1. Chapter 5 The Motor Carrier Industry © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

2. Introduction Brief history Important role in development of 20th century U.S. economy Industry emerged at time of WW I Industry greatly benefited by rapid development of highway system, particularly the Interstate system Rapid growth of economy following WWII corresponds with rapid growth of trucking industry Dominant mode of freight transport today © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

3. Industry Overview Measures of Industry Significance Expenditures for trucking services $645.6B or 83.8% of total expenditures in U.S. for freight transportation in 2006 Truck share of freight transport About 31% of total ton-miles Approx. 8.7M people employed in trucking industry © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

4. Industry Overview Types of Carriers Several classification schemes Legal form of carriage For-hire vs. private Common, contract or exempt for-hire Local vs. intercity operators Truckload (TL) vs. Less-than-truckload (LTL) Heavy LTL Classification by type of commodity hauled © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

5. Industry Overview Number of Carriers Large number of relatively small carriers.6M operators, most with 6 or fewer vehicles Numbers vary significantly by sector Very large number of TL carriers Low capital requirements for entry into TL Much smaller number of LTL carriers High capital requirements for LTL due to terminal network and pick-up and delivery fleet Explanation of LTL operation Yellow dominates national LTL market © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

6. Industry Overview Types of Commodities Hauled Dominates transport of high-value manufactures Food and manufactured products, consumer and industrial goods Most transported relatively short distances (less than one day driving time) Dominates transport of live animals These shipments move very short distances Moves substantial quantities of bulk materials These shipments move very short distances © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6

7. Operating and Service Characteristics General service characteristics Trucking has an advantage on most service- related characteristics Accessibility Door-to-door service Speed (transit time) Enables lower inventory levels Connections to other modes: universal connector Smaller carrying capacity – inventory advantage Lower damage rates than rail © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7

8. Industry Overview Competition and Market Structure Intense rivalry within trucking sectors and from private carriers Few capital or other constraints on entry Exception at national LTL level Partial exception for specialty commodities carriers Despite capital constraints on entry, national LTL segment faces intense competition from other transport segments Market structure TL is monopolistically competitive National LTL is oligopolistic © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

9. Operating and Service Characteristics Equipment Equipment-related advantages Technical features enable service advantages Flexibility, smoothness, small capacity Rapid loading/unloading capability Principal equipment decisions Type of tractor (power) Type of trailer (length and type) Where and when to position equipment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9

10. Operating and Service Characteristics Types of Vehicles Line-haul vehicles Used for long distance transport Typically tractor-trailer combination with 3+ axles Typical trailer lengths are 45, 48, or 53 feet Maximum length and weight can vary by state Fed. max. gross vehicle weight is 80,000 lbs. Some states have grandfathered rights to allow more Some loads may be more under permit Carrying capacity: function of vehicle dimensions and density of cargo © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10

11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

12. Operating and Service Characteristics Types of Vehicles City (straight) trucks Single units used for pick-up and delivery (PUD) Typically 15-20 foot cargo unit Growing use of 28 foot line haul trailers (pups) for PUD Saves multiple handlings of cargo and time Special vehicles e.g., flatbed, tank trailer, refrigerated, high cube © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

13. Operating and Service Characteristics Terminals Pickup and delivery terminals (satellite or end-of- run terminals) in LTL operations Peddle run networks Peddle time and stem time Shipment consolidation and distribution operations Vehicle dispatch operations Other services © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13

14. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

15. Operating and Service Characteristics Terminals Break-bulk terminals in LTL operations Consolidate and re-sort shipments Designed to facilitate higher utilization of vehicle capacity Disadvantage: slows transport time, adds handling, reduces reliability Driver domicile Relay terminals Necessitated by hours-of-service regulations “Slip seat” and sleeper team alternatives © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16

17. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

18. Operating and Service Characteristics Terminal Management Decisions Number of terminals Desired degree of market penetration Trade-offs with length of peddle runs and with level of customer service Trend has been to reduce number of terminals Locations of terminals Influenced by hours-of-service regulations Consideration of backhauls between terminals © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18

