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Prepare for Change: ELDs, Autonomous Trucks and the Future of Trucking

July 25, 2017

The electronic logging device mandate could be a “shock and awe” event that reduces capacity and increases freight rates, and it will create a “data explosion” that could reduce driver detention time. Meanwhile, autonomous trucks will not replace drivers any time soon, and new investors are showing interest in the motor carrier industry – but fleets must be prepared, flexible and transparent if they want to make a deal.

Those were some of the observations from leaders in government relations, economics, and finance at the Trucking Owners Business Roundtable held June 22 in Nashville, TN.

The event, sponsored by Katz, Sapper & Miller’s (KSM) Transportation Services Group, KSM Transport Advisors, and King & Ballow law firm, brought together owners of some of the country’s top trucking companies to hear from industry leaders and discuss the state of the trucking industry.

Massive Consolidation Coming?

Among the topics discussed was the long-awaited electronic logging device (ELD) mandate, which will go into effect Dec. 18, 2017. Brad Delco, a managing director of the Stephens Inc. investment firm in Little Rock, AK., said the ELD mandate, if strictly enforced, could reduce for-hire fleet capacity by seven percent.

Delco said many small carriers and owner-operators use paper log books that can be falsified to extend driving time. When the ELD mandate takes effect, they no longer will be able to do that, and the reduced hours will be the equivalent of removing 56,000 trucks from the road. Citing ATRI Research, he said seven percent of the for-hire sector’s capacity will be reduced, or 3.7 percent of the industry capacity, including private fleets. In a $700 billion truckload market, that is $49 billion worth of capacity removed from the system, the equivalent of the less-than-truckload and domestic intermodal sectors combined.

At the same time capacity is being reduced, smaller carriers and owner-operators will no longer have a mileage advantage over larger carriers, while the larger carriers still will enjoy greater economies of scale. The result: “massive amounts of consolidation in this industry over the next two to 10 years as long as the ELD mandate is enforced,” he said.

Delco went on to say that the fragmented trucking industry needs a “shock and awe” event for rates to significantly rise, and the ELD mandate could serve that purpose. The industry has been struggling with a freight recession that began in May 2015, which was partly the result of an inventory glut caused by a variety of factors from the previous two years. In 2013, hours of service rules were tightened, reducing capacity by an estimated 1.25 percent. Meanwhile, e-commerce began hitting its stride that year. In 2014, the so-called “polar vortex” weather event stranded trucks, while there were issues with the rail and port sectors. Those factors led shippers to increase their inventories, resulting in favorable contract rates at the beginning of 2015. However, in May of that year, shippers began realizing they had too much inventory in a slow-growing economy, and they began reducing it.

ELD Data Could Reduce Detention Time

At the same time the mandate is taking some trucks off the road, it could put others back on. Dave Heller, the Truckload Carriers Association’s (TCA) vice president of government affairs, said the mandate will create a “data explosion” because once ELDs are adopted, fleets and compliance review officers will know which customers are not maximizing fleets’ time.

Heller pointed to numerous studies showing drivers spend too much time waiting on loads, with one study in 2001 by the Federal Motor Carrier Safety Administration (FMCSA) tying that wait time to crash involvement. A FMCSA study through Virginia Tech in 2014 found that while the industry standard is two hours, drivers are being detained a total of 3.4 hours. J.B. Hunt also found that fixing the detention issue would let drivers add 44,475 miles per year – a significant pay raise.

However, it is uncertain what can be done about that issue. The Moving Ahead for Progress in the 21st Century Act (MAP-21) signed into law by President Obama in 2012 gave FMCSA authority over shippers, receivers, and intermediaries who coerce drivers into violating hours of service laws, but it is unclear if detention time is coercion. Congressional action may be needed to further clarify enforcement of MAP-21.

Other implementation challenges remain. A list of 62 compliant devices has been released, but just as important will be another list, still under development, of noncompliant devices fleets must avoid. Meanwhile, states must create their own enforcement regimes.

“States are all over the map,” Heller said. “Some states get it. Some states know how to do it. Other states are really kind of diving into it right now and figuring how they are going to enforce this.”

The roundtable also included a panel of experts in mergers and acquisitions: Craig Decker of Wolfe Capital Markets and Advisory; Mark Niznik with Linx Partners; Paul Jones with Raymond James & Associates; and Seth Wilson with Headhaul Capital Partners. Wilson and Niznik work for private equity firms that own companies, while Decker and Jones are investment bankers who assist others in buying and selling firms. Wilson agreed with Delco that the ELD mandate will lead to significant consolidation, while Niznik said the mandate will improve rates. Niznik said a firm that wants to be acquired must be compliant now.

‘Not A Bad Time’ to Sell Your Company

The panel painted a mixed picture of the market. Wilson said private investors without previous experience in transportation are showing interest. Jones said the market is “in decent shape right now, but it is not as hot as it probably was a couple of years ago.” Still, owners considering selling their company should focus on its performance rather than the overall state of the industry.

“If your company is doing really well, now is probably not a bad time,” Jones said.

Asked what makes a strong prospect, Niznik said “a strong management team and a good business model.” Wilson said his firm looks for companies with a defensible niche position. One company, for example, transported radioactive materials for the U.S. Department of Defense, which meant it did not have much competition. His firm prefers fleets with a strong regional presence over those with wider but weaker coverage areas.

The four agreed that companies that are selling or considering selling should be prepared, flexible, and transparent. “Surprises kill deals,” Wilson said, while Decker said, “Uncertainty brings about time, and time is the killer of all transactions.”

Autonomous Vehicles? Not Yet.

In other business, the four agreed that autonomous vehicles are many years away. Decker expects the technology initially will be limited to closed environments such as ports because it will not be able to react to unexpected situations on the highway. Wilson said some of his business classmates 20 years ago focused on online grocery delivery, a market that still has not taken root. Just as cell phones have glitches, so too will trucks, he said.

Regardless of how fast the technology improves, autonomous trucks will not be traveling any highways until the legal and regulatory frameworks are ready. Earlier in the roundtable, TCA’s Heller said many questions remain to be answered, including what happens if a truck is hacked, how to cover accident liability, and how regulations must change. The issue is getting a lot of attention from policymakers, with the FMCSA expected to issue its policy soon.

“You cannot throw a rock in Washington, D.C. nowadays without hitting an autonomous vehicle conversation,” he said.

The Nashville-based roundtable occurred after an eventful few months in Tennessee. Dave Huneryager, president and CEO of the Tennessee Trucking Association, reported on that state’s IMPROVE Act, in which Gov. Bill Haslam and legislators raised $350 million for roads by passing a six-cent gasoline tax increase and 10-cent diesel tax increase along with increases in natural gas taxes and registration fees. Meanwhile, $410 million in other taxes were cut.

So what does the future hold? These things we know: The ELD mandate is coming this December, while autonomous truck buyers will have to wait a lot longer. And while the market is forever changing, it always favors the prepared.

David Roush President, KSM Transport Advisors & KSMTA Canada

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