Trucking industry prepares for hard enforcement of ELD mandate, strong contract bid season

Compliance with hours of service regulations has improved as a result of carriers adding electronic logging devices (ELDs) to trucks, and this suggests that new enforcement actions won’t impact capacity later in spring, said Brandon Oglenski, transportation analyst for Barclays.

Also, for at least the next year, large truckload carriers should see improved pricing and margins based on the availability of drivers, fleet use and orders of class 8 trucks — the largest class of big rig.

In a recent trucking/transportation industry note, Oglenski focused on key investment issues in the industry, including freight cycle dynamics, margin improvement, risks from increased driver pay and fleet expansion. The note also looked at the industry’s history and future, as digitization could lead to improved efficiency for carriers. Trucking stock values are approaching a mid-cycle but have yet to reach a peak, Oglenski said.

“Based on past freight pricing cycles, multiples are unlikely to sustain above average levels following several quarters of rate improvement off trough. Nonetheless, there is precedent for brief estimate revision-driven outperformance during periods of multiple contraction. Shares also mid-cycle on current cash yields, but expensive on normalized free cash flow.”

About 4% of drivers have yet to comply with the ELD mandate, based on Federal Motor Carrier Safety Administration roadside inspection violations so far this year. According to a recent survey by DAT Solutions, 91% of owner-operators are compliant with the mandate. This includes 10% who are exempt from the mandate and 81% who have an ELD. Another 2% expect to install an ELD before April 1, which is when roadside inspectors will start to place trucks out of service for not having an ELD.

More than half of the survey respondents said they installed an ELD in the past three months, and 22% have been using the devices for less than six months. More than 77% of the carriers said their drivers were being detained for more than two hours on at least one out of five loads. Shippers haven’t taken into account drivers’ hours of service when loading and unloading.

Carriers who use ELDs reported that 67% are driving fewer miles and 71% are making less money than before the devices were installed, according to the DAT survey. Since the ELD mandate went into effect in December, drivers have found it more difficult to park their trucks, with 61% saying it was much harder and 26% saying it was harder.

In a recent blog post, Brian Webb, senior vice president for the Dedicated Contract Services segment of Lowell-based carrier J.B. Hunt Transport Services, said some companies, after installing ELDs, found that they were no longer compliant with hours of service. The companies that had evaluated their routes and hours of services before installing ELDs were better off than others. But the mandate is leading more carriers to rethink their fleet strategy, whether they were prepared for the mandate.

“Companies are realizing fleet capabilities have changed, and recovering hours is a lot different in the transportation world,” Webb said. “A driver can’t easily cover a shift or pick up where another left off. Each driver has a set limit of hours per day, and once that time is up — that’s (legally) it whether you’re 30 minutes from home, stuck at a receiver, or in the middle of a delivery.”

Oglenski called ELDs the “trojan horse” for digitation of the freight industry and expected fleet productivity to rise between 4% and 7% over the long term as technology increases truck and driver use.

DRIVER SHORTAGE CONCERNS
High driver turnover and the driver shortage are expected to limit organic growth in fleets and high margins for large carriers as competitive wages cut into margins, according to Oglenski. Compared to the previous upcycle, the driver shortage has been more pronounced and more severe than before.

In the fourth quarter of 2017, driver turnover for truckload carriers declined seven points to 88%, but the rate was higher all year than it was in 2016, according to the American Trucking Associations’ Trucking Activity Report.

“Despite this dip in turnover, the driver market remains tight, and the driver shortage remains a real concern for fleets and the industry,” ATA chief economist Bob Costello said. “If the economic climate continues to improve, I expect both turnover and driver shortage concerns to rise in the near future.”

Turnover at small truckload carriers declined four points to 80%. The rate was 14 points higher than it was in the fourth quarter of 2016.

“Despite the continuing tight driver market, I think there are a couple reasonable explanations for the dip in turnover this past quarter,” Costello said. “First, freight demand was very strong, which may have encouraged drivers to stay at their current fleet because they were making even better money with strong volumes. And second, many fleets implemented or announced pay increases last quarter, which may have disincentivized drivers from moving to new jobs.”

The driver shortage isn’t a new problem, Webb said, and the issue relates to the lack of drivers who are qualified to work as the economy and regulations change.

“The current driver workforce is aging with an average age of 49, and the industry isn’t as appealing to younger generations as it once was. With a stronger economy, there are more jobs closer to home that don’t involve driving a truck,” Webb said. “The gig economy is also attracting potential drivers for other work where they can set the hours. All of these factors are affecting the ability to recruit and retain quality drivers.”

The key constraint to capacity is the lack of available drivers, according to Benjamin Hartford, transportation analyst for Baird. He expects wages to rise between 5% and 10% in 2018, from 2017, and the increases are needed to narrow the gap between competing occupations that has developed over the past 15 years. However, contract pricing growth in the 2018 bid season is expected to provide for real price increases for carriers this year.

Hartford said this bid season could be “one for the ages” as contractual truckload pricing could surpass 2014 levels and possibly 2005 levels. The target price increase is between 5% and 10%, from 2017 levels.