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Back to Reality: The Trucking Industry Grapples With a New Industry Paradigm

August 22, 2019


“This is a frustrating time in trucking; a confusing time. Last year we were at record highs, record production, and record driver shortage. This year is the opposite.”Craig Fuller, CEO of FreightWaves

After 2018, a year that many in the industry considered a modern era peak, 2019 has been a sobering reminder of how fickle the trucking business can be. Industry leaders gathered at the Trucking Owners and Leaders Roundtable, hosted by Katz, Sapper & Miller’s Transportation Services Group, King & Ballow law offices, and KSM Transport Advisors on July 25 in Nashville, TN, to discuss the state of the trucking industry, challenges affecting carriers, and strategies moving forward. The event featured several panel discussions along with presentations from industry leaders.

Driver Recruiting and Retention

Chad Hendricks, president of Brand Outcomes, began the day by addressing the issues that continue to be at the forefront of carrier concerns – recruiting drivers and methods of employee retention. Hendricks’ presentation considered the issues from a marketing and branding perspective, rather than a human resources focus.

“We’re a commodity,” said Hendricks. “What can a carrier do that is unique to attract drivers?”

Marketing costs continue to rise as some of the larger companies spend hundreds of thousands of dollars per year on advertising and marketing efforts. But despite making those changes, many companies aren’t seeing a difference in retention and turnover. To compound the issue, finding experienced drivers has become increasingly difficult.

For an issue that is such a big concern, Hendricks said that carriers aren’t putting in enough effort to take what they’re learning from marketing and branding and converting it into recruitment. “Branding is important. When everything is a commodity, we need to match company values with branding.”

“We need better recruiter training,” he said. “How do you sell drivers on coming to your company? Drivers ask questions, get their answers, and then disappear. Recruiters need to control the conversation and sell drivers on the business.”

Hendricks also noted that carriers can’t assume that promoting a “family” culture is a good thing. Maybe candidates don’t like what a family culture means to them personally. “You need to see opportunity through their eyes.  What are their experiences, and how can your company cater to what they’ve seen as positive outcomes?”

One solution proposed by Hendricks was to align key driver criteria with the company’s reality. He said that a 10-minute review process can often help determine whether a driver is a good fit for your company. “By setting up a driver profile, you can often uncover whether some candidates should even be drivers.”

Hendricks also suggested carriers should remind drivers about the benefits of their role as “recruiters.” Driver referral programs can put extra money into a current employee’s pocket and have been effective. This strategy leverages existing relationships with friends and family to identify potential driver candidates and the positive impressions of current drivers to recruit new drivers.

Maximizing Margins, Business Strategies, and Where’s My Freight?

KSM Transport Advisors’ President David Roush led a panel discussion addressing several pressing industry topics. Panelists were:

The first topic for the panel – and one that would be addressed by several experts throughout the day – was whether the industry was entering into a freight recession. All three panelists agreed that there were significant new headwinds including a reduction in volume in 2019, softening revenue, and tighter competition.

“2019 hasn’t been a growth year,” said Gibbs. “But the industry isn’t as bad as it was in 2008 and 2009. It’s not a recession, but a return to more normal patterns in the industry.”

“We have to work harder than we did in 2018,” said Voorhees. “We’re not close to a recession, and other economic indicators show we’re in good shape.”

The panel then addressed the shift in freight leverage. “We’re a commodity,” said Voorhees, “and sometimes customers are a commodity. When freight is tight we need to assess which customers are relational and which are transactional.”

Another topic that was raised by Roush was the International Maritime Organization’s low-sulphur fuel mandate for ocean vehicles, otherwise known as IMO 2020. Due to changes in environmental regulations for shipping lines, there will soon be competition for diesel fuel, which could cause an increase in prices as soon as October 2019. All panelists agreed that this should be watched and discussed with shippers.

The panel also discussed the movement toward hiring 18-year-old drivers as a solution for the continuously aging driver workforce. While the industry is showing some support for the strategy, performance and insurance issues are red flags. Many carriers don’t feel comfortable hiring young drivers – but there also aren’t many 18-year-olds who necessarily want to become drivers. All panelists agreed that something needs to be done to address the age concern, but what that is remains to be seen.

