Fleets’ famine

| December 12, 2008

White males 35 to 54 years old, who now account for more than half of truck drivers, are expected to decline by more than 3 million over 10 years.

Certain phone calls this year brought the problem home to Gordon Klemp. Never in the 10 years since he began the National Survey of Driver Wages had less-than-truckload fleets called to inquire about their competitive position.

“Not that they’re hurting, but for the first time they were actually losing some drivers to truckload carriers,” Klemp says. For LTL fleets, known for better pay and home time, to experience higher turnover rates meant truckload carriers were seriously raising the ante to woo new drivers.

More than ever, the supply of drivers – especially skilled, safe, over-the-road professionals – is not keeping up with demand. While the industry scrounges for new sources of drivers, carriers and shippers face the continuing headaches of high turnover and lower efficiency in moving freight.

On the flip side, this is good news for long-haul driver pay. Based on most analyses, the good times have only begun to roll.

Would you believe annual increases of 6 percent to 7 percent for the next three years? That’s the conclusion of the most current in-depth study, done by Global Insight for the American Trucking Associations. For the mid-range of owner-operators and company drivers, earning roughly $40,000 to $50,000, such increases would mean raises of $2,500 to $3,500 in the first year.

It could get even better. A year ago, carrier executives at the Freight Transportation Capacity Crisis Productivity Summit mentioned $60,000 to $65,000 as the target wage needed to seriously reduce the shortage in the near future. Klemp puts the bar at $70,000 or $80,000.

“I would guess that pay should double,” says Peter Swan, assistant professor of logistics and operations management at Pennsylvania State University. Trucking consultant Eric Starks agrees, forecasting $85,000 within 10 years.

Such bold prophecies could be dismissed as knee-jerk responses to the first flush of an economic rebound. However, evidence points to fundamental problems that aren’t going away any time soon.

The last time the industry howled about a driver shortage was the late 1990s. A 1997 ATA study concluded the industry needed to hire 80,000 drivers a year through at least 2005. ATA Chief Economist Bob Costello notes that this oft-quoted figure included industry growth and driver attrition.

Costello adds that the study did not necessarily find a problem with driver supply; also, unlike the recent Global Insight study, it covered the entire trucking industry, not just long-haul truckload.

In late 2000, though, driver demand plunged as the economic downturn began. Sign-on bonuses all but disappeared. Pay actually fell for about two years. Costello attributes this to fewer available miles, though Klemp says his wage survey indicates pay rates also fell.

In the initial rebound of late 2003 and early 2004, freight demand was so strong that many carriers couldn’t hire enough drivers to handle all the extra business, Klemp says. “When demand started to slack a little bit, we were back to where everybody is short, but it’s doable,” he says. However, “if we get much kick in demand, you just can’t hire drivers. It’s hard enough to hire a company driver, but getting an owner-operator is next to impossible.”

Responding to the rebound, as well as concerns over lost productivity expected from the new hours of service rule, large carriers introduced major pay raises in early 2004. The start of 2005, likewise, brought another round of raises even though the rebound was decelerating.

The raises sent revenue per mile up 12 percent for the first six months of 2005 over the first half of 2004 for clients of American Truck Business Services, says Todd Amen of ATBS. However, additional fuel costs – 9 cents per mile – ate up most of that extra revenue of 11 cents per mile. Net income growth was flat. However, with lower miles factored in, clients’ average income per mile rose to a record 40 cents in the second quarter of 2005.

Most of those who did above average were getting 7 miles per gallon or better and were leased to carriers with fuel surcharges pegged to 6 mpg. Every time diesel went up, they benefited, says Kevin Rutherford of The Alliance, an owner-operator financial services firm. “We did our mid-year numbers and thought we had made a mistake in our software,” he says of his clients’ strong revenues.

Apart from good surcharges, many owner-operators benefited from basic pay hikes. Some major carriers are raising pay two or three times in 2005. Others have introduced innovative ways to boost compensation. Tri-State Motor Transit Co. last month announced it is establishing an employee stock ownership plan. Last year, Heartland Express began its Green Miles program to pay bonuses – as high as 95 cents per mile for owner-operators – for delivering into less desirable zones. Recently, Crete Carriers and CFI announced they are moving to practical pay rating, which typically means 3 percent to 4 percent more miles than commonly used short miles.

The demand for entry-level drivers has increased to the point that small and private fleets are contacting the driving school at Shelton State Community College in Tuscaloosa, Ala., says program director Mike Warren. Before, such clients typically hired from large truckload fleets, but those employers now “won’t turn loose of them,” Warren says. “They’re paying them better, treating them better and getting better equipment.”

