When I first entered the trucking industry, radial tires were beginning to replace bias belted tires. I remember hearing from several drivers who were dead set against driving the new tires. That was 1979. Soon, the transition to a new tire type would become the least of the industry’s worries as deregulation turned the industry on its head. Most of the 100 largest carriers in 1979 are no longer in business due to sale or bankruptcy.
Clearly one of the keys to running a successful trucking company is the ability to adapt. And one of the biggest challenges to confront the industry since deregulation will arrive in just a few weeks.
The full implications of the new hours-of-service regulations are sinking in, and some are panicking, believing that as much as 20 percent of today’s trucking capacity will disappear. While the new HOS regulations will disrupt the industry, take the doom-and-gloom predictions with a grain of salt. This industry will find ways to minimize any damage done by well-intentioned bureaucrats in Washington.
But assume that capacity does shrink 20 percent. Who really will be hurt? In the short term, carriers will be as they fight for the rate increases to offset lost productivity and increase driver pay. Neither carriers’ nor their drivers’ fixed costs will have shrunk, and higher rates must make up the difference.
For years, carriers have cried wolf to shippers, saying rates needed to rise to maintain the industry’s health. Shippers haven’t given in because they could always find another carrier. That may seem unfair, but it’s the reality of a competitive market place.
One benefit of this new mandate from Washington, however, is that it applies to all carriers. Sure, some will try to cheat the new system. But if capacity shrinks 20 percent, a little fudging won’t make a big difference. Manufacturing plants in this country will shut down. And when stories hit the newspapers about plants shutting down because of a lack of trucking capacity, shippers will realize that we weren’t crying wolf after all.
Most manufacturers’ transportation costs range between 3 and 8 percent of revenue. These costs are dwarfed by the fixed cost of the plant, which can range between 40 and 60 percent of revenue. Faced with a choice between shutting down a plant or absorbing a 20 to 30 percent rate increase, shippers would have little choice but to take the rate increase and try to pass it on to their customers. In this light, the new hours rules may be the shock to the system that shippers need to become more concerned with capacity than rates.
But fortunately or unfortunately, we probably won’t see a 20 percent shrink in capacity. Arguably, the worst-case scenario for the trucking industry is a 2 to 3 percent shrink, which would hurt carriers but wouldn’t get the full attention of shippers. The most likely outcome, I believe, lies in the middle – an 8 to 12 percent capacity loss initially with increased capacity as carriers and shippers start to adapt.
A small capacity loss might not hurt the shipping community as a whole, but it will hurt shippers with the most driver unfriendly freight – loads that tie up drivers weighting on the dock or require drivers to spend eight hours loading or unloading. In fact, these customers already suffer to a small degree. Most senior drivers are smart enough to avoid problem loads, so these shippers and receivers get rookie drivers or those who have no other options.
That’s not a prescription for getting great service.
Even with a small shrink in capacity, carriers will have a much greater choice in the loads they haul. If the loss of capacity isn’t large enough to trigger major rate increases, then carriers will pursue freight that maximizes their drivers’ productivity. Problem shippers will have to change their ways or accept rate increases to compensate drivers and carriers. Initially, they will be reluctant to do either. Instead, they will try to find new carriers to haul their freight. Smart carriers will avoid this gift of new freight.
As the new hours-of-service regulations go into effect, don’t be surprised if shippers start calling asking if you are interested in their business. If so, ask yourself why are they calling you now. Don’t let problem shippers use you to fix their problems.