Investors Face Lowered Returns on New HOS Costs, Fleets Warn

This story appears in the May 13 print edition of Transport Topics.

Publicly traded trucking companies are warning investors that upcoming changes to the hours-of-service rule could take a bite out of productivity and reduce equipment utilization.

“If these rules are adopted and our customers are unable to provide more flexibility in terms of pickup-and-delivery times, it will have a negative effect on productivity and available capacity,” truckload carrier Knight Transportation Inc. said in its first-quarter earnings report.

Kevin Knight, the company’s chairman and CEO, estimated on a conference call with investors that the hours-of-service rule changes would decrease Knight Transportation’s productivity by 1% to 3%.

Similarly, David Parker, chairman and CEO of Covenant Transportation Group Inc., told investors the new rule would decrease the utilization of trucks by 2% to 4%. The loss would be worst for the highest-mileage drivers and driving teams, he said.

“It’s just going to be those trucks that are putting a lot of miles on them will be affected,” Parker said in an April 25 investor call.

As of July 1, the Federal Motor Carrier Safety Administration will place new restrictions on the optional 34-hour restart drivers can use to reset their weekly clocks, as well as requiring a 30-minute rest break before driving more than eight hours.

Knight called particular attention to the new requirement that anyone using the 34-hour restart must include two periods from 1 a.m. to 5 a.m. during the restart.

“Unless our customers take the steps to keep us as productive and avoid doing work between 1 a.m. and 5 a.m., and unless our customers bring more flexibility back into their appointment and schedule times, that could have a negative impact on our productivity,” he said.

Swift Transportation Co. President Richard Stocking called the new hours-of-service rule a “headwind” for the industry. Trucking is likely to see a 5% productivity loss, but “we believe our terminal network, internal processes and better planning will help to mitigate some of the impact,” he told investors April 23.

Stocking added that Swift probably will be able to recover the additional costs from the lost productivity through price increases very quickly after the rule takes effect July 1.

Covenant’s Parker said he was not sure if his company would increase prices, but he assured investors that the carrier could not absorb the utilization loss, because drivers will demand to get paid for their empty capacity.

Though Covenant will adjust to the new rule, it likely will cause a “negative effect” on third-quarter earnings, Parker said.

Werner Enterprises Inc. said in its earnings statement that the rule “will result in a decrease in truck productivity and could tighten up supply relative to demand in the freight market.”

Celadon Group Inc. executives said that trucking industry capacity will tighten due to the rule, but Paul Will, the company’s CEO, told investors that it had not calculated how it will affect Celadon.

But other companies said the rule won’t be a problem.

Roadrunner Transportation Systems Inc. and Old Dominion Freight Line Inc. said their business models will protect them from most of the productivity losses the rest of the industry will see.

“Based on the analysis that we’ve done for the company, we don’t anticipate that is going to have much of an impact at all on us,” Mark DiBlasi, Roadrunner’s CEO, said in a May 1 investor call. Other carriers in the industry will be hurt by the new 34-hour restart charge, but Roadrunner has not relied on the restart provision in the past, he said.

Old Dominion is in a similar situation and does not rely on the 34-hour restart, Chief Financial Officer Wes Frye told investors April 25.

“Our network is geared properly to where this is not an impact,” he said.

American Trucking Associations is challenging the rule in court, saying it is too restrictive and that FMCSA overestimated the role of driver fatigue in truck crashes in order to justify it.

Public Citizen is also challenging the rule, though it said it is not strict enough, and FMCSA should have cut the 11-hour driving day to 10. The U.S. Court of Appeals for the District of Columbia Circuit heard arguments in the case in March and has yet to decide the new rule’s fate.