Bouncing Back

| April 02, 2002

After three years of high diesel prices and, more recently, slower freight, owner-operators who’ve stuck it out have proved their mettle. Many have already rebounded from a big drop in income in 1999, according to the Overdrive 2002 Market Behavior Report. Many other owner-operators struggled the past three years, and others went under.

But those who survive stand ready to prosper when, by many estimates, the economy picks up this year or in 2003.

Lisa Porter, recruiting supervisor for Melton Truck Lines of Tulsa, Okla., says the company’s five years of 15 percent annual growth boosted income for its 40 owner-operators. Stable insurance rates and, when diesel prices were high, a surcharge of up to 6 cents a mile helped everyone.

Likewise, GBI Trucking, a reefer fleet of seven owner-operators and two company trucks in Lone Star, Texas, has seen its income go up. Office Manager Tammie Gilmore credits that to plenty of freight and better rates.

The Overdrive report, based on a 2001 survey of 937 owner-operator readers, shows those owning six or fewer trucks reported an average income of $44,800 in 2000. After a difficult 1999, when fuel prices drove average earnings to $39,300, the 2000 average shows a return to the $40,000-plus levels owner-operators experienced in the late 1990s.

One reason for the strong rebound in the average income during 2000, observers note, is that the meager incomes of thousands of struggling owner-operators who left the industry in 2000 and early 2001 were not part of the survey, done in August and October of 2001.

“The last couple of years have knocked out a lot of borderline owner-operators,” says David King, head of the National Association of Independent Truckers. Not only did fuel costs, insurance costs and slow freight make things difficult, but some owner-operators of recent years were ill-prepared company drivers who bought a first truck under the easy credit of the late 1990s.

“They were in for some mighty stiff surprises,” King says. “The money sure pours in, but boy, it goes out.”

The roller-coaster swing in 1999-2000 average incomes jibes with the quarterly reports of the owner-operator clients served by accountant Kevin Rutherford of Florida. As a rule of thumb, owner-operators need to gross about $110,000 or they will have little earnings left, he says.

“In 1999, we were amazed at how many didn’t make it to $110,000,” he says. “In 2000, we were amazed at how many made it to $120,000.”

Those who survived the initial increase of fuel prices in 1999 racked up plenty of loaded miles during 2000, which accounts for the improvement in average income. “We had a good economy going and a lot of freight out there,” Rutherford says.

The Cass Freight Index shows freight expenditures peaked from late 1999 to late 2000 and have been declining since then.

From 1999 through 2001, company drivers have fared better than owner-operators, says Gordon Klemp, whose National Survey of Driver Wages tracks compensation at medium and large carriers.

“Company driver pay has increased at a rate of about 10 percent higher than owner-operator revenue,” he says. And because of high fuel prices, owner-operator income growth lagged behind their increase in revenue, Klemp says.

One owner-operator whose income has slipped over those years is Jim Healey of New Jersey. An owner-operator since 1969, Healey maintained above-average income – $50,000 to $60,000 – for the past three years, but has seen slight declines because of increasing tolls and foreign competition in his carrier’s commodity, plastics.

Heath Smith, who pulls a flatbed for Williams Trucking of Dothan, Ala., says sticking with his 1991 Freightliner instead of buying a newer truck has helped keep his income steady.

2001

It’s difficult to say whether owner-operators’ tax returns next month will show their income rose or fell from 2000 to 2001. Diesel, though still higher than the sub-dollar prices before 1999, gave owner-operators some relief in late 2001, dropping through the fall and staying below $1.20 during December. However, the economy, already slowing during the first part of the year, felt the brakes even more after Sept. 11.

That tragedy marked a downturn for Dave Heffner, who hauls expedited airline parts on his step-deck. Prior to that, though, Heffner and his wife, Barbara, who drive team, were in the top echelon of owner-operator income, netting about $140,000 a year from 1999 through 2001. Even expensive fuel didn’t bother them because they received a surcharge that got as high as 13 cents a mile. “The airlines were very sympathetic,” Heffner says.

Other owner-operators have had tougher times. “I have to stay away from home longer and work harder to maintain the same miles per month than I did the two previous years,” says Richard VanDyke, an owner-operator leased to Melton Truck Lines. “I think this is caused in part by the shortage of freight brought on by the lack of consumer confidence and the slowdown in the economy.”

Heath Smith, who pulls a flatbed for Williams Trucking of Dothan, Ala., and owner-operator Chris Arce, who is leased to M-Quick Delivery in Mesquite, Texas, noticed that freight slowed after Sept. 11. As a result, Arce believes his 2001 income will be less than in 2000.

“Freight rates have been negotiated down and down and down,” King says. “I’ve never seen such predatory pricing. The owner-operator gets caught in a hard spot. He’s got a certain amount of fixed expenses. If the wheels are not turning on that truck, he’s getting behind every day.”

“2001 was an extremely difficult year because load availability has decreased, and you have a steep increase in expense, particularly like insurance,” says Chris Brady, head of Commercial Motor Vehicle Consulting. Industrial production began to decline in October 2000 and declined throughout 2001, he says.

2002

Rising insurance costs also have impacted the industry. Liability rates for fleets went up by nearly a third in 2001, with the biggest increases coming after Sept. 11, according to an American Trucking Associations survey. The biggest premium increases were for automobile haulers, followed by tanker trucks and general freight.

Most leased owner-operators, though, won’t have it as bad as most fleets, says Edmund Campbell, chairman of 1st Guard Corp.