19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19

20. Cost Structure Fixed vs. Variable Cost Components Cost structure: mix of fixed and variable costs Varies depending on the type of trucking operation For long-distance, tractor-trailer operation 70-90% of total costs are variable Fixed costs relatively low % of total costs Public investment in highway system Small increments of capacity can be added Few terminals needed For LTL operation, fixed costs are higher due to terminal system © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20

21. Cost Structure Labor Costs Principal variable cost categories Labor Fuel Maintenance Highway user charges Note: these are the principal costs associated with daily operations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21

22. Cost Structure Labor Costs For a long-distance, tractor-trailer operation Total operating cost: $3.75/mile (2006) Driver cost: 20% of total operating costs Mileage rate for distance traveled (local delivery drivers paid an hourly rate) Hourly rate for loading/unloading, operating delays Total labor costs consume approximately 55% of each dollar of revenue © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

23. Cost Structure Labor Costs Driving time regulations Federal limits on the maximum hours an individual may drive or do “on-duty” work Maximum limits 11 hrs driving, 14 hours “on-duty” No driving after 60 hrs on-duty in 7 days or 70 hours on-duty in 8 days Drivers must be off for 10 consecutive hours before working the maximum hour limits © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

24. Cost Structure Labor Costs Qualified driver shortage Major impact on TL carriers Contributing factors Federally imposed commercial driver’s license (CDL) requirements Imposed nationally in 1992 Stringent rules on drug and alcohol abuse Demanding, unattractive life-style Industry efforts to attract drivers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

25. Cost Structure Fuel Costs Fuel costs in 2006 averaged about 48 cents per mile of operation 12.8% of total operating costs Fuel costs include federal and state diesel fuel taxes imposed as part of highway user tax structure Federal tax is 24.4 cents/gallon State diesel fuel taxes average 24.5 cents/gallon © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

26. Cost Structure Economies of Scale (EOS) No major EOS in trucking Some purchase economies may be available for large scale operations Large scale operations may have higher labor costs i.e. diseconomies of scale, due to unionization Economies of utilization (use) Present in LTL operations where fixed costs are higher due to terminals, IT systems IT systems requirements also adding to fixed costs of TL carriers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26

27. Cost Structure Funding System of federal and state highway user taxes and fees used to fund the provision of highways User fees principle: those that benefit most directly should pay for the system Covers construction and maintenance costs of most non- local roads Revenues from federal user taxes and fees deposited to Federal Highway Trust Fund (FHTF) State user fee revenues used to match FHTF distributions Debate: does each user category pay fair share? © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27

28. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28

29. Current Issues Safety Improved safety means improved profitability FMCSA publishes rules for motor carrier safety fitness inspections Carriers classified as satisfactory, conditional, or unsatisfactory If unsatisfactory, carrier given reasonable time to correct deficiencies FMCSA has power to stop operations if improvements not made Fitness findings influence carrier selection process © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

30. Current Issues Safety Alcohol and drug abuse Industry response: substance abuse testing, treatment, and prevention programs Programs focus on health and safety dangers, abstain from moral judgments. Include: Consistent, enforceable policies applicable to all employees Known policies for violations Counseling and rehabilitation services Hours-of-service and driver fatigue Vehicle size and weight concerns © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30

31. Current Issues Technology Impact of satellite technology GPS systems for vehicle tracking and onboard computers for communications Enhance management control Enable more efficient and timely communications between driver, management and customer Status notification Responsiveness to routing and delivery time change requests made by customers Enhancement of environmental safety in movement of hazardous materials © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31

32. Current Issues LTL Rates LTL rates are market driven, much discounting Limited anti-trust immunity Immunity for commodity classifications, mileage guide rules, and general rate adjustments No tariff filing requirements Carriers must maintain rates, rules, and commodity classifications and furnish to shippers on request But rates need not be in writing to be enforceable © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32

33. Current Issues Financial Stability Many carriers have high operating ratios, exceeding 95% Industry overcapacity is a recurring problem Problem worsens during economic downturns Puts much pressure on carriers to discount rates to maintain market share Alternatively, some carriers try to build market share through mergers and consolidations Each year, 1,500+ carriers file for bankruptcy Evaluation of carrier financial stability is now an important aspect of carrier selection process © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33