2019 has caused a thinning out of some of the transportation companies and caused the remaining firms to continue to evolve, grow, and adjust to the changing climate. An article from Transport Topics stated that “More trucking firms have shut down during the first six months of 2019 than in all of 2018.” Many companies couldn’t stay in business due in part to tariffs, regulations, and increasing costs.
We summarized some of the headlining industry changes in 2019 and what lies ahead for 2020…
Transportation companies continue to face increasing regulations.
- The FMCSA released the proposal to make changes to its hours-of-service rules in August. The HOS rules were intended to allow for more flexibility for the driver without increasing the maximum time a driver is allowed to spend driving.
- The electronic logging device (ELD) rule took effect two years ago but December of 2019 was the final date for 100% compliance. They recently published a press release reminding carriers of the deadline and that there “will be no soft enforcement grace period.”
- The main risks for transportation companies are the same ones that could derail overall economic growth–global trade wars and higher interest rates. A further escalation of the U.S.-China dispute would slow economic growth and hurt certain transportation sectors more directly (shipping is the most exposed).
- The other key risk to transportation companies, higher interest rates, affect economic growth, the capital markets, and–more directly–companies’ interest expense. Transportation companies use large amounts of debt and they are probably ready to handle rising rates as long as they don’t increase too sharply.
Looking at the trucking side of the logistics industry, there has been a major stalling point for the last two years: Too much freight and not enough drivers, which is both good and bad for the industry as a whole. This is good in the sense that the U.S. economy is still robust. The bad news is that carriers have been struggling to recruit and retain quality. Unfortunately, as 2019 comes to an end, more of the same can be expected for the remainder of the year.
The Morgan Stanley Truckload Freight Index (TLFI) said, “we expect TL companies to focus on potential market tightening in 2020 this earnings season given supply side rationalization catalysts on the horizon, including the Drug and Alcohol Clearinghouse and insurance rate spikes, as they continue to grapple with a currently tough operating environment.” Their sentiment survey showed an overall negative outlook regarding rates and supply.
Looking Forward into 2020
The truck driver shortage has been a serious issue through 2019 and is expected to continue causing issues well into 2020. One reason it has been so difficult to recruit and retain quality drivers is the demand for salary increases. Good drivers expect to see salary increases of as much as 20% to 50% over what they were paid just a few years ago. You can expect to see a major jump in driver recruiting efforts, going so far as the government lobbying to lower the commercial driving age to 18. Fleet carriers will put pressure on insurance companies to take a risk on these non-traditional, younger recruits in order to relieve the pressure. The FMCSA’s Entry-Level Driver Training (ELDT) regulations go into effect in February of 2020. Their intent is to raise the professional standards for new drivers with new training requirements. This training requires aspiring drivers to complete a curriculum of basic working knowledge and behind-the-wheel (BTW) instruction with one of the FMCSA’s registered training providers. This could result in more fully-trained drivers and help combat the shortage.
The good news is that fatalities due to crashes have decreased in the last decade, however, there have been more crashes resulting in severe bodily injury. While this data may seem conflicting, the reason is because of increased speed limits and the increasing use of safety equipment in vehicles. The high dollar amounts for these severe crash claims have taken the insurance industry somewhat by surprise and these increased costs will undoubtedly be passed onto the carriers in the form of higher premiums and deductibles in 2019 and 2020.
The growing cost of insurance and claims litigation will only increase the pressure felt by carriers to reduce the crash frequency, avoid litigation and improve DOT compliance. ISS scores, drivers, maintenance and ELD equipment will be a major focus for insurance carriers in 2019 and 2020. “Best-in-class” carriers that are DOT compliance will likely try alternatives like member-owned insurance captives and risk retention groups, which can help ease premium and deductible costs.
Legislation changes could increase trucking costs. Though more and more carriers are independent truck drivers, it is facing more and more public scrutiny and legal issues. The California State Supreme Court ruled that any independent contractor must be able to pass an “ABC Test,” with what many consider an unreasonably high standard in an effort to discourage using these independent drivers. New Jersey is also scheduled to review a similar bill. These state legislations could start happening in more states and cause problems for owner-operators and potentially increase trucking costs in the affected states.
Inevitably, the freight capacity overloads the transportation industry has been stuck in the past few years will find a balance before too long. You can expect that when supply and demand do eventually balance out, the trucking industry profitability will slow down considerably and there will be a difficult struggle between insurance underwriting and the ability of fleet operators to pay increased premiums and deductibles. Until then, the major players in the transportation logistics industry will continue to grow and turn a nice profit in the meantime.
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