“The independent who is leased – his costs should stay relatively stable,” Campbell says, because physical damage insurance for owner-operators should not jump much. “The guy with his own authority is going to be fighting the same battles for liability and cargo insurance as the fleets are, and he’s probably looking at a 10 to 50 percent increase.”

Weak used truck value, a major concern for fleets and truck makers, is of less concern for one-truck owner-operators willing to maintain an older truck until a better time to trade.

Arce says his 1996 Kenworth T800 will be his last truck. Smith says he’s not worried about used truck values. Maintaining his 1991 Freightliner FLD 120 instead of paying for a newer truck has helped his income remain steady for three years, he says.

All things considered, there are reasons for optimism this year. National indicators since late 2001 have shown growth in consumer confidence, orders for durable goods and industrial activity, as well as shrinking factory inventories. The Federal Reserve predicted in January the recession would end by June. Brady and others forecast a slight increase in freight volume during the second half of the year.

Perry Wiseman, owner of Truckers Accounting Service in Omaha, Neb., notes that fuel prices seem to have leveled off. Also, “A lot of people have been weeded out over the past couple of years,” leaving more business for the survivors, Wiseman says.

Fleets, too, have thinned. More small and medium sized ones will go under or merge because they can’t hold out for the turnaround, forecasts Tom Kretsinger, president of American Central Transport in Liberty, Mo. When the economy does rebound, “There won’t be enough trucks,” he says.

Owner-operators will play an increasingly important role as the economy rebounds, says the chairman of the Truckload Carriers Association, Pat Quinn of U.S. Xpress. In the next five years, many smaller carriers expect owner-operators will make up 40 percent to 50 percent of their fleets, he told TCA members in January.

As always, the owner-operator with good business sense and a strong work ethic has a big edge. “No matter what the economy’s doing,” Wiseman says, “if you’re willing to go out and work hard, you can find somebody who’s able to pay you and give you the miles.”


Chris Arce, also a flatbedder, was hurt financially when freight slowed after Sept. 11.

PROFILES OF PROFIT

So which owner-operators are coming out smelling the sweetest? Those earning the most tend to be in their 40s with at least 20 years’ experience, hold a college degree, operate under their own authority or are paid by the mile as a leased operator, run long-haul, and own more than one truck, according to the Overdrive 2002 Market Behavior Report.

The survey also shows that pulling a reefer or certain specialized trailers is more profitable than a dry van or flatbed. David King, head of the National Association of Independent Truckers, says he’s noticed that hauling specialized freight makes owner-operators more immune to economic cycles. “I know several drivers in the hazmat industry, and they’re doing fine now,” as are household movers, he says.

The Overdrive report shows that owner-operators pulling auto trailers, reefers, intermodal and certain types of overdimensional trailers fared better than others.

That’s the case with Classic Carriers, a reefer fleet of 45 owner-operators in Versailles, Ohio. The company has enjoyed steady freight during the past three years, says Vice President Ed Ruhe. His company drivers earn about $50,000, and those who have moved into his company’s truck leasing program report similar earnings.

Chris Brady, whose Commercial Motor Vehicle Consulting conducted the survey for the report, commented on other characteristics of the highest-earning owner-operators.

NUMBER OF TRUCKS AND TRAILERS

Fleets as small as two trucks “are maybe getting some economies of scale in terms of expenses,” Brady says, and consequently income often goes up in a well-managed operation. For example, an accountant will not charge much more just because one or two trucks have been added to a one-truck operation.

The study shows income dipping for the owner who bought a second trailer because the economies of scale aren’t big enough to counter the added equipment expense. In some cases, the buyer of a second trailer still has only one truck, which makes it tougher to recoup the investment.

The hit of paying for the second trailer has an upside when it comes to taxes. Heath Smith, who pulls a flatbed for Williams Trucking of Dothan, Ala., says he showed a loss for 2000 because of depreciation on the $22,500 Transcraft Eagle trailer he bought in 1999.

METHOD OF COMPENSATION

The merits of being paid by the mile or by percentage of revenue are hard to pin down.

Percentage pay in a healthy freight environment tends to be a little better, at least for operators who know how to run the numbers accurately and are good at finding backhauls. However, last year’s survey showed respondents with mileage pay making $2,000 more than those on percentage.

Brady says that’s because weakening freight in the second half of 2000 increased deadhead, and that’s what erodes profit under a percentage system. “When you start to see load availability weakening, it’s better to switch from percent of revenue load basis to per-mile basis,” he says.

An owner-operator who has arranged fixed payments for loads probably has his own operating authority, Brady says. “He’s writing a contract directly with the shipper,” he says. The pay can be better because there is no for-hire carrier acting as a middleman, but the downside is the risk and effort of having to arrange all your own loads.

Owner-operators getting hourly pay are rare, he says. Most such jobs, in construction and other local haul operations, tend to go to company drivers.

FIGURING COST PER MILE

The effort and discipline required to calculate cost per mile reflect a conscientious businessperson – one more likely to be a high earner. The information also has a practical effect on profit, Brady notes. “You have a better idea of how to offset increases in costs or make changes to your operation, as opposed to someone making changes to their operation on a gut feeling.”

AGE, EXPERIENCE, EDUCATION

For the owner-operator, it might be true that life begins at 40 – at least if you measure life in take-home pay. The survey shows peak earning years are the 40s. That’s especially true for someone who started in his early 20s, giving him 20 or more years’ experience by the time he’s in his 40s. “You have a better understanding of controlling your costs – the management side of the business – combined with energy,” Brady says. “You put in the miles.” Owner-operators in their mid-50s and older tend to log fewer miles.

Academic experience helps, too, when it comes to managing an owner-operator business. The survey shows pursuing post-high school education improves earnings.

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