Constricting capacity

Onslaught of safety regulations raises costs, supply uncertainty for truckers and shippers.

Truckload capacity in the United States is at equilibrium, but it’s usually not difficult for shippers to find a carrier to move their goods. The market could quickly change, though, if the economy picks up closer to 3 percent average annual growth on a consistent basis. And the biggest constraint is likely to be drivers, not equipment.

In addition to a difficult demographic challenge — the majority of commercial drivers are in their 50s and fewer young people are entering the industry — safety regulations are already weeding out a large number of drivers, putting pressure on companies to seat qualified people in their 18-wheel vehicles.

The trucking industry faces a 36 percent increase in average hiring requirements between now and 2020 to cover additional drivers needed to cope with freight growth as well as retirements, regulatory fallout and people who quit for other jobs, according to Noël Perry, a senior consultant and economist at FTR Associates. Motor carriers will have to annually hire more than 1.3 million drivers by then compared to 1 million in 2013 to keep their trucks on the road. He estimates the industry between 2011 and 2016 will replace or add 1.5 million drivers due to the impact of regulations, assuming the Federal Motor Carrier Safety Administration (FMCSA) follows through with enacting promised rules.

The figure includes turnover for new hires.

Large motor carriers with resources to comply with higher standards mostly feel that small, independent firms, which constitute the bulk of the industry, tend to cut corners to stay competitive and hope the rules will drive many mom-and-pop operators out of business.

There are more than 500,000 trucking companies and only about 400 of them operate 1,000 trucks or more. The vast majority are small companies with 20 trucks or less, according to the FMCSA.

“When safety is undercut, it’s done so to reduce the price on a bid,” so the agency is fighting “against a race to the bottom,” FMCSA Administrator Anne Ferro said Sept. 24 in Washington at a policy forum organized by investment bank Stifel.

New hours-of-service (HOS) rules that went into effect July 1 are expected to cause the biggest drag on driver productivity, but the trucking industry faces an avalanche of new and pending safety regulations like never before that could further tighten the supply of drivers.

Perry, who once worked for Schneider National, one of the three largest truckload carriers in the United States, projects the industry will need to find about 180,000 new drivers per year by decade’s end to replace those lost to higher regulatory standards.

Industry officials have been warning since the middle of last decade about a pending driver shortage and its economic consequences, but the potential crisis never materialized because the recession drastically cut demand for freight transportation. Large trucking companies subsequently pared their fleet sizes and have been more disciplined about adding equipment until economic growth becomes more robust.

But the industry is highly fragmented, despite the exit of thousands of mostly small companies, and competition for available loads, along with stable fuel prices, has kept a lid on rates. Capacity utilization is above 95 percent today, according to freight analysts. If supply were truly in balance with demand the HOS rules would have triggered noticeable capacity shortages. But, they add, it won’t take much economic growth to reach the tipping point.

The trucking industry needs to hire about 96,000 new drivers annually to keep pace with demand, according to the American Trucking Associations (ATA). If freight demand grows as projected in coming years, the shortage could reach 240,000 drivers by 2022, it claims.

But for now, no freight surge is expected and shippers should be able to find trucks under normal circumstances.

Shippers eventually can expect to pay more for transportation when capacity becomes scarce and carriers pass on some costs of beefing up safety technology, training, record-keeping and other new measures.

“The net effect of all these regulations is to reduce the driver force or the productivity of those drivers that remain. Within the next two to three years these regulations could create the type of capacity shortfall that could push freight rates up pretty dramatically, as well as the price of everything we consume,” John Larkin, managing director of transportation and logistics equity research for Stifel, said.

But analysts agree that shippers won’t agree to pay higher rates on the possibility of a driver shortage until it actually begins to impact their operations. And any shortage can be corrected by paying drivers more, some say.

Here’s a breakdown of the major rule changes facing the motor carrier industry heading into 2014 and their impact.



