A recovering U.S. economy is driving record demand for trucking. But many smaller operators, who make up the vast majority of the roughly 470,000 for-hire fleets on the road today, say they’re missing out on the boom.
The amount of freight hauled along the nation’s highways hit an all-time high earlier this year, fueled by improved retail sales and factory output. Trucking industry revenue has grown an average of 6.5% a year since 2009, topping $700 billion last year for the first time, according to the American Trucking Associations.
Small and midsize trucking companies are finding they are ill-equipped to adapt. Hundreds of these firms, with an average fleet size of about a dozen vehicles, have gone out of business in the past two years, according to Avondale Partners LLC. Others have sold out to larger competitors, which are more likely to have cash reserves or access to financing to weather changes in the industry. If large numbers of small fleets fail, it can reduce overall capacity enough to raise costs for shippers, analysts say.
“It simply takes more manpower, technology and capital to operate a truck line than it did even a few years ago,” said Steven Dutro, managing director of Transport Capital Partners, which specializes in trucking mergers.
Jim Burg, who owns a 90-truck fleet based out of Warren, Mich., said he regularly turns away customers who want to hire his flatbed trucks to haul cars, construction equipment and other freight. He said he can’t afford to expand his fleet because it is too risky to borrow to buy new equipment.
“I haven’t grown in three years,” Mr. Burg said. “I don’t know where the future is, I don’t know what my costs are going to be in two years.”
He said he has purchased only three new trucks in the past seven years because new vehicles cost 60% more than they did in 2008. He doesn’t pay sign-on bonuses to new drivers, fearing they will quit as soon as they get their money. Instead he offers guaranteed time at home and tries to pay a competitive salary in hopes his drivers will decline poaching offers.
By contrast, the largest trucking companies have expanded rapidly, purchasing hundreds of new vehicles or acquiring competitors. Many claim the average age of their trucks is under two years. Most large fleets have raised pay at least once in the past year—often by more than 10%—and are offering thousands of dollars in sign-on bonuses.
To be sure, bankruptcies have dropped sharply as plunging fuel costs have given struggling companies a reprieve, according to financial-services firm Avondale Partners LLC. Companies operating six or fewer trucks still make up 89% of all fleets, and a sustained period of strong demand for their services should eventually help them charge higher rates to cover rising expenses, analysts say. However, some industry experts are bracing for another wave of bankruptcies and mergers when new regulations kick in.
Over the next few years, the Federal Motor Carrier Safety Administration is expected to require all trucks be equipped with electronic logging devices that track the hours that trucks are on the road. Many companies still use paper logs, which drivers can manipulate to plan their time off or skirt rules restricting the hours during which they can drive. While some larger fleets already use “e-logs,” some drivers have threatened to leave the business rather than submit to monitoring. The government is scheduled to release a final e-log rule at the end of October.
“E-logs will dramatically decrease the capacity of the carriers who are not already doing it, and decrease their profitability as a result,” said Donald Broughton, analyst at Avondale. “A lot of those guys will go out of business.”
Limits on driver hours are meant to keep roads safer, but are controversial because drivers say the structure of the restrictions, which set mandatory breaks between shifts regardless of a driver’s location, don’t take issues like peak time traffic, lack of rest-stop parking, and natural sleep patterns into account.
Analysts estimate that enforcement of mandatory breaks through e-logs may significantly reduce companies’ use of capacity by limiting drivers’ abilities to stay on the road. And because so many drivers are against the restrictions, it is expected to drive costs up for companies to recruit and expand. Some independent owner-operators—drivers with their own trucks who are the smallest of small businesses in the trucking industry—say they are planning to quit or retire once e-logs are mandatory.
“Everybody’s quitting, all us old-timers are done. We’re done with the regulations,” saidEric Peterson, 47 years old, in Burlington, Wis. He drove his own truck for 17 years, but recently decided to sell it because he could no longer afford to make payments. He is now driving for an hourly wage for a local carrier. He said owner-operators haven’t seen the benefits of rising freight rates, and restrictions such as a ban in California on trucks made before 2010 have reduced work for small companies, which update their fleets less often.
For his part, Mr. Burg said he has installed e-logs in about 70% of his trucks, and sees some benefits, such as a decrease in the number of citations his drivers get from authorities for failure to update their paper logs. To make up for the inconvenience, he raised driver pay by about $1,000 a year.
Many business owners who started their companies in the 1980s, when the industry was deregulated, are planning to retire in light of the new challenges. Gary Hanke, 64, said he wasn’t able to expand his company, Pegasus Transportation Inc., quickly enough to meet strong demand for his trucks in recent years. Approaching retirement age, he sold Pegasus to CRST International Inc. in March. Since then, Pegasus’s fleet has expanded to 300 trucks, from 235 before, helped by CRST’s scale and ability to operate nationwide.