Independent driver decline impacts excess truck capacity, analysts say
Wednesday, October 16, 2013
Self-employed truck drivers who own their own equipment and contract with trucking companies and shippers to move freight are a dying breed and can't be counted on as an additional source of truckload capacity if the economy picks up steam and large fleets are too busy to take on extra business, analysts say.
Owner-operators aren't going away, but the non-employee driver segment has undergone tremendous change since 2000 in the face of sharply higher operator costs and scrutiny by safety regulators. A new 18-wheeler today costs more than $125,000, a 30 percent price increase from older models, in part because of requirements for clean-burning diesel engines. Truck operators also are under pressure from high fuel costs, rising insurance premiums, requirements for new safety technology such as electronic logging devices, productivity constraints ranging from new limits on daily and weekly driving time to combat fatigue and legislative proposals for speed-limiting devices, and new safety scorecards applied to companies and drivers that force companies to weed out drivers with a history of violations, and reputation with customers, high.
Add it all up and the capital requirements to stay in business can be overwhelming for small companies.
"The owner-operator, as we knew him or her, with their cowboy boots and Peterbilt (tractors) with smokestacks, have become none-economic entities for the most part," John Larkin, managing director of transportation markets for investment bank Stifel Nicolaus, said last month at a Stifel seminar in Washington about the impact of federal policies on the freight industry. "The cost-structure is non-competitive."
Traditional independent drivers who broker their own freight represent about 15 percent of the U.S. driver pool and that figure is dropping from about 50 percent of the industry's labor force at the pre-recession peak, Larkin estimated. And many of the remaining owner-operators are closely tied to large trucking companies such as Schneider National and Swift through lease-purchase programs, analysts say.
Lease-to-own programs are designed to create a pool of non-employee drivers from experienced drivers within and outside the company, some of whom strike out on their own once the truck is paid off if they are good at managing their costs and truck utilization. Under the programs, trucking companies typically negotiate bulk pricing deals with third-party leasing companies and then deduct monthly payments from the driver's check to pay the lessor.
At Schneider National, for example, drivers who want to control their own schedules and routes can choose an option by which they receive 65 percent of a job's revenue. Those that want to rely on company dispatchers can choose a mileage-based option that pays slightly less than full mileage pay to cover the lease payments, according to recruiting information on the company's Website.
Companies such as Landstar and Universal Truckload that have access to very specialized freight tend to attract more of the traditional owner-operators, Larkin said.
Shippers say they aren't having trouble getting their freight moved today, but there are widespread concerns that an uptick in the U.S. economy could cause transport shortages because motor carriers face difficulties finding qualified drivers of any kind and have whittled down their fleets to meet lower demand in recent years.
"Big carriers use (independent drivers) as excess capacity. It gives them the ability to flex without having to own the assets," Eric Starks, president of FTR Associates, said in an interview.
Starks declined to estimate the level of independent drivers to employee drivers in the truckload segment, saying that data is difficult to track. Most of the shrinkage in the owner-operator sector has already occurred as thousands of small businesses went out of business during and after the recession, he said.
FTR expects more independent drivers will decide to partner with larger fleets to help manage the more challenging regulatory environment.
"So they're owner-operators on the company's books, but in reality they're dedicated to the company," Starks said.
Others will simply walk away from the business because the administrative, training and economic requirements are too daunting for those without extensive support systems in place.
Cargill, a large vertically integrated food and feed producer, has had difficulty finding owner-operators for its private truck fleet. "They're old school and quite frankly don't want to mess with the new regulations," Jon Meier, who is responsible for the company's North American truck transportation, said during a panel discussion at FTR's annual transportation conference in Indianapolis Sept. 24-26.
John Vesco, executive vice president of operations for Comtrak Logistics, the Memphis-Tenn. rail drayage subsidiary of Hub Group, said he has also seen owner-operators exit the industry because of regulatory demands.
About 15 percent of Comtrak's 2,900 drivers are employees and the company wants to balance that mix more, he said in an interview.
One of the downsides of using independent drivers, Vesco told American Shipper, is that they tend to operate tractors with sleeper cabs, which add about 1,500 pounds to the vehicle's overall weight and reduce the amount of cargo that can be carried in order to stay within the 80,000-pound gross vehicle weight limit set by the federal government.
"So we like the company capacity because it provides a little lighter weight equipment. Then we can buy day cabs," he said.
Comtrak, which has about 800 drivers in a lease-to-purchase program administered by an outside party, is trying to incentivize owner-operators to invest in day cabs too, he added.
Companies may also have to switch to employee drivers if regulators in some states are successful in enforcing labor laws on the grounds that employees are being misclassified as independent contractors to avoid paying taxes and benefits, a practice that has received particular scrutiny in the port drayage sector, Vesco acknowledged.
Labor departments in states such as California and New Jersey, for example, have issued large judgments in several cases requiring back pay and claims for unreimbursed business expenses.
Vesco said Comtrak doesn't set hours or other conditions for owner-operators, who are free to work as much as they want.
The Evans Network of Cos. is experimenting with lease-to-buy programs with about 10 truckers, Chris Giltz, senior vice president of operations, said.
Evans Network is a $300 million trucking company that does about 60 percent of its business making shuttle runs to ports and railheads. It also operates a domestic truckload fleet. Only 43 of the 1,300 trucks in its fleet are self-owned.
Lease-to-own could increase capacity and be a big growth platform for the company, Giltz said.
He acknowledged some lease programs are not run well and "rip off the driver."
TTSI, a port drayage company headquartered in the Los Angeles area, is helping more than 150 contractors with a lease-to-own program because of state environmental mandates banning trucks with pre-2007 engines from serving ports and rail yards as of Jan. 1. The company said it recently turned over the keys to a modern truck after two drivers partnered to complete payments on the vehicle in 4.5 years.