Removing unsafe drivers:

Drug and alcohol testing database — The proposed rule closes a loophole that enables drivers who fail a test to simply move to another company and remain employed. Now carriers will have to submit any tests — pre-employment, random or post-accident — (or refusals to take a test) to a national database that can be reviewed by employers. The system is expected to shake some drivers out of the industry. The rule has been stuck at the Office of Management and Budget for review since March.
Drug testing methodology — Many large trucking companies have switched from urine-based drug tests of drivers to hair follicle tests and industry watchers expect the FMCSA to eventually make the switch mandatory. Illegal drugs in urine can be masked. The hair follicle test will weed out more drivers and further decrease the supply of available drivers. Companies that use the hair follicle test report a 10 to 15 percent failure rate among drivers at the outset, but the number tends to go down over time as word spreads about its accuracy and habitual drug users learn not to apply for jobs at companies that use the testing method, Larkin said.
Pattern of violations — Congress last year gave the FMCSA authority to go after carriers that have exhibited a pattern of violations by examining the company’s management to determine if they have played a role and whether they should be allowed to operate, especially if they have closed and opened companies under different names to escape regulatory attention. A final rule could be issued in 2014.
The language in the rule is fairly broad — it even covers consultants to trucking companies — and industry officials are concerned about how far the FMCSA will go to investigate, Annette Sandberg, who owns TranSafe Consulting and headed the FMCSA during the second Bush administration, said at a recent freight transportation conference hosted by FTR Associates in Indianapolis. Sandberg said she works with many troubled companies that are trying to improve their safety and maintenance practices and potentially could be targeted for enabling a lax safety culture.
Sleep apnea — President Obama in mid-October signed legislation mandating that any effort by the FMCSA pushing trucking companies to screen, test or treat drivers for sleep disorders be done through a formal rulemaking rather than by issuing guidance.
The agency originally said it would issue medical guidance to deal with the safety issue. Motor carriers typically feel obligated to follow guidance even though it doesn’t carry the same weight as a rule.
Congress and the president passed the law even after the agency last month reversed itself and said it would go through the rulemaking process.
ATA argues testing for sleep apnea and other disorders could cost the industry $1 billion and, therefore, requires the rigor of a rulemaking that includes hard data from the latest research and a cost-benefit analysis.
Trucking companies are also worried about potential liability issues from not hiring drivers determined to have a sleep disorder, according to Sandberg.
“It puts them in a tough spot when it comes to the EEOC (Equal Employment Opportunity Commission) and ADA (Americans With Disabilities Act) because drivers will claim their rights were violated,” she said.
Requiring the truck industry to test for sleep apnea could have a dramatic effect on the driver population, with a third of drivers likely to require testing, Larkin said.
Medical examiner’s certification — A draft rule issued in July essentially standardizes medical exams required to hold a commercial driver’s license. Doctors would also have to transmit all medical certifications to a national database. The proposal also says the medical exams should be sent to the driver’s employer because they want to know if he or she passed. The rule is expected to shrink the existing driving force by identifying drivers who are not healthy enough to drive an 80,000-pound vehicle, much like airline pilots are subject to national fitness standards.
Doctors will have to sign up for training programs and walk drivers through a comprehensive medical exam for their certification compared to today’s loose system of guidelines, Larkin said.
“It’s not the healthiest group in the world. The average truck driver is 52 years old, weighs 261 pounds and eats chicken fried steak seven nights a week and doesn’t get much exercise,” he quipped.

Raising the bar for entering the industry:

Entry-level driver training — The FMCSA is working to draft a new proposal after withdrawing one several years ago. Sandberg predicts it will be one or two years before the agency issues a notice of proposed rulemaking on driver-training standards.
New entrant proficiency exam — This rule would require anybody applying for a new Department of Transportation operating certificate to prove they know the industry regulations by passing a proficiency exam. The FMCSA has been considering this rulemaking since 2009. About 39,000 new companies enter the trucking industry every year.
Unified registration system — Under a rulemaking issued in August, the FMCSA is consolidating four legacy systems for safety and commercial oversight into one. Congress mandated a single system 20 years ago. The system will allow carriers to apply for operating authority, be screened for legitimacy and prior unsafe behaviors, and check their account data in a more efficient manner.

Maintaining safety standards:

Hours of service — Under the new rules aimed at curbing driver fatigue, which went into effect July 1, commercial drivers who reach their 70-hour weekly driving limit must restart the clock on their work week by taking at least 34 consecutive hours off duty before heading back out on the road. The work week was also decreased by 12 hours from the previous requirement. The final rule also requires drivers have to take one 30-minute break during the first eight hours of a shift.

