The demise of the owner-operator has been a hot topic for more than 30 years, says Overdrive Trucker of the Year Steve Brosnan. “Every time I hear it – that the owner-operator will be extinct – I chuckle,” he says.
His trucking mentor Lonni Bryant heard the same thing in the 1970s when industry watchers were predicting a wave of large-fleet consolidation and fuel shocks would shut small-business truckers out of the industry. Brosnan bought his first truck in 1979 during nationwide owner-operator shutdowns. “I thought it was a hell of a bad time to buy a truck,” though he says he wouldn’t trade the decision for anything.
That love of the industry is one key to owner-operators’ survival, says Dart Transit’s in-house legal counsel Doug Grawe. “There are so many out there that really do want to be owner-operators.”
While barriers to achieving or maintaining independence in the current downturn may be many, they are also temporary, contrary to naysayers. In every economic cycle the owner-operator sector “contracts with everyone else,” says Jay Thompson, president of Transportation Business Associates, a fleet consulting firm. “We hear more noise about them because they are individual voices, as opposed to fleets that go away with little fanfare. The numbers tell the real story.”
For those who hang on, the prevailing view is that the down cycle in the wider economy will give way to recovery, as it always has. And small business truckers once again will prove wrong the following myths that predict their demise.
In Overdrive’s 35th Anniversary issue of September 1996, Truckload Carriers Association (then named Interstate Truckload Carriers Conference) President Lana Batts predicted greater consolidation among large truckload carriers. She also foresaw industry-wide gains coming through increasing utilization and a great deal of opportunity for owner-operators.
In 1996, recalls Batts, “the prospects for the owner-operator were bright. Today, they’re really kind of flat on their back.” Utilization rates are down. Particularly since 2003, as diesel prices began climbing, shippers moved cross-country freight to rail and away from the dominant long-haul trucking industry.
The average length of truck haul decreased. The Overdrive Owner-Operator Market Behavior Report since 2004 has tracked a 10 percent decline in the share of owner-operators with average hauls of 500 or more miles and a concurrent 10 percent rise in the share of owner-operators with average lengths of haul of 200 or fewer miles.
Long-haul might be on the wane, but it doesn’t mean it will go away. And even as it diminishes, does that deny opportunity for owner-operators? Absolutely not, Roger Knox says.
He runs containers full of Goodyear tires from Lawton, Okla., to a Dallas railhead and takes empties back. His 2003 Peterbilt 387 is leased to Dallas-based Rhino Transportation, a 40-50-truck fleet of mostly owner-operators.
Knox says an owner-operator moving to an intermodal short-haul operation from a high-paying long-haul gig might have to recalibrate his approach to business. Knox grosses just 92 cents a mile, loaded and empty (plus a fuel surcharge), but his expenses are lower.
“You don’t have to have a $150,000 tractor to do this,” he says. Instead, maximize uptime in an older truck with the convenience of being at or near home most days for solid maintenance and breakdown-service connections.
Local opportunities exist – and will continue to – for independents and small fleets, says Commercial Motor Vehicle Consulting’s Chris Brady, author of the annual Overdrive report. “I don’t think construction and building companies want to invest in transportation equipment,” he says. “Now, I don’t think you’ll see owner-operators driving mixers. But in dump applications and others where they can haul different commodities, where there’s flexibility in the system, they’ll definitely grow.”
In an April analysis of trucking company failures, Avondale Partners predicted ramped-up consolidation for the truckload sector. “With the continued growth of the major truckload carriers and the widespread application of advanced technology,” the report says, “the barrier to entry has been raised significantly and there are now firms in a position to force consolidation.”
At the same time, as the report notes, the severity of the current business cycle has large fleets downsizing their owner-operator programs to maintain a high utilization rate for their company equipment. The practice is nothing new and, as Brady puts it, in any downturn the small-business trucker “always gets whacked” the hardest from all sides.
Nevertheless, so-called “non-asset-based carriers” that rely heavily on owner-operators continue to thrive. Dart Transit’s Steve Gundale reports its leased owner-operator numbers were up slightly at the end of the first quarter, by 28 trucks. Landstar Carrier Group President Pat O’Malley insists his company’s all-owner-operator model ensures continued success. Warnings of the owner-operator’s extinction are “headline hyperbole,” he says. “One guy making a decision about his business is fundamentally more safe and secure than a guy making a decision about the thousands of trucks he owns.”
Companies like Landstar aren’t going away, Brady says. “Their business model has proven profitable during the downturn.” The company’s number of leased operators hasn’t changed much, even in the face of declining freight.
It is true, though, that this down business cycle has reduced leased owner-operators industrywide. Among the 10 publicly traded fleets Avondale Partners examined, all but Swift Transportation and USA Truck reduced their leased fleets from 2007 to 2008 in greater percentage terms than their company fleets.
But Brady points out that some of these same carriers, such as Werner and Knight Transportation, in turn developed their brokerage and logistics wings to capture more freight without having to invest in new equipment. “When freight becomes plentiful, they will be less aggressive at expanding their fleet – so they’ll expand with [independent, non-leased] owner-operators,” Brady says. “They don’t want to have excess trucks in a downturn.”
Increasing niche specialization among owner-operators is a parallel trend that bears this notion out. Says owner-operator Brosnan, who back in 1997 bought a lowboy trailer when he sensed specialized heavy-haul opportunity: “Owner-operators do jobs and perform services that big companies can’t do.”
Today, leased to Anderson Trucking Service, Brosnan is hauling heavy in the increasingly robust wind energy sector.
In a recent speech to a conference of heavy truck dealers, Navistar Senior Vice President James Hebe noted that the inevitability of a nationwide electronic onboard recorder mandate sounded the “death knell” for owner-operators, assuming many routinely run beyond hours-of-service limits to turn a decent profit.
