ELD devices give carriers pricing power

Tweeners offer the biggest rate opportunity for carriers

Deregulation had a profound impact on the trucking market that resulted in massive upheaval for the incumbents. If you look at the top 100 trucking companies that existed before deregulation, only about 20% are still around. The rest went away because they couldn’t survive in a free and competitive market.

What we left was a path that would make Joseph Schumpeter proud: creative destruction at its finest. New players were born sporting new business models. The freight broker also became a factor in the market.

The most successful carriers in the LTL sector were non-unionized carriers that were able to optimize their networks and gain density in lanes to a point that they could offer scheduled services and time-definite services. This in turn allowed those carriers to gain network density and offer faster services as a result. Gone were the days of two-week coast-to-coast transit times: from West Coast to East Coast in just five days became the longest transit time most shippers would tolerate. Without the deregulated period’s raised expectations and improved service, Amazon would have never emerged.

A new breed of truckload carriers sprung about. Ditching the need to file tariffs with the ICC, they were able to haul for anyone they wanted at whatever price they could get from the market. The most profitable carriers from the mid 1980s to the early 2000s were the long-haul carriers that were able to haul long distances with expedited transit times. Their service times and utilization couldn’t be matched.

Solo transit times were acceptable, but the best margins were made on teams. In those days, team transit times were priced at the same level as solo transit because of the operational efficiencies that the carriers enjoyed. It’s hard to beat the profits of a truck that can get 6000 miles a week, even at solo rates.

Solos were also profitable. Long distances provided amazing utilization rates and yield optimization for the long-haul carriers.

But around 2005, something changed. The carriers that were in the long-haul sector ended up losing pricing power. The railroads had gotten their act together and started to provide expedited intermodal services that offered solo transit times at a price far below what a long-haul asset-based carrier could offer.

Carriers that had significant exposure to the long-haul market lost almost all pricing power on their solo lanes. They simply couldn’t compete with the intermodal players like Schneider, J.B. Hunt, Hub Group, and Pacer.

They were forced to move to shorter lengths of haul and play in the regional and tweener markets. Unfortunately, most of the long-haul carriers were ill-prepared to compete with the regional carriers that run tight and efficient freight networks (check out Knight Transport if you want to understand what a well-run regional carrier looks like). They ended up staking their claim to the tweener market, where they could keep their trucks running and put a lot of miles on their assets.

In 2003 and revised in late 2005, the government passed a new hours-of-service regulation that restricted how many hours a truck could run. This, in effect, forced the maximum legal amount of miles per day per truck to be around 500. The large carriers are heavily regulated and audited and can not run beyond their available hours, but the independents that were willing to work around the log rules were able to put around 700 miles a day.

This had an interesting outcome: the small operators, with less technology and network density, were able to thrive. Not only could they get more miles per day per truck, but they could also offer faster services than their larger competitors who were not willing to play so liberally with their log books. Brokers found a huge opportunity in this market. They were able to stake out a claim in the tweener market by functioning as a sales agent for the small carrier. Gone were the days of being a backhaul player: brokers went prime-time.

Companies like Transport America, Covenant Transport, CFI, and Celadon were the most profitable carriers in the 1990s, but found the new environment more hostile. They couldn’t compete against the intermodal players on the long haul part of the business, they were not operationally disciplined to be effective regional operators, and couldn’t enjoy pricing power in the tweener market.

A few years ago, Covenant realized how underpriced their team expedited transit services were and quickly fixed this. Companies like Amazon were willing to pay Covenant and carriers with teams high premiums to get expedited services. In turn, Covenant’s stock and profits accelerated. What was once viewed as a likely bankruptcy by Wall Street insiders became the hottest trucking stock in 2014.

The tweener market was still a crappy place to operate. While you could get more miles on a load than a regional carrier, you couldn’t get paid for the inefficiencies in this market. And you had almost no pricing power. But this all changes with ELDs.

If ELDs force hours-of-service compliance among small and independent carriers, the tweener freight will see the most upside in the freight market for the large enterprise fleets. Carriers will have the opportunity to properly price this freight. Shippers that treated 600-700 mile length of haul freight as a single day transit will also desire teams for these loads. That is a bullish thing for carriers that have a lot of them.