It retains the current 11-hour daily driving limit, which must be completed within a 14-hour work day and be followed by 10 consecutive hours off duty.

The rules are too new to definitely gauge their impact. There has not been a widespread shortage of drivers to date, but industry officials and analysts say there are pockets of the country where on-time deliveries have become more difficult because of driver constraints.

Analysts expect the rule to shave industry productivity by 2 to 3 percent. Schneider National, the largest privately held for-hire motor carrier in the nation, reported Oct. 24 that its productivity has slipped 3.1 percent for solo drivers and 4.3 percent for team drivers, since the implementation of the new rules, but that safety has not noticeably improved since the last HOS change in 2005.

Comtrak, a national firm that shuttles containers to and from ports and railheads, has experienced a 2 percent productivity hit and instituted rate increases of 4 to 5 percent in certain lanes due to the increased transit time caused by the HOS change, Executive Vice President John Vesco said at the FTR event.

Larkin disclosed in Indianapolis that FedEx Freight dumped a carrier working under subcontract when it couldn’t provide the same level of service on certain lanes under the new rules. The carrier continued to provide service on routes where it could remain compliant.

“FedEx found someone else to provide the service, even though in order to do so, they would have to violate the rules,” Larkin said.

Some fleets may have larger exposure to the HOS changes, Perry said, citing one company he studied that experienced an 8.5 percent drop in capacity for long-haul team drivers from July 2012 to July 2013. The data may have had some flaws, so the precise impact is less important than the general direction of the trend, he cautioned.

Three congressmen in late October proposed legislation that would block the restart provision in the current federal HOS rules until the Government Accountability Office conducts an independent review of the data and rationale used by the Department of Transportation for its decision.

The FMCSA says a driver’s 24-hour body clock requires two nights’ rest for drivers to function safely, but the trucking industry questions the scientific basis of that assertion.

In August, Reps. Richard Hanna, R-N.Y., Tom Rice, R-S.C., and two other Republicans sent a letter to Transportation Secretary Anthony Foxx asking the FMCSA to produce a report on the potential impact of the 34-hour restart provision that was supposed to be issued months earlier.

Michael Michaud, D-Maine, co-authored the True Safety Act with Hanna and Rice. The bill would reinstate the 34-hour restart rules that were in place prior to July 1, and the new restart rule could not be re-implemented until six months after GAO submits its assessment to Congress.

The lawmakers are concerned the rule’s rest periods are not flexible enough and will hurt motor carriers. A truck driver, for example, that finishes his or her work week at 9 a.m. on a Friday would be out of service for a much longer period than 34 hours.

“This has the potential to decrease productivity by 15 to 18 percent if you don’t properly educate your drivers about when to take this rest time,” Larkin said.

The 34-hour restart provision is causing the most problems for Comtrak, Vesco said, because drivers that work on weekends are unavailable on Monday, which is usually a busy delivery day.

“So we’ve lost some capacity because of that rule and therefore we’ve had to beef up capacity as well as look at some outside carriers to help support the heavy demand of Monday,” he said.

The congressmen complained the new rules potentially cause more congestion during peak morning travel and could push drivers to be more aggressive during the hours they spend on the road.

“It is wrongheaded for the federal government to impose an arbitrary and capricious regulation that impacts almost every sector of the American economy without first finishing a study on its effectiveness,” Hanna said in a statement. “Federal agencies should have an obligation to prove that new rules and regulations do not cause more harm than good — in terms of both safety and costs.”

Rice said, “I am proud to join my colleagues in introducing this bipartisan legislation because our American truckers are being held to a new un-tested standard that limits their productivity and ultimately — their profitability. Congress required the FMSCA to complete a comprehensive study before imposing new hours-of-service standards on our truckers. Instead, the agency has abused its authority and is requiring truckers to comply with one of the most stringent parts of its regulation prior to receiving their study’s findings. This legislation will rein in FMSCA and postpone the new untested hours-of-service regulation until its study is complete and require an additional study to ensure that our truckers are not being overregulated.”

In a statement, ATA President Bill Graves said, “This bill would simply do what should have been done in the first place: delay implementation until we really know the true operational impacts, costs and safety benefits.”

