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Despite Challenges, Trucking Industry Outlook Remains Strong

September 26, 2018


Nearly 71 percent of all U.S. freight is moved by trucks, making the transportation industry an integral part of the nation’s economy. In fact, changing dynamics in trucking could have a ripple effect to many other industries.

To discuss the state of the transportation industry, Katz, Sapper & Miller’s Transportation Services Group along with King & Ballow Law Offices and KSM Transport Advisors, hosted its annual Trucking Owners Business Roundtable in Nashville, TN. Experts offered presentations on benchmarking trends, strategic acquisitions, the current market environment, tax law updates, legislative updates, and other key industry topics.

Though the transportation industry still faces some of the same challenges as in recent years, particularly related to driver shortage, the overall outlook for the remainder of the year is positive.

Characteristics of Top Performers

Analyzing aggregated data from over 160 trucking companies, the Truckload Carriers Association’s (TCA) inGauge benchmarking platform was used to identify internal and external benchmarks through multiple data visualization tools. The TCA Profitability Program includes best practice groups, currently consisting of 82 member-companies that meet two to three times per year to compare data and share ideas.

Chris Henry, program manager for TCA’s Profitability Program, explained that the cloud-based benchmarking platform, which was designed to promote best practices in the trucking industry, noted nine common success traits of high-performing carriers and distinguished the top 20 carriers based on their gross margin performance. The top carriers shared the following traits:

  1. They “add by subtraction,” eliminating redundancies.
  2. They invest in tangible and intangible assets, optimizing time, distance, and pricing.
  3. They consider dynamic pricing, understand commitment versus capacity, and identify spot markets.
  4. They work “on” versus “in” their business.
  5. They embrace meritocracy, accepting that the best ideas do not always come from the top.
  6. They spend 95 percent of their time listening, realizing that good leaders listen more than they speak.
  7. They understand the value of time and that meetings must have a purpose and an outcome.
  8. They see the big picture and are nimble and flexible to change when needed.
  9. They tell their story effectively, understand the value of communication, and manage expectations.

Another trait common among the most successful carriers is that they realize how internal and external communications contribute to a favorable company image. Many leading trucking companies, including several TCA high-profit performers, have effectively used social media to expand their reach through focused storytelling on Facebook, Twitter, and YouTube. By utilizing various channels, the carriers are sharing their brand and message with new audiences they would not have reached otherwise.

In addition to the success traits, the 2018 inGauge Insights Report cites that this year’s top performers have realized five out of six TCA predictions for 2018, including:

  1. Achieving between eight to 22 percent organic revenue growth.
  2. Realizing up to a 14 percent improvement in gross margin results.
  3. Increasing driver and non-driver payroll.
  4. Shortening the length of haul.
  5. Continuing to see issues related to driver retention.

The only TCA prediction not experienced by top-performing carriers is a high driver to non-driver ratio.

Key Factors for Savvy Acquisitions

Strategic acquisitions are significantly impacting the transportation industry, but according to a panel of experts, there are a number of factors that must be considered to help ensure a successful transaction. Katz, Sapper & Miller’s Randy Hooper, a director in KSM’s Transportation Services Group, led a panel discussion on how to successfully navigate strategic trucking acquisitions with industry experts Bill Provost, president and CEO of Quickway Distribution Services, Don Streuber, executive chairman of Bison Transport, and Spencer Tenney, managing partner of The Tenney Group. Sharing their personal experiences with acquisition successes and failures, the panel outlined the following as key factors for consideration when making an acquisition:

  • The overall growth strategy through acquisition.
  • How aggressively to pursue new opportunities.
  • The importance of looking at niche carriers.
  • The decision to tuck-in versus operate independently.
  • The impact of investing in traditional carriers versus private equity.
  • The use of tax laws and deferrals as negotiation tools.
  • The importance of cultural fit, a strong management team, and non-competes.
  • Other factors that drive up valuations.

While carriers find success using a variety of acquisition strategies, the panel agreed that a strong management team and cultural fit are essential elements of successful acquisitions.

