Irregulated Capacity

The impacts of regulation in trucking are often told in safety enhancements via hours of service (HOS) and commodity restrictions on dangerous goods. There won’t be any pretense about efficacy or implementation of regulations from here. What unfolds instead is what the waves of regulation and response do to the less discussed -price.

From WWII until the Motor Carrier Act of 1980, the government routed and priced interstate commerce with a fraction of the number of registered trucking companies today. Central routing is best with fewer players. Fast forward, the ATA touts over 750K active carriers with figures under their public page summary. The decade after the act, counts doubled to 40,000. By the year 2000, a 10x increase to about half a million.

The initial deregulatory response gave much easier access to transport markets which gave way to higher competition, resulting in lower prices. The Cambrian explosion of authority into the late 90s inevitably met need for oversight into driver and equipment conditions of so many independent entities. The FMCSA was then established in 2000 within the Dept of Transportation to help prevent commercial motor vehicle-related injury and death.

What has transpired since is a tug-o-war of policy and petition that have at best moderated freight cycles, and at worst induced them. The first big change was with a published final ruling in 2003 that extended drive time to 11 hours straight, but capped total on-duty time to 14 hours, and extended the break to 10 hours. Effectively containing work into a 24-hr day. In addition, drivers would have to take a 34 hour break after 60 hours of work within 7 days straight.

You couldn’t run like a scalded dog for weeks on end any longer. Weren’t supposed to anyway. Some had shadow books to compensate while larger firms were beholden to more stringent adherence and internal oversight. The ruling was quickly contested through legal battles until 2005 when in August, a revision came, keeping the eight consecutive hours in the berth. Later that month, hurricane Katrina hit.

Both sides of the scissors cut into capacity that Fall. Demand was reshaped by flows around the Gulf while the housing bubble began to take shape. Supply was not adequate in number. This is where most explanation stops, the S-curve is now below the D-curve and that’s that. Continuously missed in supply calculation is the flow rate through the supply chain.

It is often the kinks in the hose that change trajectory in the market versus accumulations of equipment and driver, or lack thereof. Replacing a split berth (off-duty/sleep) with continuous eight hour increments didn’t make drivers quit in droves to cut supply. Instead, the running churn of schedules and driver labor became disjointed against dock hours and appointments at shippers and receivers. Industry veterans lost flexibility while newer entrants and big players adopted the rulings into operations and training.

The inefficiency brought by massive change in scheduling against strengthening demand drove rates into the first big cycle. The impulse is to add capital in times like these. Entrepreneurial spirits brighten that push more into smaller businesses or lease agreements while also building the pool of new entrants and registrations.

At some point, new levels of supply are established to meet demand just as it crests or tables that breeds high competition and appetite for reform. In the summer of 2007, the rulings were challenged and retracted with the help of Public Citizen and OOIDA. The net effect is negative for rates as capacity increased by freedom to drive more. It feels counterintuitive, but when there are even the same number of drivers as shipments, if each driver goes 100 more miles a day, they will increase the flow rate. This makes a negative feedback loop for rates and oversupply.

Although 2008 is marked as an awful time in most memories, the interim rule enacted in December of 2007, pushed the ten hour consecutive break and 34 hour resets.

Again, the market maladjusted to the timing considerations and for much of 2008 rates lifted. I entered the industry in September and remember the office hitting target. It was 2009 that brought real the pain.

Cash for clunkers came along to save the unwind, then came successive considerations that included limiting the 34 hour reset as well as new food safety guidelines implemented in 2011.

Record high fuel prices ruined the party again into 2012. The next July, the 34 hour reset was limited to windows and one-time per week. No longer could drivers string together 60/7’s and 34 hour resets together. The cycle of capacity shortage begins anew. In November of 2013 Schneider National reported 3% decline in solo runs and 4% less team shipments due to the drop in productivity.

A global oil glut and zero interest rates kept the cycle up until a manufacturing slowdown pulled demand down well into 2016. Spats emerged in 2015 and ended with congress suspending the reset parameters in the middle of 2017, but that mattered little behind the ELD mandate going into effect in December.

Enforcement became wide enough, even with the grandfather clause, to curb many of the tweener moves into a two day run. At 11 hours straight driving X 50mph, one should net 550 miles a day. It is often 6-800 miles between Chicago and the East Coast hubs across the Mid-Atlantic and Northeast and vice versa. Between northern and southern states, it is much the same.

For years, savvy or spirited drivers knew how to position day and a half runs to create 3 turns and a possible pick/drop in one week. Once beholden to the strict electronic timer, each was turned into 2 days each turn, which make for 2.5 turns in a week. Even if one religiously held to paper logs prior, extra buffers and contingencies were built to counter shut-off systems in newer equipment.

The revenue expectations have nowhere to go but up once again as capacity in aggregate gets culled. Not just by number of operations or drivers, but because the flow rate moves to sludge. Each time, this perpetuates the expansion and glut cycles.

Adding to the elasticity of rates in each successive cycle were the introduction of rating tools and market contexts in the twenty teens. Technology brought more visibility to market clearing rates, making the $50-100 increments of negotiation by phone and fax whittled into increasingly exact numbers. At some point I chose personally to move to $10 increments to circumvent these traditional rate agreements. $2070 beat $2100 or wasn’t too far from $2050.

As more platforms and data have entered the market with growing supply of transactional carrier and intermediary, rates have become more liquid and volatile. The year-on-year trend in the chart above shows this in higher peaks and lower troughs above.

It’s not that the total number of drivers is simply bigger in absolute terms, it’s that when capacity splits into smaller operations, they become much more reliant on spot freight. Thus, rates are propelled by inefficiency in expansions and an outright drubbing when competing in soft markets.

Although the pandemic jump in authority wasn’t related to any large regulation prior, the reason was all too familiar. Yes, demand was hot and heavy, but the big problem was so much backup and delay -inefficiency and flows again. Regulation did arrive, however, and has had some influence.

First, earlier in the pandemic, HOS rules were suspended for key items like sanitizers and toilet paper. Great for the consumer. Not so much for trucking. Rates tanked to decade lows on the higher flow rate on less demand until the containers started flying in again.

Once the deluge began, so did the backups, and in late 2020 changes came to ease prior rulings. Biggest was extending the short haul exception by two hours and 50 extra miles, as well as more flexibility with breaks, bad weather, and splitting up time in berth. The easements came to some relief for burdened capacity through 2021, but later contributed to the 2022 nosedive.

Once the backlogs in the West Coast evaporated due to the threat of fines, the flow of freight accelerated. It wasn’t that all the new authorities showed up in February of 2022. The S-curve was above the D-curve, but rates nosedived in Q2 as the wheels greased from falling demand and higher rates of freight flows.

Although we look at the freight market as one of the best exemplars of a freer system, it has long history of oversight, whether direct or indirect, that has helped contribute to the boom and bust nature of the industry.