The pay improvements, most observers say, still aren’t enough to get the industry where it needs to be. Over-the-road driver pay hasn’t advanced as it should since the industry’s deregulation in 1980, says Jerry Fruin, an associate professor of transportation and logistics at the University of Minnesota.

“Under a regulated situation, government and labor and management set prices,” Fruin says. “In a deregulated environment, you go back to market forces, so you have to have adjustments made,” and trucking has not adequately adjusted.

He adds, “I don’t view it as a drastic shortage. I view it as the time has come to look at pay scales.”

A deregulated environment also allows for wide variations in pricing, so the most cut-rate operations in effect restrict the ability of large fleets to raise freight and pay rates.

“There’s still some carriers out there at 28 cents,” Klemp says of driver pay rates. “It’s kind of a mispriced industry right now. Some small carriers have done a good job holding the line and holding down freight rates.”

Some fleets have seen turnover drop significantly after a pay raise, Costello says. On the other hand, even after the first quarter pay raise, “turnover went up in the second quarter after falling quite a bit in the first quarter,” he says.

One problem for trucking is, “We’re trying to do this in an environment where there are a lot of other jobs out there,” Costello says. This was especially noticeable during the downturn. After many years of maintaining average earnings above construction and manufacturing, long-haul trucking fell 7 percent in 2001, dropping below construction earnings. The gap is closing, but trucking still pays less than construction.

For that reason and others, the ATA study sees no short-term solution to the driver shortage and is pessimistic about long-term solutions.

The long-haul sector raised pay 5.1 percent in 2004, and some major carriers boosted it 10 percent or more, the study says. If that 5.1 percent continues annually, the study states, “it would take three years to regain the relative wage position the industry experienced in the 1990s and at least four years to achieve a larger differential that might support attracting an increasing share of the labor force into long-distance trucking.”

That 5.1 percent won’t do much for the shortage, the study says, so expect 6 percent to 7 percent for three years. That should “reduce the severity of the driver shortage,” the study states, but not problems such as aging of the driver force, slowing growth of the general labor force and increasing demand for trucking. “Because the adverse demographic trends affecting the industry will intensify in the second half of the decade, trucking firms will face a continuing challenge.”

The Truckload Carriers Association has long grappled with the problem. “We’re looking at every way to get people into our industry,” says Kevin Burch, president of Dayton, Ohio-based Jet Express and chairman of TCA’s recruitment and retention committee. Ongoing efforts include outreach to Hispanics and other non-traditional driver pools. TCA President Chris Burruss says the group is working with the military and with veterans and senior citizens organizations to attract new drivers, and is seeking a U.S. Department of Labor grant for recruitment efforts.

TCA’s younger driver initiative, despite provisions intended to ensure the safety of interstate drivers younger than 21, was defeated by safety activists. But Burch remains hopeful. “A lot of the big carriers don’t want to hear it,” he admits. “But I’ve got some insurers who say, ‘We understand that if we don’t start to get some truck drivers, we won’t have any to insure,'” he says. “So we’re getting some momentum.”

Such efforts could help solve the shortage on both levels – short-term, reflecting the up-and-down cycles of the industry, and long-term, taking into account trends in the economy and the work force. It’s critical to address both, says Eric Starks of Freight Transportation Research Associates.

At the beginning of an up cycle, fleets scream for drivers. For example, after the last downturn ended, fleets offered sign-on bonuses as high as $7,000. “Typically, as the industry starts to recover, to mature in the cycle, they start putting enough drivers in place,” Starks says.

That’s happened to an extent this time, but the factors creating a long-term shortage remain. “They’re fighting with a labor environment that’s not growing fast enough to fill their needs,” Starks says.

Even boom periods aren’t necessarily good for trucking because construction booms simultaneously, offering plenty of jobs with good pay and home time and siphoning off potential drivers, says Bob Novack, an associate professor in supply chain management at Penn State. “But when the economy’s bad, construction’s also down,” he says. “They might want to work for a motor carrier, but most carriers don’t need drivers because business is down.”

An additional 320,000 long-haul driving jobs need to be created during the next 10 years, according to the ATA study. Another 219,000 new drivers will be needed to replace retiring drivers and younger ones who leave the industry, based on current trends. Together, that means about 54,000 new drivers per year, apart from openings created by churn among fleets.

The study concludes the industry is short 20,000 long-haul drivers today. Without a major change in existing trends, that will rise to 111,000 by 2014.

As fleets know too well, churn greatly complicates the shortage. It also adds tremendous cost to their overhead, considering that the cost of replacing one driver – advertising, recruiting, training and other expenses – is $6,000 to $9,000, by various estimates.

Chris Brady, head of Commercial Motor Vehicle Consulting, notes that most fleets say about three-fourths of their driver force is relatively stable. The other fourth turns over at an extremely high rate, producing 100 percent-plus averages for large truckload carriers. The Overdrive Reader Profile confirms this: Only 13 percent of owner-operators worked for more than two carriers in the last five years.