Supply and Demand in Today’s Economy

Though demand in the trucking industry remains high, the driver shortage remains the primary industry supply constraint, according to Brad Delco, managing director at investment bank Stephens, Inc. In a tight labor market, the average age of drivers continues to rise, and driver pay continues to be inferior to that of other vocational jobs. Despite the swelling number of Class 8 orders, supply capacity is tight and should remain so in the year ahead given the ongoing driver shortage. The other factors affecting supply include ongoing equipment costs, increased operating expenses, comprehensive drug and alcohol testing, and regulations such as speed limiters.

Looking ahead, Delco predicts that strong spot rates will reaccelerate into the fall and holiday peak season, that contractual truckload rates will continue to push higher, and that accessorial fees will become more common with increased equipment detention times.

While the demand for trucking is strong and is expected to remain so through 2019, investor concern over hitting a peak inflection point has negatively impacted stock performance. Given investor sentiment, carriers must focus on making business decisions that will generate high returns and entice investors.

The Impact of Tax Reform on Individuals and Trucking Companies

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, affects businesses in very different ways. Troy Hogan, a director in KSM’s Transportation Services Group, explained that tax professionals are still navigating the details of the law’s provisions, especially as the Internal Revenue Service continues to issue clarifying guidance.

The new law includes tax provisions affecting businesses established as both C corporations and pass-through entities. There are also significant changes to how bonus depreciation and like-kind exchanges are treated. Provisions affecting individuals include the itemized deduction limitation, an increased alternative minimum tax (AMT) exemption, and an increase in the standard deduction amount, to name a few.

The TCJA will affect carriers differently depending on whether they are non-asset or asset-based, whether they lease or purchase equipment, and whether they have owner-operators or employee drivers. However, the proposed regulations only further confirm that trucking companies are among the winners with the new law.

Legislative and Regulatory Changes Affecting Transportation

From laws pertaining to electronic logging devices (ELDs) to those addressing hours of service, industry leaders Dave Huneryager, president and CEO of the Tennessee Trucking Association (TTA), Dave Heller, vice president of government affairs at TCA, and Eddie Wayland, partner at King & Ballow Law Offices, shared insight on the regulatory changes impacting the transportation industry. One potential change focuses on The Honest Operators Undertake Road Safety (HOURS) Act, a bill introduced that would allow drivers to operate with more flexibility – such as adjusting schedules to avoid rush hour traffic – to better suit their needs without incurring detention time.

Other regulatory changes include bills related to young drivers, the size and weight of trucks, drug and alcohol testing, infrastructure, and federal preemptions under the Federal Aviation Administration Authorization Act (F4A), which apply to interstate trucking operations and are related to state meal and rest break laws.

Balancing Customers, Demand, and Profitability Goals in Today’s Environment

In a diverse market, trucking companies are using a variety of tools, processes, and methods to analyze and optimize freight networks. Jack Porter, CEO of the GPorter Group and managing director of TCA’s Profitability Program, led a panel discussion on the current state of the transportation industry with carriers Jeff Reed, president of Skyline Transportation, Inc., Mike Floyd, director of truckload/LTL linehaul operations with Averitt Express, and Dennis Dellinger, president of Cargo Transport, Inc.

When asked to name a few top qualities of preferred shippers, the panelists had very specific characteristics that distinguished their favorites. Floyd’s list included shippers with whom reasonable service expectations are established up front so that commitments are consistently met. Reed looks for consistency, efficiency with loading and unloading, and accurate invoicing; he also looks for shippers with a unique need that can be serviced to create long-term customers.

Carriers are also challenged with exploring new ways to keep drivers happy. Averitt’s mission, according to Floyd, is to “have profitable driver-friendly freight.” To that end, its drivers are consistently surveyed, and their feedback is incorporated in decision-making in an effort to keep drivers happy. For example, Averitt’s drivers indicated a preference to be home on the weekends, so the company lessened its weekend deliveries.

Where Does the Industry Go From Here?

Though trucking demand remains strong, carriers continue to face a number of challenges, including driver recruitment and retention and dipping stock prices. As a result, carriers are continually looking for ways to improve their business, whether it is developing a driver-friendly culture, growing via acquisition, or leveraging operational efficiencies. The good news is that the new tax law will likely be advantageous for carriers as they leverage tax planning opportunities, and proposed regulatory changes will allow carriers increased flexibility as carriers navigate the roads in the year ahead.

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