Transportation Risk Finance – State of the Market and Strategies

The second panel discussion of the day discussed insurance concerns within the industry. Moderated by Dan Cook, principal and practice leader at TrueNorth Companies, the panelists included:

A large part of the panel’s discussion focused on insurance liabilities and their substantial impact on profitability. All the panelists expressed concern about companies at risk of losing assets and the continued escalation of medical costs. Aging drivers means a potential decline in overall health which could increase premiums. Risk profiles have become much more precise and companies are not able to reduce coverage because of the potential risk of losses. For small fleets with smaller margins, carrying excess coverage is an even greater burden.

The solutions to these problems are still to be determined but all panelists agreed that correctly using technology, such as video and efficiency software, may help reduce areas of exposure and concern.

Transportation Industry Economic Outlook

Ibrahiim Bayaan, chief economist at FreightWaves, presented an economic outlook for the industry.

Bayaan began his presentation by noting that the general economy has been steady since 2016, averaging about 3.2% growth year-over-year. He did, however, state he expects growth to slow down to about 2% but still show positive momentum. Trucking, conversely, isn’t doing as well. While job growth is happening on the service side of the economy, those increases are not significantly related to freight.

The outlook for trucking is based more on numbers related to supply, imports, and retail. With manufacturing in decline and imports down – partially related to tariffs causing a plateau in factory orders – expectations are muted.

On the supply side, 2018 was a strong year for trucking hires, with close to 45,000 jobs added since the recession. But in 2019, the pace has slowed down significantly. “Capacity was expanding but demand has flattened,” said Bayaan. “Pricing is in a tenuous position and the environment is challenging. The industry may have overextended itself, so some correction may need to take place.”

Per Diem Plans and Compliance From an Accounting and Legal Standpoint

Strategies with regard to per diems and travel expense accounting were the subject of the presentation by Eddie Wayland, senior partner at King & Ballow, and Troy Hogan, director at KSM.

Drivers were previously able to take per diems as a miscellaneous itemized tax deduction, however, the Tax Cuts and Jobs Act (TCJA) took away that option. As a result, per diem plans have become a hot topic of conversation for trucking company executives.

Also discussed was the difference between an accountable plan and a non-accountable plan. In an accountable plan, companies give employees money for expenses and the employees bring back receipts without personal tax consequences. In a non-accountable plan, any money given to the employee for expenses is considered taxable compensation, regardless of its use.

Hogan stated that per diem plans are an effective way to increase driver pay by putting additional non-taxable cash in a driver’s pocket. The driver is then responsible for their expenses, and every dollar of per diem can save the company on FICA taxes and potential worker’s compensation expenses. One caveat: Any per diem paid above the per diem maximum of $66 per night out has to be treated as additional W-2 wages for tax purposes.

State of the Trucking Industry

The final presentation of the day was a keynote address by Craig Fuller, CEO of FreightWaves. Fuller said that despite the impressive results of 2018, the truckload sector has not yet made it back to the same volumes experienced before the recession of 2008 and 2009.

“We are in a freight recession, not an economic recession,” said Fuller. “Every fundamental indicator of supply and demand – pricing, volume, truck orders – has gone down for more than two consecutive quarters. The tax cuts last year created a massive amount of demand, which has softened since.”

But Fuller said it’s unfair to compare 2019 to 2018 because 2018 was such a great year. You can, however, compare it to typical seasonality in the freight market. “Are you in a market where volumes are growing or shrinking?”

Fuller questioned whether the growth in 2018 was in the small or large fleets, because both added trucks. But the attitude in 2018 was different. People in the industry were asking why they should work for a large trucking company when they could own and operate their own vehicle. The industry turned quickly and 2019 has already seen six sizable trucking company bankruptcies, with more expected to come.

Fuller said the tariffs were another point of impact. When they went into effect, freight volumes slowed because ports had been driving the domestic freight market since last year. “Tariffs alone don’t matter,” said Fuller, “but inconsistencies and disruptions in supply chain confidence put a lot of strain on the market. Tariffs resulted in a 30% drop in volumes in the port of Los Angeles alone.”

As mentioned by several presenters, freight and rates have gone down, while pay rates, insurance, and fuel costs have increased. Fuller also raised the issue of fallout from the impending IMO 2020 regulations. The demand for ultra-low-sulphur diesel fuel may cause a cost increase of .25 per gallon. He said spikes in diesel costs were the number one predictor of bankruptcies. As a result, smaller carriers are going to find their margins squeezed.

The challenges facing the trucking industry haven’t changed, but the realities of 2019 are forcing those in the sector to reconfigure their expectations after the positive results of 2018. Adapting to the shifting landscape is necessary to further momentum and position companies for growth going forward.

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