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| A new breed of owner-operator in an old boy's world, Kristen McCallum hauls in the Alberta Oil Patch in Northern Canada. (Photo by Jim Park) |
By Jim Park, Equipment Editor
The question that always arises after any economic downturn is, will owner-operators survive? Those still standing today may be battered and bruised, but if they survive the next six months, they'll be well positioned to profit from what could be a rather dramatic upturn in our economic fortunes - for a while, at least. The question we ought to ask is not whether owner-operators have a future, but what does the future hold for owner-operators? Their success will depend on how they can respond to change and adapt to the new operating environment. To quote Nashville songwriter Mickey Newbury, "the future's not what it used to be."
Many analysts are suggesting major change in the supply chain is already under way, and will continue as we move forward. They see more long-haul freight shifting from trucks to trains, leaving trucking with the shorter regional and local hauls. Since the traditional owner-operator business model is mileage-based and presumes that an adequate supply of miles will produce a reasonable amount of revenue, something will need to bend in order to make shorter runs profitable.
While the long-haul model will not disappear entirely, it might be dominated by commodities requiring specialized equipment and handling. Flatbeds and reefers come to mind, but even temperature-controlled loads are finding their way onto rail cars for cross-country trips. Time-sensitive loads will have a place on trucks as long as shippers are prepared to pay for premium delivery times. Those prepared to a wait a day or two longer may well settle for intermodal instead.
Next on the list of seismic shifts is a stiffening in the regulatory environment, as demonstrated by CSA 2010, the Federal Motor Carrier Safety Administration's new safety rating program. It has been estimated that as many as 175,000 drivers could be rooted out of the industry by poor safety performance or non-compliant behavior. A significant number of non-compliant carriers could suffer a similar fate if they are unable to turn around before FMCSA "interventions" them right out of business.
FMCSA chief Anne Ferro made her intentions clear while speaking at the first hours of service listening session held in Arlington, Va., in late January. While addressing the need to develop a workable HOS rule, she appeared to be saying the agency is prepared to eliminate a portion of trucking's current capacity, while making it much more difficult for new drivers and companies to enter the marketplace.
"I take seriously the absolute obligation we have as a federal agency to develop an hours of service rule that mirrors the three core priorities at the agency. First, to raise the bar to entry to the commercial trucking industry; second, maintaining high standards to stay in the industry, and third, to remove high-risk operators from our roads and highways and from the service provider community as well."
That remark wasn't lost on Steve Gundale, senior corporate communications manager for St. Paul, Minn.-based Dart Transit, a longtime champion of the independent contractor model. That's going to be a game-changer for trucking, he says.
"Look at it this way: If FMCSA uses CSA 2010 to eliminate 5 percent of the industry's current driving force just when demand for trucking service is on the rise, there will be a very serious shortage of both trucks and drivers," he notes.
In addition to CSA 2010, it appears likely that electronic onboard recorders to track driver logs will become mandatory across the industry at some point in the not too distant future, and there are fears that a newly forged hours of service rule could reduce the number of available daily or weekly driving hours.
When all is said and done, it's going be a lot harder to break or even bend the rules and get away with it.
While many drivers say they won't be comfortable working in such a tightly regulated environment, some, like independent owner-operator Gordon Tullett of Davis, Calif., welcome the change, and think it's high time government got serious about enforcement.
"The U.S. trucking industry seems to be based on 'Smokey and the Bandit.' The mentality seems to be any time we can get away with something, we will," says Tullett, who emigrated from the UK six years ago. "It's like a game to a lot of owner-operators. It's not a business, just an expensive hobby. I have no problem with tighter regulations, but you might expect that, since I come from a highly regulated environment in the UK. Trucking in the U.S. is 25 years behind Europe in many ways, especially in the regulatory sphere. CSA 2010 won't be a problem as long as you have your house in order. I do, and I'm not worried."
The third threat to the future of owner-operators is the seemingly unending challenges to their independent contractor status. In addition to numerous suits and countersuits filed by organized labor, the IRS, and a multitude of state agencies with a stake in the status of the owner-operator, late in December, Democratic Senator John Kerry of Massachusetts introduced legislation aimed at preventing employers from "misclassifying" workers as contractors instead of employees. The bill would affect most industries in the U.S., including trucking.
The Taxpayer Responsibility, Accountability and Consistency Act of 2009 would amend the Internal Revenue Code, eliminating Section 530's "safe harbor" provision. Stripped of the mechanism that allows accepted custom and practice as a "reasonable basis" for determining that a worker is a contractor, companies would be forced to prove that a worker is in fact a contractor, not an employee.