A recent study by the American Transportation Research Institute, ATA’s research arm, found that the changes FMCSA made to the restart will ultimately have a net annual cost of up to $376 million, rather than the net benefit of $133 million the agency claimed in its rule.

“We had hoped FMCSA would’ve listened to reason when we asked them to delay initially, but we hope they’ll listen to Congress and rethink these changes,” Graves said.

The 30-minute mandatory rest period is also reducing motor carrier efficiency, Larkin said. The rest period frequently stretches out to 50 or 60 minutes because truckers cannot find enough parking at truck stops or rest areas. By the time they drive around to an alternative location, shut down their engine, go inside the facility to eat or relax, and get back on the highway, they’ve consumed well over 30 minutes of their allowable driving time.

The FMCSA made clear in its final rulemaking that it seriously considered changing the daily driving time limit to 10 hours, but lacked clear scientific evidence to justify the move. Ferro has publicly said the agency would still consider eliminating the 11th hour and Sandberg said she wouldn’t rule out the possibility during the remainder of the Obama administration.
Compliance, Safety, Accountability program: CSA is essentially a safety scorecard that applies to companies and individual drivers based on data entered into a federal system from roadside inspections and citations for moving violations by state law enforcement officers. The scores are rolled up into a measurement system that rates carriers versus their peers on seven attributes — such as unsafe driving, HOS compliance, vehicle maintenance, and driver fitness — and allows regulators to analyze how well companies are adhering to basic safety standards. The program was launched three years ago to help target which carriers should be picked for compliance reviews given the agency’s limited capacity to inspect hundreds of thousands of companies.

The new methodology for safety monitoring is already having an impact and industry experts say it will force many drivers out of the market, primarily through self-selection by carriers who do not want employees that will cause them to receive poor ratings. Although the FMCSA has stated that the ratings are only a tool to guide enforcement and improvement, the system is public and many shippers and brokers are making decisions on who to hire based in part on the carrier’s rating, even if it’s a level or two above the threshold for intervention.

There have been a number of lawsuits filed against the FMCSA for the way CSA is used and the DOT inspector general and an independent congressional watchdog agency are reviewing the program’s effectiveness and fairness. The scrutiny has delayed a rulemaking on safety fitness determinations, which is supposed to be the new rating system for drivers.
Speed governors — The National Highway Transportation Safety Administration is expected to propose in the spring a rule requiring all highway trucks to be equipped with devices to limit their top speed to about 63 or 64 mph, and that the modules be activated, as requested for many years by the ATA. Many of the trade group’s large members already use speed limiters for safety and to save fuel, and want the rule to prevent independent truckers, who often exceed the legal speed limit, from gaining a delivery time advantage that appeals to customers.

Sandberg predicted a two-to-three year phase-in period once a final rule is published to give vehicle manufacturers and motor carriers time to implement the rule for new and existing trucks. The rule, she said, is likely to require the devices be tamper-proof.
Electronic stability control — The National Highway Transportation Safety Administration has proposed requiring the technology on big trucks. A final rule could be completed by spring and will raise the cost of equipment for carriers.
Prohibition on coercion — The FMCSA is supposed to issue a rule by Jan. 1, stating that anyone who coerces a driver to violate any safety violation can be penalized. The rule will apply to shippers, truck brokers, and carriers. A shipper, for example, that puts pressure on a carrier to instruct its drivers to make their deliveries on time without regard to whether the daily cap on hours driven has been exceeded could be targeted for investigation under this rule.
Driver vehicle inspection report — A rule proposed in early August is actually designed to save motor carriers money — an estimated $1.7 billion per year to be specific. The FMCSA said it wants to modify the requirement that drivers file their reports after each pre-trip and post-trip inspection of equipment so that reports are only required if defects or deficiencies are found, thereby eliminating 95 percent of reports and relieving the industry of a major paperwork burden.
Sandberg questioned the decision, saying “the agency right now will tell you that most drivers don’t do this inspection properly in the first place. So they are simply pencil-whipping the form. And what actually takes the most time is getting the driver out of the truck and doing the inspection.

