The pain and possible gain from trucking regulations

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Sean Kilcarr, Fleet Owner  /  October 26, 2016

There’s no doubt a tremendous number of “big ticket” regulations coming together to hammer the trucking industry in some truly enormous ways: the electronic logging device (ELD) mandate; speed limiting devices; the now-official Phase 2 greenhouse gas (GHG) rules that will further increase equipment costs.

In sum, the regulatory to-do list is long and simply poised to get longer.

So how will all of the rules – existing and soon-to-be-implemented alike – ultimately re-order trucking and the freight world as a whole?

John Larkin, head of the transportation & logistics equity research group at Stifel Capital Markets, recently offered some thoughts on that impending “re-ordering” and in his view at least there’s at least one thin silver lining amid what could be some significant motor carrier carnage – the ability to get better freight rates.

“Sometime between the second quarter of 2017 and the second quarter of 2018 we think there will be a return to the environment that we saw in 2014 where there was more freight than there are trucks,” he explained at the Surface Transportation Summit earlier this month. “The spot market will go from being awful to being quite attractive, [while] contract rates will start to move up as high as mid-single digit rates.” Larkin added that one reason many shippers adopted what he called a “Neanderthal pricing mentality” earlier this year is they think this is sort of their “last shot to get a bite at the apple” to push rates down.

“Maybe they take another little bite in the first quarter of next year but that may be their last chance,” he stressed.

“From that point forward capacity will be taken out by ELDs, fleet downsizing, fleet failures, people coming out of the industry and then the next litany of regulations including speed limiters, the safety fitness determination [rule], drug testing methodology, and sleep apnea testing,” Larkin emphasized. “As all of those regulations are going to have the same net effect: reducing truck supply.”

Make no mistake, however: those three words, “reducing truck supply,” will encompass a huge amount of pain for this industry to endure.

Lots of truck drivers are going to leave the industry; many potential recruits will say “no thanks” to careers as truck drivers due to the ever-increasing hassles; and trucking firms will close their doors in the face of regulatory compliance costs.

It won’t be pretty.

“The big constraint on truckload capacity is drivers; even though we have a soft economy [they] are still very difficult to find,” Larkin noted.

“It’s tough to find those people who are willing to sacrifice their lifestyle to be out on the road,” he added. “And I’m not sure what changes that, especially in a world where in order to micromanage the cost structure of [trucking] operations we’re telling the driver to stay in the right hand lane on a specified route, to drive 63 miles per hour and to take his 30 minute rest at this particular rest area and to take on 50 gallons of fuel at this particular truck stop and to deliver the freight within this 15-minute window at that shipper.”

In Larkin’s view, there’s “virtually no autonomy left” and “very few red-blooded men and women” want told what to do every minute of the day while living in a little metal box hurtling down the highway at 63 mph. “That’s the constraint,” he explained.

So instead, as truck pricing fell apart this year, fleets are downsizing in an effort to keep truck utilization up while cutting costs.

Larkin also feels that as the ELD mandate hits on Dec. 1 next year, other motor carriers may simply call it day and close up shop – though that’s not necessarily a bad thing, in some ways, especially for those cutting lots of corners where safety is concerned.

“As we get into next year when the ELD mandate gets closer you should see more and more companies adopting them, which will eliminate the cheating that goes on currently with the manual [paper] logs,” he explained. “That should tighten things up as well.”

Larkin believes about roughly 50% of the trucking industry has ELDs to make the math easy, while the other 50% does not. Many of those still using paper logs are doing do now primarily to cheat, he thinks, running in a 600 to 750 mile length of haul range that’s completed in one day, “which of course you cannot do legally with a solo driver,” he emphasized.

Thus when those fleets convert over to the ELDs, Larkin predicts their productivity will drop by 6% to 10%. “And if 50% of the industry is down 6% to 10% that implies 3% to 5% of capacity coming out of the [trucking] industry.”

That also assumes that all of the small carriers who take this “productivity hit” are going to be able to survive, he pointed out; which Larkin doesn’t think will be the case.

“We think quite a few of them are going to hang up their cleats and call it a day and just exit the industry,” he said. “So it could be worse than a 3% to 5% loss of capacity when all is said and done and the dust settles.”

That’s big, painful change, no doubt. But if fleets can make the transition to ELDs and comply without too much trouble with the other regulations being placed on the books, they may very well end up with some serious rate negotiating leverage. We’ll see if that happens as predicted.