Robert Digges Jr., deputy general counsel of the American Trucking Associations, says the legislation would create administrative nightmares for companies using independent contractors, and could really hurt owner-operators who have established themselves in the business.
"I think most of them would say, 'hell no, we like it this way,'" Digges says. "There's an impressive list of huge companies here who started as one-truck operations. It's an opportunity to build a business. Some call it the American dream, but the Kerry bill throws all that up in the air." (We'll delve deeper into independent contractor status in the March issue of HDT.)
But let's take this a step at a time. As we emerge from this recession, the recovery is going to be quite different from anything we've seen before, and trucking seems poised to take back a lot of ground from shippers who are currently picking our bones for the best possible deal. Owner-operators stand to gain, as well.
Zero to 60 in six months
While no one is certain when the turnaround will begin in earnest, many say that once the ball starts rolling, the trucking recovery could take off faster than we might imagine. Through bankruptcies, shutdowns, and consolidations, a significant percentage (14 percent, or about 223,000 trucks) of the national truckload fleet has been liquidated and sold offshore, according to Thom Albrecht, managing partner at BB&T Capital Markets. Albrecht points to further cuts in capacity with the recent closure of a few larger fleets - Arrow Trucking, FreightMaster, and Sitton Motor Lines, to name a few. And more are to come.
"Look for an increase in the number of carrier failures through the first half of 2010," he says. "As equipment values improve with tightening capacity, lenders will be more likely to pull the plug on underperforming fleets, further tightening capacity just when it's needed most."
It's predicted that this will happen at about the same time the economy starts placing strong demand on trucking, tightening capacity almost overnight. But since few fleets are in the mood or the position to acquire additional equipment to meet that demand, they'll be looking to their traditional source of flexible capacity: owner-operators.
"From a demand standpoint, the future prospects for owner-operators are very bright," says Dart's Gundale. "If the economy continues to expand, there will be very high future demand for their services, and surviving carriers and owner-operators will have much more pricing power."
Because so many carriers have been reducing their capacity, Dart has enjoyed extraordinarily high recruiting volumes, Gundale says, which has allowed the fleet to be very selective in who it chooses to sign on as an independent contractor.
Dart's not the only fleet that has continued recruiting through the recession, looking for the pick of the crop. "You are what you hire - or in our case, lease," says Lance Craig of Craig Transportation Co. in Perrysburg, Ohio. "Even in good times we're concerned about the quality of the people we work with, but we've had a lot or really good applications in recent months, so we'll go forward in very good shape."
Craig, incidentally, is a shorthaul operation, with a 300-mile average length of haul, sticking to the Midwest states north of the Mason-Dixon Line. Most drivers get home every weekend, some every night.
"The challenge is in getting the drivers the 400-500 miles they need every day, but we're pretty successful at it," he says. "We're kind of going back to the way we ran in the '70s and '80s with the areas we serve. Other carriers are now looking at this shorthaul model. The competition is heating up, so there is definitely something to this supply chain shift."
Resilient or resistant?
One thing many of the survivors now have in their favor is they've learned to be more efficient. Carriers and owner-operators alike have had to cut costs to survive with lower rates, but many face a difficult period getting their financial feet back under them. The decline in equipment values means many of them are upside down at the moment, and the tightening in the credit markets may put the brakes on refinancing plans. But don't count them out just yet.
"What you have in the owner-operator community are resourceful, service-oriented people with above average skills, a willingness to work hard, and a tremendous sense of pride," says Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association. "But even that doesn't help when you're dealing with sub-standard rates. I believe that's why we're seeing a high number of lease operators applying for their own authorities. They know what's out there in terms of rates, and they want their fair share of it."
It remains to be seen whether owner-operators can capitalize on the heydays ahead. For those who want to lease on with carriers, being safety-conscious and business-savvy will put them more in demand than ever, and that may lead to higher pay. "True" independents may be better positioned than lease operators to get the rates they need and to adjust to market demand.
The new breed
Eventually, more equipment will enter the market, and we'll see those high rates head back down. Or, sensing escalating costs on a long-term basis, some shippers may decide to switch modes, opting for rail when possible and practical.
The savvy owner-operator will have his or her finger out in the wind looking for the next profitable shift in the market. That's likely to be a switch to a shorter lane, perhaps pulling heavier loads under much more scrutiny from the enforcement community.