Industrywide, churn is mostly because of pay. That’s the No. 1 factor cited by leased owner-operators in choosing a carrier, according to the Overdrive Market Behavior Report. Asked the most important benefit other than pay, respondents to the Reader Profile said home time.

Home time and working conditions are indeed a big part of the driver shortage, but not the main problem, Fruin says. “I believe you can solve any labor shortage if you pay enough money.”


WHY THE SHORTAGE IS GETTING WORSE
Many factors fuel the driver shortage, according to Global Insight’s study for the American Trucking Associations. Some are longstanding; others more recent.

AGING DRIVERS. Truckers, especially owner-operators, have always tended to be older than the average working person, and the gap is widening. More than half of all truck drivers are now white males, 35 to 54 years old. That group will decline by more than 3 million between 2004 and 2014.

WORKFORCE SLOWDOWN. The growth rate of the nation’s labor force will shrivel by almost two-thirds by 2012, from 1.4 percent to 0.5 percent.

GROWTH IN TRUCKING. The economy will have 3.2 percent average annual growth in real gross domestic product from 2004 to 2014. Trucking growth will slightly outpace this level,
at 3.4 percent.

HAZMAT RESTRICTIONS. Security regulations make it tougher than ever to get, transfer or renew a hazmat endorsement. Because so much freight is classified as hazmat, more fleets require the endorsement. The Transportation Security Administration estimates that the first year of implementing its fingerprint-based criminal history background checks could knock out 20 percent of the qualified hazmat drivers.

HEALTH STANDARDS. New regulations regarding blood pressure in the commercial driver’s license medical exam are more restrictive.

HOURS OF SERVICE. The rule that took effect in 2004 reduces productivity, so carriers need more drivers to compensate.

INSURANCE RESTRICTIONS. High levels of litigation and claims have caused insurers to severely raise rates in recent years, effectively forcing many carriers to reject applicants with marginal safety records.

DRIVER SAFETY SCREENING. Federal regulations now require carriers to seek safety-related information on prospective drivers, and previous employers are required to furnish it.

IMMIGRATION LAW. A ceiling on annual visas restricts the number of workers who can be brought into the country by industry, including trucking.


WEAK LINKS IN THE SUPPLY CHAIN
There is no driver shortage, some say, because if there were, store shelves would be empty. Retailers are likely to reply: Just wait.

Take the example of Limited Brands Logistics Services, which stocks 3,760 specialty stores, including The Limited, Victoria’s Secret and Bath & Body Works. In 2003, trucking’s problems became Limited Brands’ problems.

“Some of it was a commitment from a capacity standpoint,” says Paul Marshall, director of inbound logistics for the company. “Others would accept loads, but be unable to cover the load because they would overbook.”

This capacity problem improved but then worsened in late 2004, Marshall says. Limited Brands has no crisis at the store level, but on-time delivery has slipped to 95 percent from 99 percent three years ago.

Consequently, the company has been forced to adjust to a less flexible trucking industry plagued by a chronic shortage of drivers. While consumers have not yet been inconvenienced, evidence of disruption lies not far below the surface.

“I’ve talked to some shippers, and service is not what it used to be,” says Bob Novack, an associate professor in supply chain management at Pennsylvania State University. “Price is up, service is down, in general because there’s not enough drivers.”

Supply chain kinks are easy to spot once you look closely, says Novack’s Penn State colleague Peter Swan, an assistant professor of logistics and operations management. “Firms that offer loads to truckers often have to call many more firms to get loads moved,” Swan says. “Some loads sit for multiple days waiting for a driver. The effect is disproportionately high for regions that terminate but do not originate loads.”

Carriers are taking advantage of the tight freight capacity “to take a good, hard look at segmenting their customers” into shippers who are carrier-friendly and those who aren’t, Novack says. “When push comes to shove, this one gets our capacity, and this one doesn’t.”

During the 1990s, the logistics trend was to replace inventory as much as possible with just-in-time delivery, says Pete Stiles, vice president of marketing and strategy at LeanLogistics. “People are going just the opposite way now,” he says, because carrier capacity has become uncertain. The new trend is “forward position inventory” – meaning, have plenty of goods in warehouses close to customers, Stiles says.

The driver shortage has also prompted many shippers to share their needs as much as 60 days in advance with carriers, Stiles says. “Traditionally, they’d wait until a day to three days before the actual need, then go dialing for diesel. Well, that’s not working anymore.”

Limited Brands is trying to communicate more with suppliers and make contingency plans when feasible, such as arranging for an extension of dock hours, Marshall says. The company dealt with about 16 leading truckload carriers in 2003; that’s more than doubled to about 35, because the company needs more delivery options.

