ELDs’ capacity squeeze assumption no. 1: Fewer miles

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Updated Dec 11, 2017

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Every Wednesday, Diane McHaney downloads average-rate data from DAT Solutions. As an analyst for Barton Logistics, a brokerage based in Bandera, Texas, she identifies trends in spot and contract freight markets.

Of particular interest is the mode — the most frequently occurring value in the data set. Also important is the standard deviation of DAT’s rolling 15- and 30-day spot market average-rate data. Both indicators help identify early signs of rate volatility.

One year ago, their analysis led McHaney and Criss Wilson, Barton’s vice president of operations, to predict that rates would begin to increase dramatically by late 2016 as more carriers came into compliance with the electronic logging device mandate. Pricing would be much higher, they surmised, as ELDs took capacity away from small fleets and owner-operators by squeezing their utilization.

Their predictions, which have been echoed around the industry for years with respect to mandated ELDs, have been wrong to a certain extent, and they well know it. One reason is that because the Owner-Operator Independent Drivers Association’s court challenge of the mandate loomed large until June, when the challenge met its end, few owner-operators have moved to adopt ELDs. The same can be said for the smallest of small fleets in Overdrive’s audience.

Among Overdrive readers who say they intend to continue trucking after the mandate comes into play at the end of the year, only 20 percent report using e-logs today, many of them leased to larger carriers that have required it for years. While that percentage is up from spring 2016 levels when nearly identical polling at OverdriveOnline.com showed 14 percent of respondents using e-logs, it’s hardly approaching universal adoption.

Owner-operators’ view on the potential positive/negative rates effect of the ELD mandate

According to recent polling, shown above, six in 10 Overdrive readers, largely an anti-ELD mandate group, believe there will be at least an upward bump, if not a prolonged change, in rates. Two principle assumptions underpin the notion that ELDs will impact the industry enough to result in capacity shortages that drive up rates.

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Assumption No. 1

Many drivers now are running more miles than they otherwise could if strictly adhering to the hours of service rule.

A solo owner-operator running strictly legal hours would be hard-pressed to top 125,000 annual miles, says Todd Amen, president of ATBS, the nation’s largest owner-operator financial services provider. Estimating that half of today’s trucks don’t have an ELD, “when we put in this ELD mandate, we’re going to lose 8 to 12 percent of the miles that we run.” Rates, he says, “are going to have to go up to compensate.”

In Overdrive’s February report in this series, we reported a 3 to 6 percent productivity drop, post-ELDs, for larger carriers. Some owner-operators have noted larger drops.

With so many large carriers already operating with e-logs, a reduction in overall capacity on the lower end of the oft-noted 3 to 6 percent productivity drop reported by carriers may be most likely. Craig Fuller of the TransRisk rate-hedging service believes the rate impact of a small drop, likely to be a couple percentage points over the next two years, would be minimal.

But if the equivalent of 6 percent of available capacity were taken out of the market, the impact on rates would be “exponentially more” because of how the supply chain works, Fuller says. Shippers likely would overbid rates to ensure their loads move quickly enough.

The ELD rule’s full impact will be difficult to gauge, he says, since other variables could play a factor for the remainder of 2017 and into 2018: e-commerce growth, changes in trade policy, government spending and more.

Amen, like the Barton Logistics analysts, admits he’s gotten a fair number of his own forecasts relative to ELDs and rates wrong. In spring 2016, Amen predicted that miles for his owner-operator clients would drop in 2016 as the ELD transition picked up steam. On the contrary, miles rose as owner-operators ran harder to make up for lackluster rates through most of the year. Most continued to postpone ELDs as long as possible.

Amen also predicted 2016 rates would be up 10 percent or more, which didn’t happen. He says he was “just early” on that one, as rate indexes began to swing in a positive direction for truckers in late 2016 and into 2017.

Whatever the timing, Amen and some others still believe ELDs will push up rates. Speaking on a conference call with owner-operators in April, he said the ELD transition is “going to mean great things for you, ultimately. … Once that takes the ability to run [excess] miles out of the industry, there will be more freight, and rates will have to go up.”

Don’t count Monte Wiederhold, owner-operator of nine-truck B.L. Reever Transport, among the true believers. Wiederhold faults the assumption that there’s much “skipping a trip,” or hidden drive time, going on among pros today. “I’ve been through a couple DOT audits,” he says. “In this day and age, to be able to hide that stuff” is more difficult with the burden of supporting-documents proof put on carriers. “In this electronic age,” even if you’re using a paper log, “it’s hard to hide anything.”

B.L. Reever Transport small fleet owner-operator Monte Wiederhold (his 2000 Western Star pictured) might be among the fifth of owners who see the potential for a brief rate bump. “Every time there’s some sort of a major new regulation,” he says, rate growth is predicted. “I’m one of those guys who says, ‘I’ll believe it when I see it’ – and if I see it for a long-enough time and it’s not just a little bump.” Hear an Overdrive Radio podcast talk with him on the subject via this link.B.L. Reever Transport small fleet owner-operator Monte Wiederhold (his 2000 Western Star pictured) might be among the fifth of owners who see the potential for a brief rate bump. “Every time there’s some sort of a major new regulation,” he says, rate growth is predicted. “I’m one of those guys who says, ‘I’ll believe it when I see it’ – and if I see it for a long-enough time and it’s not just a little bump.” Hear an Overdrive Radio podcast talk with him on the subject via this link.

Wiederhold’s also jaded because he’s heard similar talk of a rate hike around every major regulatory change to hit trucking over the last few decades: Capacity was going to fall, so rates would rise. Such predictions accompanied deregulation and introductions of the commercial driver’s license, the 14-hour rule and the Compliance, Safety, Accountability program.

“There will be all this freight out here, and nobody to haul it, and the rates are just going to go up,” Wiederhold paraphrases, adding that this rationale encourages self-fulfilling prophecy. “Let’s say today there’s something to do with the winter in South America where coffee beans are grown, and people start talking about a coffee bean shortage. The price of coffee beans doesn’t go up six months from now – it goes up immediately. Then there’s a little bump, and people all say, ‘Well, we kind of wore that one out,’ and it’s back to situation normal. And I think it’s the same situation with this.”

The fickle nature of the spot market for freight, and brokered loads in general, is more likely to adjust quickly to the new reality than experience any sort of long-term improvement, Wiederhold believes.

Talking enough about a big ELD effect on productivity may yield that self-fulfilling prophecy in contract negotiations between large carriers and their shipper customers, Wiederhold says, but it won’t be as simple for smaller carriers. They often don’t have much leverage with shippers beyond providing excellent service.

On the contrary, at this moment there’s evidence of shippers speeding up or otherwise extending their bidding processes to get out ahead of rate expectations from the mandate. In May, Walmart wrote carriers and brokers participating in its annual bid, noting a “high variance in rates” was submitted for its truckload bid. In response, the retailer announced it would invite additional nonincumbent parties to participate in a third round. Historically, Walmart has conducted only two rounds of bidding before awarding lanes.

Mark White of Old Time Express, a Tennessee-based 25-truck fleet founded by his father, Bo, in the 1990s, was surprised by an email from an important customer in June. “We thought maybe it was a one-off bid on a particular lane,” White says, but “it turned out to be their whole package” of contract freight. White believes “they’re trying to get out on the front end and get some pricing nailed down. They realize it could go up and go up quite a bit.”

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