“It’s hard to say how the rule will come out in the end because they can still go after the carrier if they don’t have a good maintenance system and drivers aren’t doing good pre- and post-trip inspections. But how do you know if the driver is doing good inspections if you’re not keeping the paper anymore?”
Minimum insurance coverage — A bill introduced in Congress would increase the requirement for a trucking company to carry a minimum of $4.5 million worth of coverage, up from the current $750,000, which could put a lot of small carriers out of business.
Broker registration and bonds — Under a law passed by Congress last year, as of Oct. 1 asset-based carriers that also broker loads must have a separate license to operate as a load broker. Carriers that don’t establish a separate brokerage operation face a $10,000 fine per occurrence, but there is much confusion about how to comply. The rule also increases the bond amount to $75,000 to qualify for a freight broker license.
Electronic logging device — The FMCSA is expected to soon issue a final rule mandating that all trucks have an onboard recorder that would automatically authenticate the driver’s identity when starting the vehicle and log his/her hours of operation behind the wheel to ensure compliance with HOS rules. The electronic timesheet, which has been used for many years by large trucking companies, is designed to eliminate the common practice of drivers, who get paid by the mile, falsifying their paper logbooks so they can drive further and make more deliveries. Cheating is most prevalent among drivers who own their own truck or a small fleet, according to industry officials. Small trucking outfits are economically challenged to compete and therefore some try to run more hours, and drive faster, than they legally should to make more money and keep their rates low. By eliminating the “fudge factor” the rule will level the playing field for companies that comply and likely result in further tightening of capacity as more drivers and trucks are required to move the same amount of goods due to lost — albeit unsafe — productivity.

Sandberg predicted the rule could go into effect by 2015 or 2016.

She has worked with 15 to 20 companies during the past two years that had their DOT safety rating downgraded from “satisfactory” to “conditional” based solely on HOS violations. The actual level of falsification can be determined by comparing a truck’s GPS records with the driver’s paper logs. Those audits revealed a 30 to 60 percent falsification rate for drivers exceeding the 11-hour daily driving limit, Sandberg said.

Last year’s MAP-21 legislation instructs the FMCSA to study third-party certification of electronic logging devices, instead of allowing manufacturers to continue certifying their own products for meeting federal standards. If implemented, such a requirement could slightly increase costs for the devices, but at least carriers will have confidence the devices have been approved for use by regulators, she said.

Still to be resolved is the ongoing problem of roadside inspection officers demanding a driver’s HOS paperwork, even if the truck has an automated logging device. In some instances officers are making drivers recreate their logs on paper, Sandberg said.

Some executives at motor carriers that already use the technology believe it will actually increase productivity over the long term because dispatchers are not sure how many hours a driver has actually worked when assigning a job and build in several hours of buffer time to ensure the driver is legally operating. Logging devices provide predictable driver capacity, Perry said at the FTR event.

“When you were manual, you wouldn’t know what a driver’s hours were at a given point in the day. Now, with HOS being automated it allows for a little better dispatching because I know you’ve got five hours to work. I see it, it’s real time. So I can give you a load that optimizes your hours,” Vesco said after the panel discussion.

Qualified Drivers. Difficulty finding qualified drivers has led more fleets to consider hiring them straight out of training programs and nearly three-quarters of carriers plan to increase pay or have already done so, according to an ATA member survey.

“It seems that the largest carriers who recruit experienced drivers, have training programs, know how to get drivers home on a regular basis, have very sophisticated systems, brand new trucks, a very competitive wage scale, and good benefits, are doing OK finding enough drivers, but they put a huge amount of resources into it,” Larkin said at the FTR conference.

“Those just below the top tier are really struggling. I hear over and over again from many carriers, ‘If I had enough drivers I could seat another 150 trucks and would have plenty of respectable freight to haul.’

“So, there’s enough capacity out there, but just barely,” he said.

The FMCSA has recently been taking greater advantage of its enforcement authority to use inspection and performance data it collects to shut down companies with a track record of crashes, non-compliance, poor maintenance and unsafe driving. The extreme measure is used when a company ignores warnings to take corrective action. For about a decade until 2009, the agency forced about 10 motor carriers or bus companies that posed an “imminent hazard” to close down, but since the Obama administration came to power it has issued about 30 out-of-service orders per year, Ferro said.

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