Privatizing Truck Capacity

Privatizing Truck Capacity

When Lucas Oil transportation chief Marty Martin needs a truck, he usually doesn’t call a trucking company. He goes out to his dock or calls one of his own drivers.

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Martin runs the in-house transportation operation for a $150 million company that ships diesel fuel additives and engine lubricants throughout North America and worldwide. Although he uses some less-than-truckload carriers, almost all of the company’s outbound truckload freight rides in its private truck fleet, Martin said.

“With our own fleet, we have more control over our product,” he said. “With a lot of retailers, if you don’t meet the delivery due date, you get fined.”

An internal fleet of about 60 trucks and 40 drivers gives Lucas Oil a certainty about the availability of trucks and drivers and the quality of customer service that’s become increasingly important to shippers of all types and sizes.

Tight for-hire trucking capacity, especially in the longer-haul truckload segment, is leading shippers to expand and depend on in-house private fleets.

The same capacity and price trends shifting truckload freight to intermodal containers and LTL trailers are encouraging shippers to strengthen in-house corporate truck fleets, industry executives and analysts say.

As shipping volume picked up and truck capacity shrank last year, 60 percent of private fleet operators told the National Private Truck Council they expected to expand their in-house trucking operation by an average 13 percent.

That growth is trending slightly higher this year, the NPTC said. “The private fleet is generally growing,” President and CEO Gary F. Petty said. “The vast majority of our members report they are adding drivers and equipment.”

The NPTC is preparing its next annual benchmarking survey, and “four out of five” of the shippers surveyed are talking about expanding their private fleets, said Tom Moore, vice president of education at the Arlington, Va.-based association. “It’s in the 70 to 80 percent range now,” he told The Journal of Commerce.

These aren’t “big dramatic increases,” Petty said, “but incremental ones.”

Private carriage has been part of the shipper’s transportation tool kit since the horse-and-wagon days, and companies that use in-house fleets also use for-hire carriers on a transactional and dedicated basis, as well as freight brokers.

Truck fleets owned and operated by shippers carried 4.9 billion tons of commodities worth about $3.6 trillion in 2009, 55 percent of total U.S. truck tonnage that year, the NPTC said. They operated 68 percent of the nation’s Class 8 power units and about 78 percent of all heavy and medium trucks on the highway in 2009.

In recent years, rising operating costs and lower truck rates led many shippers to look at outsourcing more of their transportation operations and increasing their reliance on for-hire carriers, but since the recession the market may be shifting as capacity and service loom larger.

“For several years, we’ve been talking about private fleet conversion” to dedicated contract and for-hire carriage, said Kenny Vieth, president and senior analyst at ACT Research. “The question is, are we at that spot right now where we might start to see the pendulum swing back toward ‘for-hire fleet’ conversion.”

It’s not just higher costs compelling shippers to rethink private fleets, but also the uncertainty about whether trucks will be available when they need them.

“On the for-hire side, a lot of companies are moving toward right-sizing their equipment to be in a stronger (pricing) position,” Petty said.

“The companies that own private fleets simply can’t afford to be in a position where they have breaches of service and dramatic spikes in costs,” he said. “That’s what’s got a lot of people thinking about getting more capacity under their own control.”

More capacity, of course, doesn’t mean all capacity, and there’s always been an ebb and flow to the transportation mix that’s unique to each shipper. The dedicated contract carriage business is growing, and many shippers often use a combination of dedicated carriage, for-hire trucking and private truck fleets.

But truckload capacity, the backbone of most distribution operations of any scale, has tightened since 2008, and many shippers aren’t waiting for a bidding war for freight space to do something about their supply chains.

Shrinking for-hire truck capacity “is definitely contributing to the increase we see in demand for dedicated contract carriage services,” said Tom Scollard, vice president of dedicated contract carriage for Penske Logistics, a subsidiary of Penske Truck Leasing. Reading, Pa.-based Penske leases trucks to private fleets and operates dedicated fleets for customers.

“Shippers are looking to protect the high service levels required to stay competitive in the marketplace while also ensuring they have stable capacity at an efficient and predictable cost,” he said.

Some of the largest dedicated contract carriers are also for-hire truckers, including J.B. Hunt Transport Services, Schneider National and Werner Enterprises.

U.S. Xpress Enterprises, the sixth-largest U.S. truckload carrier, is expanding dedicated operations, a step that reflects growing diversification in the truck market.

“We’ve got a big pipeline of new dedicated opportunities,” said Jeffrey S. Wardeberg, chief operating officer of Chattanooga, Tenn.-based U.S. Express. “We’ve got big customers asking for ‘pop-up’ fleets where we give them a set number of trucks for a short duration of time, perhaps two weeks or a month.”

Those types of operations are handy when there’s a seasonal surge or a retailer opens a new store.

For shippers, the level of service a customer requires often is the key factor in deciding whether to ship freight with an in-house truck and driver, or whether maintaining a private fleet is cost-effective.

“It’s when you have a premium product and a premium customer with a strong customer service component to the delivery,” Petty said. “It’s often difficult to distinguish the product being sold from the transportation means used to deliver it.”

There may be no better example of a product with a definite delivery time than caskets. “You can argue that all those caskets look the same in a warehouse, but the delivery makes the difference because the casket has to be there when the funeral director needs it.”

Private fleets have another advantage: satisfied drivers. Private carriers have a high driver retention rate, with annual turnover averaging about 10 percent, the NPTC said. That compares with a 75 percent driver turnover rate at large truckload carriers in the first quarter, according to the American Trucking Associations.

Private fleets often attract drivers with higher pay and better benefits and working conditions than for-hire companies, especially long-haul carriers. That will put more pressure on for-hire carriers to raise the bar, and truck driver pay.

The Department of Transportation’s CSA program — for Compliance, Safety and Accountability — also may convince some shippers concerned about their potential liability in an accident lawsuit to shift more freight to company trucks.

As for-hire truck capacity contracts, shippers will be forced to re-examine and test their distribution networks. “There is more of this testing going on right now, with companies looking at vulnerabilities in all their lanes, in every market,” Petty said.

“They’re asking, where is this going? They’re looking at the services they’ve been getting,” he said. “They can’t like the feeling of vulnerability that’s looming on the horizon.”

-- Contact William B. Cassidy at wcassidy@joc.com. Follow him on Twitter @wbcassidy_joc.