Shippers Face Bumpy Ride in Trucking

2013 was a turbulent year for trucking, and we expect 2014 to be more of the same. Pressure is building, and although a crisis isn’t inevitable, one could occur if a combination of events breaks the wrong way. Here is our take on the major themes that will be in place next year:

Modest Growth Meets Static Capacity

Demand for trucking services has been growing at a tepid pace, and this trend is expected to continue through 2014 with expected growth pegged in the mid-2-percent range. Carriers, meanwhile, haven’t been adding capacity, opting instead to buy only sufficient new equipment to refresh their fleets and to keep average age in check. This has resulted in historically high fleet utilization. 

The fleets have been refining their operations relentlessly and continue to do more with less. But rate pressure is beginning to build. Although the year-over-year figures don’t reflect it, FTR Associates’ data indicates rates, in fact, did begin to move up smartly in the second half of 2013, a trend we expect to continue through this year.

It’s All About Drivers

The biggest constraint on the industry, and likely the biggest cost pressure going forward, will be drivers. Driver supply was already tight going into 2013. It appears the revised hours of service regulations that kicked in last July are shaving overall truck fleet productivity by around 3 percent on average, as predicted.

But the anecdotes are beginning to mount that the lack of flexibility in when and where drivers can take their 34-hour rest needed to “reset the clock” are really grating on long-haul drivers, and more are electing to throw in the towel and exit the profession. 

Although we have already factored the 3 percent productivity hit into our forecast, we haven’t incorporated a significant exit of experienced drivers from the industry. If that occurs, the negative effects on capacity and consequent upward pressure on pricing would be magnified, perhaps in a significant way.

Regulatory Storm Surge

Probably the biggest headline for trucking in 2014 is that the industry is in the midst of an unprecedented stream of regulatory changes. Some of the changes result in one-shot reductions in carrier capacity. Those that kick out unsafe carriers and drivers are of this variety.

Others affect the recruitment process and provide tools for more effectively weeding out substandard candidates that sometimes slip through the system and get behind the wheel. The establishment of a national drug-test database for drivers would fall into this category. 

Still other regulations increase the training and qualification requirements for new drivers and new carriers. And still others permanently affect fleet productivity by effectively reducing the average number of miles a driver and tractor can be expected to produce each day. 

Although the Federal Motor Carrier Safety Administration’s CSA safety program and new hours of service rules have garnered the headlines, there are a slew of additional proposed rules contained in the regulatory hopper. These include the mandating of “black boxes” (ELDs, or electronic logging devices) on every truck. These units will ensure strict adherence to the rules and eliminate any wiggle room currently allowed by the manual pencil-and-paper logbooks. 

The net effect of these regulations will be steady pressure on the driver supply and the productivity of the industry. Driver wages can be expected to ramp up, causing rates to rise in turn, because carriers already have trimmed about all the fat they can out of their operations. Unlike the previous relatively short and severe driver shortage/rate shock that was associated with the HOS change that occurred in 2004, the pressure associated with the current situation will be severe and prolonged, as it will take a few years for all the regulations to unfold.  

Our prediction is for truck rates to rise in the mid-single-digit range in 2014.

It’s Not Written in Stone

As with all forecasts, there are risks to these projections. There are, after all, many unknowns. Who can really predict whether our dysfunctional federal government, for example, will refrain from inflicting further damage on the economy during the next round of budget/debt ceiling discussions?

Our assumptions are that the economy will continue to grow at least at the current tepid pace and the FMCSA does what it says it’s going to do in terms of these new regulations. If the economy stumbles, either from natural cyclical causes or from the influence of exterior events such as government gridlock, then the power will shift from carrier to shipper and pricing increases will be suppressed along with freight growth. 

In addition, our projections are based on our current understanding of the FMCSA’s intentions and schedule regarding the rollout of new regulations. If history is a guide, these may slip. However, we can only include the regulatory initiatives we currently know about, and can’t include additional items that may be added to the agenda in coming months.

On the other hand, there’s also a chance the economy will grow faster than expected, at least for a quarter or two. Keep in mind that such volatility is normal in the economy and that the relatively steady performance of recent years is actually the anomaly. If such a growth spurt occurs coincident with a seasonal peak in activity, this pressure, when combined with the effects of new regulations could make for a dicey situation with regard to capacity. Not only would we see more significant upward price movements, but service failures and inability to obtain needed capacity also could be the result.

We don’t consider this outcome to be likely, but prudent managers should have a contingency plan in place to deal with the eventuality.

Noel Perry is managing director and senior consultant for FTR Associates. Larry Gross is senior consultant for FTR. Contact them at nperry@ftrassociates.com and lgross@ftrassociates.com.

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