortune 500 shippers want from suppliers are gaining advantage in a market where costs are rising alongside rates, and where rates in many cases have not regained parity with 2008 pricing.
Sidebar: Atkinson's Changed World .
The big-small divide is apparent in Washington, where the American Trucking Associations and the Owner-Operator Independent Drivers Association are often at loggerheads over issues such as a proposed mandate for electronic onboard recorders and truck speed limits. It’s obvious on the highways, as well, where the largest truckload and LTL carriers are gaining freight and expanding their businesses, while smaller operators struggle to keep up with rising costs.
Swift Transportation, the nation’s largest truckload carrier, reported a $90.6 million net profit in 2011, its first annual profit since 2006. Total revenue at Swift rose 13.8 percent last year to $3.3 billion. Heading into 2012, “volumes are improving, operating metrics are favorable, and our driver pipeline continues to be full,” the company said last month. Swift increased its truck count 3.3 percent in 2011 to more than 15,100 units. Weekly net revenue per tractor rose 4.1 percent to $2,997.
Full-year figures at FedEx Freight, the nation’s largest LTL carrier, won’t be out until June, but the company has posted three straight profitable quarters. Revenue was up 9 percent in the quarter that ended Nov. 30 to $1.3 billion. Con-way Freight, the second-largest LTL carrier, increased net profit more than 300 percent in 2011 to $119.8 million as revenue rose 5.6 percent to $3.2 billion.
But while Swift and other larger carriers were gaining freight and bulking up, numerous smaller companies were considering quitting trucking altogether.
In a survey last fall, 20 percent of small fleet operators said they would consider leaving trucking within six months unless freight volumes improved. On a more long-term basis, almost 40 percent of carriers with less than $25 million in revenue were considering leaving the industry within 18 months, compared with 23 percent of larger carriers, according to consulting firm Transport Capital Partners.
“A dichotomy still remains in our industry, even with carriers seeing more freight volumes,” said Lana Batts, a managing partner at the firm, which helps facilitate acquisitions. For the smaller operators, “in essence, it just isn’t fun anymore.”
The fun has long gone out of trucking for Joseph B. Atkinson III. This month he shut down Atkinson Freight Lines, a Northeastern regional carrier founded by his great-grandfather, in Bensalem, Pa. He said he is negotiating final terms of the closure with the Teamsters union, which represents his drivers. Although AFL’s labor costs were higher than at nonunion competitors, he doesn’t blame the union for the company’s demise.
Commentary: How Independent Are Owner-Operators?.
“It’s the market,” Atkinson said, noting there are few purely regional operators left in the Northeast. “They’re my friends, and they’re all dying. Try and run a regionalized union trucking company in the Northeast competing against the big guys. It’s impossible.”
Although larger truckload carriers won steady rate increases in 2011, Atkinson said he came under increasing pressure to cut rates just to remain in the game. “Fuel costs and tolls are going up, and my customers tell me I’ve got to lower my cost structure,” he said.
Whether they typically use multibillion-dollar trucking companies such as Swift, Schneider National or FedEx Freight or rely more on small operators, shippers should be concerned about the financial health of smaller trucking operators. The vast majority of U.S. freight haulers are small companies with fewer than 20 trucks. Swift, with more than 15,000 tractors, only commands about 1 percent of the truckload market, according to its own estimates. The rest of the top 10 truckload carriers control another 7 percent. According to the Department of Transportation, there were more than 725,000 motor carriers in the U.S. last year.
Smaller carriers provide the muscle smaller manufacturers and retailers use to move freight when they don’t have the volume to attract a large carrier. They also provide large amounts of capacity to third-party logistics companies and freight brokers that shippers of all sizes increasingly use to manage transportation.
The loss of smaller trucking companies and independent contractors — whether they’re acquired, go bankrupt or simply park their trucks when costs get too high — will undoubtedly have an effect on the rates larger carriers charge. “The desire to leave the industry will significantly change the face of the industry as well as the business models that depend upon smaller carriers providing hard assets,” Batts said. Or as Atkinson puts it, “I believe in the next five years the shippers are going to get blown away in pricing, and it will affect our economy.”
The situation could get much worse if diesel prices — which as of mid-February were up 38 cents on average compared to a year earlier — climb this spring and summer.
That’s not lost on larger carriers which often rely on smaller carrier partners or owner-operators to provide additional capacity as demand fluctuates. “We’ve got questions from the standpoint of capacity when we look at some of the smaller fleets and owner-operators,” said Chip Overbey, chief strategy officer at Old Dominion Freight Lines, a $1.9 billion trucking company that is expanding beyond its U.S. LTL core into drayage and less-than-containerload service from Asia.
As regulatory and operating costs rise, “how are they (smaller carriers) going to manage through this?” Overbey asked. “We get so hung up on the big rocks in the creek as opposed to some of the smaller pebbles. But there’s going to be some tightening of capacity with those companies. You take an owner-operator out there that has a few trucks, it’s getting harder for those guys to make it.”
That matters to ODFL, which is expanding its drayage business using owner-operators. “This gives us an opportunity to help our customers in their global supply chains,” Overbey said. But ODFL needs those contractors to do that.