Opinion: Small Carriers: The Tough Get Tougher

This Opinion piece appears in the May 25 print edition of Transport Topics. Click here to subscribe today.

By Eric Belk

Vice President

Match Factors Inc.

Industry insiders say the remainder of the year may continue to be tough for small carriers. The good news is that trucking continues to be America’s most important transportation mode, thanks to its flexibility and efficiency. As the economy grows, truck tonnage and available freight continue to increase, which presents many opportunities for trucking firms, large and small, to be successful.

However, the small-trucking segment, carriers with five or fewer trucks, will have a more difficult time operating in the current business climate. Those carriers will need to think smart and be tough to get around the roadblocks in their way.

Current Federal Motor Carrier Safety Administration data indicate about 146,000 active small carriers are based in the United States, representing 80% of all U.S.-based carriers. Three significant issues that affect the majority of these carriers are ambiguous Compliance, Safety, Accountability scores, stagnant freight rates and rising business costs.

• Ambiguous CSA Scores

No doubt you’ve been following the controversy about FMCSA relying on CSA, its data-driven Safety Measurement System, to better identify drivers and carriers with safety problems. Unfortunately, CSA is wrought with many problems. For one thing, not all SMS data are available for public view. FMCSA seems to be saying it will share some information with the public but not all of it, and you shouldn’t reach conclusions about a carrier’s overall safety based on the information displayed. As a result, industry stakeholders are uncertain how to interpret available SMS information in their carrier qualification process.

Moreover, several significant studies question SMS methodology and the ambiguity regarding measurements displayed in key BASICs (Behavior Analysis and Safety Improvement Categories), or performance categories.

A major issue for smaller carriers is that a threshold violation or alert in any of the five publicly available BASICs may prevent brokers or shippers from using these carriers, leaving brokers and shippers to devise their own carrier qualification guidelines, which may be strict due to growing concerns about negligent hiring and vicarious liability. As a result, small carriers are being turned down, unnecessarily so in many cases, by brokers and shippers because they may not meet certain BASIC criteria.

• Stagnant Freight Rates, Rising Business Costs

Small carriers also face a stagnant income stream because freight rates have increased little — about 5% over the past five years.

However, during that period, operating expenses for small carriers increased substantially. Insurance costs have skyrocketed and will only continue to rise. On one hand, FMCSA is contemplating raising the minimum liability insurance requirement, which will result in higher insurance premiums. Meanwhile, insurance companies are using CSA scores as a gauge to determine rates in their underwriting and pricing models. This results in higher insurance rates for small carriers, which are more prone to BASIC alerts or violations.

Unlike rising insurance costs, diesel prices bottomed out in 2014 and seem to have stabilized. While the Department of Energy’s 2015 outlook for diesel prices remains encouraging, lower diesel prices will continue to result in reduced fuel surcharge revenue for small carriers, putting additional pressure on their profit margin. Lastly, compared with large carriers that obtain freight from shippers, most small trucking companies rely on brokers for their freight, which further limits their freight profit margins.

• In 2015, The Tough Get Tougher

It’s becoming more difficult for small carriers to run their businesses effectively and earn decent profits. It’s easy to recognize the pain and suffering experienced by smaller carriers dealing with CSA headaches and an operating environment exhibiting stagnant freight rates and rising business costs. Should the industry be prepared for a significant small-trucking segment contraction? I do not anticipate this.

Small carriers historically have made up about 80% of the carrier market. Sure, regulations and market conditions will drive a number of them out of business, but I have not seen any abnormal attrition rates in the past five years, especially since CSA was first introduced. In fact, a six-month life cycle is not atypical for a small carrier, and I don’t envision major changes in the average life cycle of small carriers this year.

CSA is not going anywhere. FMCSA will continue to make modifications to the program. Small carriers that embrace CSA will survive, and those carriers that can’t effectively apply CSA recommendations will leave the industry. New entrants also will be operating under the CSA regulatory guidelines and be in a better position to obtain loads from brokers and shippers that require certain BASIC criteria.

Finally, small carriers can implement incremental and low-cost solutions to address BASIC violations or shortfalls. For example, simply ensuring logbooks are properly recorded will help minimize violations in the hours-of-service BASIC category.

Facing all these rising challenges, it’s not impossible for small carriers to succeed, especially if they understand what makes them unique. Smaller trucking firms exhibit a remarkable ability to adapt, much more so than large carriers. And those that are able to focus on serving their core customers, finding niches to service and delivering consistent performance in their key freight lanes will perform successfully in this business environment.

Match Factors Inc., headquartered in Florence, South Carolina, has been providing accounts receivable factoring services for the transportation industry since 1984. Their website is matchfactors.com.