The owner-operators who have survived the recession, and the ones who will be most successful in the future, are also those who are smarter about running their companies as a business, rather than the "Smokey and the Bandit" mentality our UK friend referred to. Smart carriers that lease on owner-operators are finding ways to help their owner-operators with those business skills.
For instance, O&S Trucking in Springfield, Mo., has developed a six-module training system that uses board games and other methods to teach owner-operators business skills. The idea is to get new - or even not-so-new - single truck owners to think like businesspeople. Many come to the job with almost no business skills, despite a six-figure investment in their equipment. Charlotte Eckley, chief development officer, says many don't even possess a calculator. But turnover at the all-owner-operator fleet has dropped 60 percent as drivers begin to understand there's more to being an owner-operator than shining the truck on the weekends.
In the meantime, owner-operators and carriers should enjoy the market advantage they'll have for a spell.
"With a capacity shortage like we have never seen, freight will be left on the dock. And that's a good thing," says Lana Batts. "The shippers used to be in the driver's seat. Now it's the carriers' turn, and so will begin the 15th round of the Balkan wars between shippers and carriers. It's cyclical."
As for the owner-operator, Batts says the future looks good for the ones capable of adapting to change. "They're getting hit upside the head with a change in the distribution system, a change in the economic system, and a change in the legal system. Other than that, they have a great future."
Are owner-operators still buying trucks?
There's no doubt that in the past few years owner-operators have struggled with five-dollar diesel and the worst recession in memory. But have they truly been hit harder than the big fleets? According to registration figures from R.L. Polk, the buying habits of owners of fleets of one to five trucks don't look markedly different than those of fleets of a thousand-plus.
Looking at the last five years of Class 8 new truck registrations, new truck buying peaked in 2006, when the industry as a whole registered more than 274,000 new Class 8 trucks. The little guys registered about 44,500, or about 16 percent of that total; the big guys registered close to 98,000, or about 36 percent of that total.
Fast-forward to 2009 (figures for January through November), and new Class 8 truck registrations plummeted to a fraction of the 2006 figures - 87,171 for the whole industry. The 1,000-plus-truck fleets made up a slightly larger percentage of that this time, about 40 percent, but the owner-operators and micro-fleets didn't drop by much, at 15.4 percent. The one- to five-truck fleets registered nearly 14,000 new Class 8 trucks; the big guys, a little over 35,000 - in both cases about a third of the number they bought in 2006 (30 percent for the one- to five-truck fleets and 36 percent for the 1,000-plus-truck fleets).
Both the 2006 and 2009 figures were affected by pre-buys ahead of new EPA emissions regulations, although the 2006 pre-buy was much larger than this past year's.
The Panama Canal
What does a ditch cut through the middle of South America have to do with the future of the American owner-operator? A great deal, it seems.
In 2014, the Panama Canal will open a new set of wider and longer locks, allowing passage of the some of the largest container ships in the world - the so-called Post-Panamax vessels. These beasts are 1,200 feet long, 160 feet wide, draw 50 feet of water beneath their keels, and are capable of carrying the rough equivalent of 4,000 to 5,000 40-foot marine containers.
Presently, a great deal of the Asian container trade with this country lands at West Coast ports, specifically Long Beach and Los Angeles. A dockworkers' strike that closed those ports for 10 days in 2002 prompted a search for alternatives. With the widening of the Panama Canal, up to half of the traffic that once called at West Coast ports will travel instead through the Panama Canal, calling at Savannah and other ports in the U.S. Southeast. The overall transit time from Asia to warehouses in Chicago may increase by a few days, but costs will drop dramatically - in large part by reducing the road or rail miles the container travels across U.S. soil.
Where will that leave truckers? "Hauling from the rail hubs to market and back again," says Lana Batts, managing partner at Transport Capital Partners and past president of the Truckload Carriers Association. "Shorter hauls, and more pick-ups and deliveries, will be the way of the future. Shippers will always opt for the low-cost alternative, and now that intermodal operators are getting their act together, there is a viable and cheaper alternative to long-haul transport."
To put it succinctly, Batts says the supply chain is changing right out from under the long-haul operators. "Owner-operators will find it very difficult to compete with intermodal on the long-haul," she says. "And that's where a large portion of that population works today. The I-40 corridor is in deep, deep trouble. Anybody who has made that their bread and butter is now scrambling to find alternatives."
From the February 2010 issue of Heavy Duty Trucking.
