Spotlight on Economics: Trucking industry a supply chain key player

Siew Lim
Associate Professor, NDSU Agribusiness and Applied Economics Department

The COVID-19 pandemic has shut down much of the economy and disrupted marketplaces and supply chain systems worldwide.

While essential businesses continue to operate, social distancing and fear of getting infected raise concerns and challenges for many workers. However, some workers continue to brave the risk of getting infected so that communities across the country can continue to receive the services and products they need.

Commercial truck drivers play a pivotal role by transporting intermediate goods to processors/manufacturers, bringing food shipments to grocery stores and transporting online orders from e-retailers to consumers. Recently, the Wall Street Journal (WSJ) called truck drivers “the unseen heroes.”

“Americans can stock up on toilet paper and hand sanitizer — and generally keep themselves fed — only as long as the nation’s truckers keep working,” wrote the WSJ’s editorial board on April 16.

In fact, like grease works on engines, the trucking industry always has played an important role in the supply chain. But trucking is a cutthroat business.

Economic deregulation

Acquiring trucking services is relatively easy. In many instances, shippers often receive several price quotes and can shop around for the best service and rate offer. However, ordering and providing trucking services were not as simple 40 years ago.

The trucking industry moved toward economic deregulation under the Motor Carrier Act (MCA) of 1980. Prior to the MCA, in addition to trucking rate regulations, the now-defunct Interstate Commerce Commission required interstate motor carriers to have a certificate that specified exactly the types of goods a carrier could haul and the routes allowed. These certificates were not only limiting but restrictive.

Moreover, certificate applicants or potential entrants had to show that existing services were inadequate, and thus they often encountered legal resistance from larger, incumbent firms. Hence, making an entry into the industry was difficult, and regulation increased the market power of incumbent firms for decades. The pre-MCA environment allowed carriers to be lax in their efforts.

Post-MCA era

The MCA produced a seismic shift in the industry by allowing firms to obtain a certificate much more easily and relaxing the rules that restricted certificate holders. Many new competitors began to enter the industry and competition in the market increased. Deregulation and intense competition caused firms to change their business practices drastically.

The new entrants increased pressure on inefficient firms to leave the industry. After the regulatory reform, the trucking industry experienced considerable cost savings and substantial productivity growth; the shipping rates were reduced and service quality also improved.

Economists generally attributed the cost savings to the industry’s adjustments and response to market competition. Union representation declined drastically in the post-MCA era, down from 62% of for-hire truckers in 1973 to 30% in 1984, and 18.8% between 2003 and 2017. Between 1978 and 1996, the average real wage rate of for-hire truck drivers decreased by 40%, even when demand for trucking services had gone up during the same period.

Today the industry is composed of a few large players and many small firms. According to the American Trucking Associations, about 91.3% of the firms in the industry operate six or fewer trucks. The industry reported nearly $800 billion in gross freight revenues in 2018, which was 80.3% of the freight bill in the U.S.; 71.4% of the total tons of domestic freight in the country were transported by trucks in 2018.

High labor turnover

Like jobs in most industries, trucking employment generally follows a cyclical pattern, meaning it rises and falls with the economy. But economic conditions are not the only factors affecting trucking employment.

The industry persistently has had a labor recruitment-retention issue unlike others. Since the deregulation, increased workloads, long work hours and less attractive pay are factors contributing to unrelenting high labor turnover in the industry.

According to the Bureau of Labor Statistics, labor turnover is particularly concentrated among the truckload carriers of the industry. Less-than-truckload carriers typically have a much lower turnover rate.

For example, in the third quarter of 2018, the turnover rate was 87% among the large truckload carriers, and this was down from a peak of 102% in 2015; small truckload carriers reported a turnover rate of 72% in the third quarter of 2018, and less-than-truckload carriers had a 10% turnover rate in the same quarter.

Because large truckload carriers are business rivals of each other and have a similar cost structure, they must offer competitive freight rates driven by the market rather than by a single carrier. Thus, to minimize operating cost in a cutthroat industry, focusing on recruiting new drivers may be cheaper for truckload carriers than retaining existing ones.

The chronic labor problem in the trucking industry leads to higher shipping costs, which ultimately are borne by consumers.

Pandemic effect on trucking industry

Because the trucking industry is procyclical, trucking employment is not immune from the pandemic despite its unquestionable importance in the supply chain. While consumer demands are fueling more shipments to grocery stores and more orders from e-retailers, trucking companies that deliver shipments to manufacturers are forced to cut pay and reduce work hours because manufacturers are not producing due to the pandemic. Moreover, despite the large volume of business, delivering shipments from to consumers is cost-intensive and has a relatively low profit margin for trucking companies.

That means the trucking demand surge in March may be dampened by the economic downturn. According to DAT, van spot freight volumes dipped by 20% in early April, and national average freight rates decreased by 8 cents per mile to $1.78.

Prior to the pandemic, the trucking industry was growing at a fast pace and freight rates were high in 2018 due to a strong economy, but the industry took a downturn in 2019 in which hundreds of trucking companies filed for bankruptcy. Two of those bankrupt firms were a truckload giant, Celadon, and a major less-than truckload carrier, New England Motor Freight Inc.

The industry’s financial struggle was a direct result of falling freight rates attributable to excess trucking capacity within the industry and the slowing global trade and factory activities in the past year. The pandemic-induced economic woes will be particularly difficult for the trucking industry, and the U.S. economic engine needs a strong trucking industry to help fuel its recovery.