Trucking is a notoriously fragmented business. The Department of Transportation estimates there are 500,000 trucking companies in the U.S., with 97 percent of them operating 20 trucks or less.
“The DOT says 90 percent of trucking companies have six trucks or less,” says Kenny Lund, vice president of support operation for Allen Lund Co., a trucking and commodity broker. “The refrigerated trucking sector within U.S. trucking is even more spread out. I’ll bet 90 percent of the trucking companies have three trucks or less.”
Within the specialized niche of carriers that haul fresh fruits and vegetables, the company size shrinks further, Lund said.
For years, the conventional wisdom has been that the refrigerated trucking sector, especially the produce niche, is about to undergo systemic change and contraction with aging owner-operators simply walking away from the business, causing a significant capacity shortage.
“There are a lot of reasons why it is hard for the smaller companies,” Lund said. “The owner-operators are the drivers, so the new hours of service rules hit them harder. Without a corporation backing them, it is harder to replace old equipment to remain compliant with pollution laws, especially in California.”
And many owner-operators say increased regulation such as proposed electronic logging devices will drive them out of the business. Despite long-held predictions, however, the expected consolidation doesn’t seem to be happening.
Last fall, some drivers in the reefer trucking business did leave the industry, according to Mark Montague, an industry analyst with DAT Solutions. “What we started to see last October was that the restart rule was particularly hard on the smaller trucking company owners, especially in the produce business,” he said. Tightened capacity was the only, and not extremely precise, way to measure the situation, he said.
But other regulatory deadlines, especially one that banned a large number of transportation refrigeration units from California roadways, didn’t seem to trigger an expected exodus. Under the California Air Resources Board rules, carriers must use refrigeration units that meet certain model year and performance standards. Starting last year, CARB officials teamed up with the California Highway Patrol to conduct checkpoints in the Central Valley and near the Mexican border. Some trucking companies have been fined for operating units that are too old, but the state agency also is making sure shippers comply with the regulations. Shippers can be liable for CARB fines if their loads are hauled in non-CARB-compliant rigs.
Because California is the only state with that rule, trucking companies are reluctant to scrap equipment that is still in good repair and allowed on the road in other states. But they are also reluctant to send trucks into California, afraid that the refrigeration unit won’t be in compliance.
“This is a headache; it’s hard to keep track of what units go where,” said Bob Costello, chief economist for the American Trucking Associations. “We are hearing that a lot of fleets have told their customers, ‘We’re not doing California anymore.’ With the state rules and heavy fines, companies that have a few hundred trucks just aren’t going to risk it and have a trailer that isn’t compliant in California somehow fall through the cracks and end up in California.”
While there is general agreement this is happening, there is no firm data on how much effect it has had. “We won’t know for a year or two if the transportation refrigeration unit regs are indeed driving people out of the state or out of business,” said Chris Shimoda, director of environmental affairs and industry research for the California Trucking Association. “If there is a downtick, it’s hard to see in the numbers now, but we will start an analysis and we’ll be able to see for certain by 2015 or 2016.”
Lund says his company hears frequently from truckers that they’re not interested in hauling California produce out of the state. The biggest difference in rates, however, is in spot rates for refrigerated shipments going into California, according to Montague.
“We don’t know that it is because of the CARB rule or because of the drought in California, which is affecting volumes and rates,” he said. “But spot rates into California have climbed even faster than reefer rates elsewhere.”
Reefer rates increased in December and stayed high through March, mostly because of the terrible winter weather, Montague said. The worst weather was confined to the East Coast and Midwest, but rates rose everywhere because of the tightened capacity caused by the storms. “Those higher spot rates are now starting to drive contract rates higher as well,” he said.
Rates going into California are up about 12 percent over last year, according to Lund. “We expected a 6 to 10 percent increase in rates overall this year, but so far for the year it’s been higher than that,” he said. “I don’t know if they are going to come down.”
Capacity is definitely tighter, but trucks are always available if the rate goes high enough, he said.
Rick Burden, director of transportation for Naturipe, a grower, seller and importer of berries and other fruit, said capacity is noticeably tighter and rates are up, about 3 to 5 percent so far. “We won’t be surprised to see the rates climb some more,” he said.
Burden said he doesn’t expect to have trouble finding capacity this year. “We only deal with asset-based carriers, and they have a handle on their equipment,” he said.
Lund’s company is dealing with the capacity crunch, higher rates and driver shortages by continuing to add new trucking companies to their vendor list. “The numbers astound me sometimes, but we are adding an average of 160 new trucking companies each week, every week,” Lund said. “We have 22,000 active carriers in our system. That means they have carried at least one load for us in the last year. We did about 225,000 truckloads during the year, so that means the average carrier hauls about 10 loads a year for us.”
In essence, he said, there are two refrigerated trucking fleets: ones that haul produce and the ones that haul everything else. But Lund said the company doesn’t dislike using the small carrier fleet. “We would much rather use the small carrier to haul our produce,” he said, noting the smaller carriers and owner-operators are in general more careful and protective of the perishable cargoes.
“Some of the big guys get in the business and say they are going to haul produce, but most of them leave the sector pretty quickly. It’s hard work and the risk for liability is high,” he said.
He said a load handled improperly would drag down earnings at larger carriers, but for the smaller produce carrier “a bad load can put them out of business, and they know that.”
Classes and educational programs are constantly available to the smaller carrier owners and drivers at Lund facilities, he said.
Another factor making it harder for smaller fleet owners to survive is rate volatility, Costello said. “Reefer is much more volatile month-to-month in rates and volume,” he said. “They may be relatively recession-proof and less volatile on an annual basis, but the month-to-month volatility can hurt cash flow.”
Costs are up, regulations are up and not every carrier is going to be able to survive, making some consolidation inevitable, Costello said. “Listen,” he said, “it’s never going to be the railroad or the airlines where there are just a handful of carriers, but I do expect more consolidation in the industry going forward.”
Contact Stephanie Nall at email@example.com.