The company’s logistics strategy remains just-in-time, and the 5 percent that’s late gets delivered the next day. Still, “when you have time-sensitive freight, 5 percent’s difficult to swallow,” Marshall says.

As trucking rates rise, shippers naturally look at alternatives, but rail is largely out of capacity, Stiles says.

“Railroad service isn’t the best these days, either,” Novack says.

Another alternative is establishing a private fleet. “Private trucking will begin to look more attractive for some as dependability of the mode decreases due to the driver shortages and congestion in the next decade,” Swan says. “The ones that demand consistency do it themselves, or use a contract carrier and structure their business so that the carrier is guaranteed enough business – and steady business – to make a buck.”


USING DRIVER-FRIENDLY SCHEDULE
Any discussion of driver turnover inevitably comes down to pay, but most experts agree that it’s no silver bullet.

“If all you do is raise pay, you’re wasting your money,” says Gregory Mechler of The Human Advantage, a fleet management consultant firm. While pay must meet a certain market level, many carriers “with low turnover aren’t the highest-paying in the industry,” he says.

Most carriers with low turnover have found ways to offer drivers a consistent work schedule. “It really comes down to creating predictability,” says Todd Jadin, senior vice president of operations for Schneider National.

This may mean telling a driver he will leave on Sunday and be home not next Friday, but the Friday after. “They may not know what they are going to do during that time, but they can be confident of the return,” he says.

“We promise all drivers they can be home every weekend,” says Barry Brookins, head of recruiting for WTI Transport, a flatbed carrier. The company can afford to schedule around those who take advantage of that guarantee because other drivers prefer to run harder. WTI’s turnover is well below the flatbed average of 120 percent, he says.

To address drivers’ desire for more predictable schedules, Schneider recently announced Home Run, a program in which three drivers share two tractors. Two drivers run while the third driver gets a week off. Though Home Run wages will be lower than in a full-time driving job, response has been excellent, Jadin says. “There are some people really excited about the 17 weeks off and excited about knowing where they are going to be.”

Such predictability and consistency is true of most private and less-than-truckload fleets. The work may be difficult, with multiple-stop loads, but drivers “know what they are going to do each week and when they’ll be back,” Mechler says. The result? One of Mechler’s private fleet clients has less than 10 percent turnover.

Quite a feat, especially compared to the large truckload sector, which hit 129 percent annualized turnover in the second quarter of 2005. Some large fleets that have focused on retention, though, have done much better. Schneider has 50 percent less turnover than the average truckload carrier, Jadin says. Turnover at Crete Carriers is less than 40 percent, says Richard Snyder, director of recruiting. “We need to see it back in the 20s,” he says.

That desire for constant improvement illustrates one key to high retention, Mechler says. “The No. 1 thing is companies that have low turnover are committed to that from the top down. It’s a prime, strategic initiative.”
-Linda Longton


COMMUNICATION: RETENTION’S SOFT SIDE
One hallmark of low-turnover fleets is a regular flow of communication throughout all possible channels – drivers, upper management, office workers, even drivers’ spouses.

Good communication has various elements, some of them subtle. WTI Transport has even addressed its vocabulary. “We no longer call them ‘terminals’ because the term means dead and dying,” says Barry Brookins, head of recruiting. “We’re calling them service centers to emphasize our commitment to our drivers and customers.”

Here are three major areas that experts say should be part of every channel:

INCLUSION. Carriers should “train drivers on financial fundamentals: Here’s how we make money,” says Gregory Mechler of The Human Advantage, a fleet management consultant firm. When drivers understand the need to meet customer demands, they are less likely to feel as though they are being taken advantage of. Getting drivers involved in problem-solving can also help. “Companies with low turnover might say: ‘We’re trying to come up with a new fuel economy plan, and you’re going to be on the team,'” Mechler says.

HONESTY. “Honesty from the get-go is one of the most important parts,” says Jet Express President Kevin Burch, who also chairs the Truckload Carriers Association’s recruitment and retention committee. “When we interview the new drivers, a lot have only been told the good things. We tell them everything.” Jet Express also uses a mentor program, which pairs each new driver with a helpful staff member.

RESPECT. Another aspect of communication is treating drivers as individuals. “So often drivers are looked at as this group of people outside the walls that’s just an extension of the truck,” Mechler says. For example, managers may talk about drivers only by driver number. “That’s dehumanizing,” Mechler says. One way to avoid that problem is to ensure everyone understands the driver’s job. At C.R. England, “The executive committee is going out on a truck in the next 30 days to make sure they stay in touch with what’s going on,” says Josh England, director of independent contractors.
-Linda Longton

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