New Rules Of The Road

Driving Home A Point by Tim Higham

As if we didn’t need more stress and strain, another challenge is headed our way that will further impact our day-to-day efficiency and profitability. The trucking market is in rapid decline and we will see even further rate increases over the next year or two.

This time, the culprit is not a short-term spike in fuel prices, which often decline as quickly as they rise. Rather, the issue now is more structural in nature and will be with us for the long term. The good news is that when something is structural, we know it will be with us for awhile and we can plan for it. But the bad news is that it will be with us for a long time and that we need to plan for it.

New Rules Now In Effect
As of July 1, new Federal Motor Carrier Safety Administration (FMCSA) rules went into effect. Within the last three and a half years, the U. S. trucking industry has seen the most expensive regulatory action in decades, imposing $46 billion in extra annual costs. If the planned mandate for Electronic On-Board Recorders (EOBRs) is approved, another $2 billion in costs will be added to the industry’s trucks. These costs are all passed on to the shipper.

There are about 500,000 trucking companies in the U.S. today, down from 1.2 million from 2003. Of these 500,000, approximately 80 percent operate 20 or fewer trucks.

These smaller companies, the true backbone of an industrialized nation, along with independent owner-operators, are literally in a fight for survival against over-regulation. These regulations always seem to come tagged with the term “safety.”

The most vital of regulations for the professional truck driver, and for you, are the new hours of service (HOS) rules. These rules determine how long a driver can drive and work, and thus have the largest impact on their income potential.

The newest change in the HOS rule, which went into effect on July 1, will limit a driver’s work week to 70 hours in a 7-day week. It also bars drivers from operating their trucks after working eight hours until they’ve taken a rest break of at least 30 minutes. Drivers who maximize their 70 hour work week will then be required to take at least two rest periods between the hours of 1 a.m. to 5 a.m, which is essentially two full “work days.” This will eliminate the current usage of the 34-hour restart provision, in which the driver will be allowed to use the provision only once during a seven-day period.

Practically speaking, what this means for you is less available trucks, less available drivers, and higher rates to both cover these extra costs incurred by the truckers and to secure a truck for your load. According to industry figures, the overall impact of the new HOS rules is an effective reduction of seven to 10 percent in the availability of trucks (or drivers with hours available) at any given time.

That’s Not All, Folks
The same bill also raised the broker bond from $10,000 to $75,000. So, if you use a small broker to arrange your trucks for you, it is likely that your broker will have to post $75,000 in cash with his bonding company just to get a license to operate. This is because the current bonding companies are not willing to take a risk on a small broker that is greater than the previous $10,000 bond. Therefore, unless your broker has $75,000 in spare cash to post, they may find it difficult to stay in business.

In fact, the same rule applies to asset-based carriers that often broker some of the loads you give them. In the past, they would take your loads and broker the ones for which they did not have their own physical truck, without needing a separate brokerage authority (license). Today, those same carriers need to set up a separate brokerage company, obtain a $75,000 bond, and have you re-tender loads they will broker to their brokerage arm — or they face a $10,000 fine per load that they broker without telling you.

On top of these issues are market and demographic headwinds that I have been talking about for years. For example, in a “normal” economy, rising truck rates would cause more people to set up trucking companies and brokerage operations. However, not only are the barriers to entry I described about hurting new entrants, but rising interest rates and tight lending don’t even allow those willing new participants to raise the money to start their business. For those few that can find the money, the shortage of drivers is at a 50-year low and getting worse each year as baby-boomers retire. Unless there is a willing and able driver for every truck needed, nobody will even want to start a new trucking company.

So What Can You Do?
First, accept the fact that truck prices on both a per-mile and a flat rate basis are going to rise even more. We saw about a 5 percent increase in rates in both 2012 and 2013. The new FMCSA rules will add an estimated 8 to 12 percent more. This means that a $2,000 load cost in 2012 will cost $2,470 in 2014, which is about a 24 percent increase. This, of course, is assuming you can even find a trucker willing to take your load.

The best approach to mitigate these issues is to meet immediately with your carriers and brokers and have an honest conversation. Be willing to consolidate who you will work with to give them incentive to stick with you during your busiest season(s). Use a Transportation Management System like to manage your freight and to see where other trucks are emptying near your origin point and grab that empty truck two days ahead of time. Securing a truck two days in advance is a lot less costly than going to the spot market the day you need the truck.

Finally, be realistic. Truck rates are going to continue to rise. Even if you own some of your own trucks, you cannot escape the new FMSCA rules. That means you cannot escape higher distribution costs that are here to stay. If you own some of your own trucks, sit down with other local growers and share your trucks. Coordinate deliveries and pool your trucks as if they were one fleet. By using technology, you can run one fleet more efficiently, even if those trucks and drivers are owned by separate growers.

As we all know, a 24-percent rise in distribution costs since 2012 is not something most growers can absorb. The only choice we have is to understand what is happening and to face that reality head on. By quickly facing the facts and by organizing ourselves to become more efficient, we do have a chance to make it through these structural changes and to be ready to face others looming right around the corner.    GG

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