It’s not a new prediction, but a little math shows that most owner-operators don’t violate hours regs, says Thompson. Cheating on hours is one way to run more miles and improve profitability, assuming you’ve got the freight, the stamina to work 70-plus-hour weeks and can avoid DOT enforcers. But the average Class 8 truck utilization “is only somewhere around 2,300 miles a week,” Thompson says.
It’s theoretically possible, running long haul and pushing the limits of the hours regs, to log 3,000 or more miles a week, he adds. Yet according to the 2009 Overdrive Owner-Operator Market Behavior Report, the average owner-operator logs just under 1,800 miles a week. “EOBRs aren’t going to be that big of a deal,” says Thompson.
In a New York Times Q and A, historian Shane Hamilton, author of Trucking Country: The Road to America’s Wal-Mart Economy, discussed owner-operators’ role in the deregulatory economic landscape of the past 30 years. He repeated an old notion about owner-operators’ supposed inability to negotiate adequate fuel surcharges in the face of increasing shipper demands for low rates.
While the numbers may seem to back him up, with only 74 percent of owner-operators receiving surcharges, according to Overdrive research, that percentage is considerably higher in fuel-intensive applications. More than 80 percent of owner-operators with average lengths of haul higher than 200 miles receive fuel surcharges. Many of those in shorter haul applications, when they are not paid by the mile, are able to recoup current fuel costs through other pricing models.
Still, “2008 was very bad,” says Brady. “We got high fuel prices and at the end of the year got whacked with a decrease in freight volume. The owner-operator is no different than larger for-hire carriers, though – they’re going out of business, too.”
Equipment costs, too, are rising. Engines equipped with 2010 emissions technology are expected to add as much as $10,000 to the price of a new truck. On this count, Hebe and others have predicted a vanishing act for owner-operators, as only the most credit-worthy volume buyers will be able to afford a new Class 8.
Thompson concludes , though, that healthy owner-operators will have no problem buying used trucks. “One of the primary drivers of owner-operator success over the last number of years has been how easy it has been to get financing,” he says. That has changed, with lenders wanting higher credit scores and strong borrowing histories. But Thompson says improvement of the lease-purchase model has made it easier for would-be owner-operators looking to get into a used fleet vehicle with a good maintenance record.
“You take the used-truck salespeople out of the equation,” he says. “And with a decent contract, [the fleet is] able to watch weekly how the driver’s performing – they can try to help him more quickly” if he needs it.
“What will change for OOs is the increased emphasis on efficiency, productivity and operating costs,” says Volvo Trucks North America’s executive director for marketing, Matt Kelly. “This pressure will have evolutionary impacts on OOs. For instance, it means a virtual end to operating traditional square-hood non-aerodynamic tractors with sub-6 mpg.”
In this environment, those who are still profitable have made needed operational choices long ago, freeing up time to focus on the demanding job of acquiring freight.
Whether the argument is rising costs or something else, time will prove wrong those predicting the owner-operator’s demise, says Brady. Or as owner-operator Brosnan puts it: “We’re an integral part of this industry, and we’ll stay that way.”
Will a new law jeopardize leased contractor status?
Since President Barack Obama’s election, concern has increased that there will be a stronger challenge to the independent contractor classification of workers in various industries, including trucking.
“The concept of an independent contractor that we have today will change legally,” says industry consultant Lana Batts.
The fear is that a federal bill similar to one Obama cosponsored in 2007 would be made law. The bill addressed IC classification for tax purposes and would have instructed the U.S. Treasury Department to set new federal standards for classifying ICs to protect whistleblowers who challenge their IC classification. It also would have levied penalties for misclassification beyond current levels and denied companies “safe harbor” in defending their position by examples of longstanding industry practices.
Such a law could cause “every motor carrier out there to take a look at the risk” of leasing owner-operators, says Doug Grawe, Dart Transit’s in-house legal counsel. Grawe sees the 2007 bill as particularly stringent on employers who are determined by a court to have misclassified ICs. “Right now,” he says, “if I get audited on the IC issue, I could be faced with paying my back taxes and penalties and fines. In [the 2007 bill], I’d have to pay penalties and fines and my back taxes and the workers’ back taxes.”
And if the carrier’s risk is too great, two totally safe choices would exist, Grawe says: “Do we want to become a broker? Or do we want to make everyone a company driver?” The former choice means all leased owner-operators would need to run their freight on their own authority, a riskier business model.
Currently, the IRS offers a control test for determining who is an IC that is little more than a recommendation to states for tax purposes. Many in the trucking community say it would be helpful if the federal government at least adopted a clear definition applicable to both tax and labor realms to supersede the current patchwork of state definitions.
Contrary to concerns that a federal bill will cripple owner-operator legal status, two recent decisions in cases brought against FedEx divisions suggest preservation of the status quo treatment of leased owner-operators.
Grawe says in one, a Washington, D.C., court of appeals ruled that FedEx Home Delivery drivers are indeed ICs and that the company did not have to recognize the Teamsters union as its collective bargaining representative. “The majority opinion spent more time on ‘the opportunities and risks inherent in entrepreneurialism,'” a concept that Grawe says has more in common with decisions of “30 or 40 years ago” than recent decisions focused solely on company “control” of the contractor.
Grawe also points to a Minnesota legislative compromise that preserved the state’s industry-specific treatment of IC definition as a recent favorable development. All the same, he expects a federal bill on IC misclassification before the end of the year.
Other analysts and industry stakeholders don’t worry too much about the IC legal territory, though. They see the latest battles as either a union/nonunion fight with little other impact or just a reason to strengthen lease terms to enhance owner-operator independence.