The impending changeover to electronic logging devices (ELDs) is but one issues that will generate operational and fiscal of challenges for truckers near-term, according to Rich Voreis, CEO of Marquette Transportation Finance. In this guest column, he explains how ELDs and other issues can affect the future profitability of motor carriers large and small, both positively and negatively.
According to Reuters, retail sales increased 0.6% in July, demonstrating a return of consumer spending confidence, which may indicate a Federal Reserve rate hike by year end.
But while the economy makes positive strides, the U.S. transportation industry expects a few twists and turns in the road ahead. Several changes in the industry landscape may affect profitability, mergers and acquisitions activity, and access to financing for some firms.
Below are five areas that may be bumps in the road for trucking companies.
Regulations chart a new course: As with many industries, regulatory oversight can add training time, expenses and processes to everyday operations. For the trucking world, December 18 begins the compliance phase of the ELD rule—truck drivers and motor carriers must begin installing and using devices on the Federal Motor Carrier Safety Administration (FMSCA) self-certification list in all hauling vehicles.
But this regulatory change to improve drive time accuracy can be a burden on a company’s operational capital. Smaller companies may be unable to absorb the costs of implementing ELDs, while larger companies will have much higher costs associated with compliance.
And, no matter the company size, some efficiency will be lost as employees are trained to use the new systems.
Compliance may decrease cash flow and increase expenses for some companies, but others may leverage the opportunity to pick up new business.
If carriers exit the market, savvy companies can pick up the slack which will require flexible financing to support rapid growth, even in an uncertain climate. In the tightening financial environment, obtaining financing to grow—and quickly—can be a challenge.
Risk management expenses grow: Insurance costs are a given in the transportation industry. Yet, insurance rates have risen more in transportation than any other commercial market—up 4% in the second quarter of this year after a 5% hike in the first quarter, according to MarketScout.
That increase, compared to only 1% to 2% for other industries, will impact cash flow and profit margins across the industry.
The driver shortage: Motor carriers across the nation continue to face a shortage of qualified, reliable drivers to meet freight and haul demands.
This can spell profit loss and extra expenses with inactive trucks requiring all of the costs of maintenance, without generating offsetting income.
Three main factors are at work in this nationwide driver shortage: industry growth outpacing driver supply, the need to replace the large percentage of retiring drivers, and the lack of qualified drivers.
In 2015, the American Trucking Associations (ATA) predicted a shortage of 175,000 drivers by 2024. Combined with the other changes in the industry, finding drivers will remain a top concern in the coming years.
Mergers and acquisitions: Required regulatory compliance combined with rising costs of risk management and keeping trucks on the road, may result in carriers choosing to exit the market.
That shift could increase the merger and acquisition opportunities for nimble companies ready to expand their market share. But, the uncertainties ahead may also cause lenders to offer less financial flexibility. If the number of carriers diminishes, but the remaining businesses are not able to take on the freight volume due to financial restrictions, the industry may see increasing volatility ahead.
Traditional financing challenges: All of the above factors have created unpredictability in the transportation market, and the last may have the most pervasive reach. Traditional lenders, like banks and equipment lenders, have limited appetite to finance an industry with high cash flow needs and uncertain expenses.
Due to the industry’s bumpy road ahead, fewer traditional banks are willing to lend to transportation companies, and those that do will likely require conservative loan structures with restrictive covenants, and may tighten controls on current loans.
The opportunities ahead—like acquisitions, mergers and increased business volume—may require freight companies to leverage themselves, other collateral or more receivables beyond many banks’ credit controls.
Moving ahead: While some companies may decide to exit the market, enterprising transportation companies could leverage opportunities for growth, whether through acquisitions or increased business volume. That is, as long as they can find financing to support their expansion.
Despite the current volatility, the freight transportation industry remains a vital part of the U.S. economy, offering growth opportunities even in times of change.