Trucking Industry Faces A Capacity Crunch

Editor’s note: This article appears in the latest magazine edition of Talk Business Arkansas, which you can read here.

Steve Williams, CEO of Maverick Transportation, has a problem: too much business. In fact, he said, “We are disappointing our good customers on a daily basis because of our inability to give them enough trucks as we speak.”

Williams only a few years ago was forced to park 400 of his 1,500 trucks because of the Great Recession. Last year, revenues and profits both were the highest ever. He’s planning on adding about 100 trucks to the fleet this year.

He could add 500, but he couldn’t find drivers to operate them. And that’s a problem not just for him, but also for the rest of the trucking industry.

An improving economy, a driver shortage and a tight truck supply is leading to higher freight rates. Williams said Maverick already has raised rates steadily for several years. 

Bob Costello, the American Trucking Associations’ chief economist, believes a capacity crunch is probably on its way. Freight levels have been inconsistent week to week, but that will change if the economy continues to improve.

The economy faced a number of challenges in 2013, including slowdowns in housing and factory output. But Costello expects a better 2014 – particularly in the dry van sector, which carries the kinds of consumer goods Americans buy as they become more confident in the economy. This will be the first year since 2007 that housing starts are expected to exceed a million units, and that will generate a lot of freight.

NOT ENOUGH TRUCKS
But there just aren’t enough trucks to carry all the goods, so rates will rise, affecting the cost of goods at the checkout counter. Carriers are operating with eight percent fewer trucks than in December 2007, and the number of truckload sector trucks at the end of 2013 was up only 0.2% from 2012. 

There are several reasons for the shortage. Many carriers did not buy trucks during the Great Recession. Financing purchases became more difficult. A series of EPA regulations have raised the price of a tractor significantly, and many motor carriers have been stretching out the lives of their equipment to avoid making the investment.

Industrywide, the average age of a truck is six and a half years, but trucks are running fewer annual miles due to an increase in the number of distribution centers, regulations that limit drivers’ driving time, and demands by drivers to be home more often, Costello said.

Truck sales are increasing, but Costello doesn’t expect a surge. Most purchases will replace aging vehicles, not add to the nation’s fleet. 

“For the first time maybe ever, we do not see trucking companies going out there and buying up trucks in anticipation of more freight,” he told The Steering Wheel magazine in January. “Now, is that on purpose? Maybe. Is it because they can’t find enough drivers? Maybe. I don’t know. It’s probably a combination thereof, but the reality is they’re not doing it, and that’s one of the reasons why I see a capacity crunch eventually hitting.”

A POSITION OF POWER
The crunch will put the motor carrier industry in an unusual position: one of power. 

Noël Perry, a partner with FTR Associates, a leading transportation data collector and forecaster, said the industry has seen significant rate increases only four years in its history: 2004, 2005, 2006 and 2010. Otherwise, it has raised profits by increasing efficiency. Shippers are accustomed to receiving discounts when they ask for them with the threat of using another carrier. But the competition likely will have a shortage of trucks as well, so rates will increase in 2014 and 2015. Perry said railroads won’t be able to relieve the excess.

Today’s economic climate has led companies in other sectors to consolidate. While there has been some consolidation in trucking, it’s been at a much slower rate than other sectors of the economy, and the industry remains fragmented. 

However, the aging fleet will play to the larger companies’ advantage. Big companies have the capacity to purchase new equipment every four years or so. Smaller companies are running less fuel-efficient, older trucks that will require more and more maintenance. Eventually, those smaller companies will be forced to replace their assets, which some may not be able to afford.

The economy got a taste of what a capacity crunch will look like during the first quarter of this year. With winter weather backing up freight, shippers were forced to rely on the spot market. 

In an email on April 11, Costello said DAT Solutions’ spot market loads index was up 63 percent and 84 percent in January and February on a year-over-year basis, respectively. 

“Freight wasn’t up that much, but shippers moved to the spot market to get loads moved as their contract carriers couldn’t,” he said. “That has subsided, although some backlog still exists, but it was a look into what will come if the economy takes off.”

A DRIVER SHORTAGE
In addition to the lack of trucks on the road, the trucking industry faces another important shortage: drivers. Across the country, there are about 30,000 unfilled truck driving jobs, according to a 2012 analysis by the American Trucking Associations, and that shortage is expected to worsen. 

As Maverick’s Williams described it, “There’s been a shortage of truck drivers all my career, good truck drivers, and now it’s going to be that on steroids.”

The ATA believes the motor carrier industry must attract almost a million drivers over the next 10 years, but those drivers are becoming harder to find. The starting pay for a new driver at Maverick is about $50,000, and some drivers are making $80,000. But the improving economy means the driver labor force will have opportunities for jobs in other fields, such as construction, that don’t require living on the road. Seventy percent of fleets surveyed by the ATA said they had increased or were planning to increase driver pay in 2013. That would not be enough to end the shortage.

“I’d go out and buy, easily go out and buy 500 trucks. … I just can’t find 500 people to train to put in the trucks to do that,” Williams said. “It’s literally, they do not exist. Class sizes that maybe were 30 a week are half that right now.”

The available driver pool is also shrinking because government regulations are making it harder for carriers to hire potentially unsafe drivers. 

Congress has mandated the creation of a drug and alcohol clearinghouse that stores positive test results. CSA, the Federal Motor Carrier Safety Administration’s new enforcement mechanism, uses data to rate carriers on their safety records. Shippers and insurance carriers are using those scores to make business decisions. 

The FMCSA’s new hours of service rules set stricter limits on when drivers can be on the road and when they must be resting. The purpose of the hours of service rules is to ensure a more rested driver workforce. However, a recent survey by the American Transportation Research Institute, the ATA research arm, found half saying they needed more drivers to haul the same amount of freight.

Barry Busada, senior vice president of Diesel Driving Academy, said his company has seen a decrease in student drivers. The company has five campuses, including one in Little Rock that trains about 250 students a year. During the recession, that number was about 350. 

“It’s not that easy to be a truck driver anymore,” he said. “You’ve got to have a good clean driving record, and that’s easy to check now.”

The typical student is a male, 30, who is unemployed or underemployed working in an unskilled, low-paying job. In order to graduate with a commercial driver’s license, the student must complete a 20-week program that includes 600 hours of training and costs $10,400. That’s not cheap, but financial aid is available, and many carriers will reimburse the student when they are hired to drive. A job is virtually guaranteed. 

“They graduate on Friday, and they’re usually in orientation on Monday,” Busada said. “And they usually all have a job offer and many of them have three or four job offers.”

Perry expects regulatory change to slow during the first half of 2014, but a number of issues remain to be settled. When new regulations are enacted, the economy will feel it.

“If we indeed get this rush of regulation late next year, I think there’s going to be quite a crisis, and when that crisis occurs there will be goods that don’t make it to the shelf,” he told the Arkansas Trucking Report magazine last year. “And when that happens, customers will pay almost anything to get a truck.”