Friday, June 8, 2012

CSA and HOS: How Serious Problems Don’t Get Solved in Washington

With truckers now hinting at lawsuits over CSA scoring and the Feds apparently not answering the phone, it would appear the love fest between the American Trucking Association (ATA) and the Federal Motor Carrier Safety Administration (FMCSA) has run its course. THANK GOODNESS. Now maybe we can actually do something about highway safety.

I would never advocate discordant relations with the regulators. They have a job to do. Plus when it comes to real power and influence, a titan of industry has nothing on the frontline bureaucrat. Seasoned companies and their trade associations understand you have to get along to go along.  However, having a working rapport with the regulators is completely different from getting in bed with them. This is where ATA and other industry groups continually go wrong in their dealings with government. Maintaining influence seems to always take precedent over policy.

During the formulation of CSA (Compliance, Safety, Accountability) and HOS (Hours of Service) rules in 2008, 2009 and 2010, ATA pretty much adopted a non-provoking demeanor. I wouldn’t exactly say they jumped in bed with the FMCSA, but in general they offered better than tepid support for the goals behind these initiatives. Of course, when the government sets the table with platitudes about safer highways, fewer fatalities, healthier and better rested drivers who feels inclined to argue?

Still when an average functional adult barely manages 7 to 8 straight hours of sleep, why insist that a trucker have 10? As if killing an extra 2 to 3 hours lying awake in a sleeper engulfed by parking lot noise actually enhances energy and alertness. Also does the government not understand that delivery sensitive professions like trucking always boil down to time and speed? The more you have of one the less you need of the other and vice versa. Therefore, it doesn’t take a soothsayer to understand the implications of shortening the trucker’s work day.

And then there’s CSA. Hey, finally the driver takes some heat when things go awry, not just the truck company. Again who would argue with a system that promises to sort out the good drivers from the bad? Except if the hassles of conforming to new rules and measurements discourages the most talented, such that they leave the profession, then the quality of the remaining gene pool deteriorates. The formerly mediocre drivers become the good. The formerly bad become the mediocre. The really bad; now just the bad. Imagine removing the freshest apples from a fruit bin. In a relative sense the remaining apples still fall into categories of good, mediocre and bad, but taken as a whole the quality of the bin has declined. So it goes with the driver pool. While we nostalgically long for a return to the “knights of the road days” we fail to examine the possible correlation between ever more stringent driving regulations and diminished professionalism in trucking.

But the numbers don’t lie. Fatalities involving trucks rose 9% the first year of CSA and revised HOS. If the outcome weren’t so tragic you would almost have to laugh. In the ultimate display of arrogance the government thought it could make the highways safer through bureaucratic fiat. That might possibly fly with something like fuel economy standards in cars, but it does not work with people. You can’t mandate better truck drivers. If you want superior talent in trucking you have to make the job more attractive. Wage and lifestyle issues factor in the largest, but regulatory hassles certainly have a huge negative influence. Thus, contrary to making our highways safer, CSA and HOS in all likelihood lowered the quality of the driver pool and concurrently created the perverse incentive for truckers to drive faster.  How else to account for the spike in truck accidents since these initiatives took hold?

In my opinion ATA saw all this coming, but in their quest to make nice with the FMCSA it appears they put politics before principal. Certainly it’s impolitic to label your regulators insane, but more likely ATA feared that any fervent objections might undermine its lobbying influence. Hence, within the context of CSA and HOS we see a microcosm of what fuels the emotions behind both Tea Partiers and Occupiers. Cozy relations between industry and government usually short-change the general public. In this case the root causes behind so many truck accidents might never get discussed, let alone addressed.

Ironically, with truck accidents now on the rise the reward for ATA’s submissiveness will no doubt come in the form of more driver rules and regulations. (Editors note: Please don’t cite that tired old industry stat about accidents per million miles trending down. The absolute numbers have risen, and from the standpoint of someone who gets hit by a truck, that’s all that matters.) The Faustian bargain feeds a vicious cycle: Excessive rules and regulations serve to impel the most talented drivers out of the profession. Less skilled drivers fill the void. Predictably more accidents occur, which creates the excuse for more rules and regulations.

Sensing drastic implications ATA has started to change tone, if not course. The organization still seems disinclined to argue forcefully that the very regulations the government keeps touting as the solution may actually be the problem.  And it quibbles far too much over sideshow controversies such as what actually defines a truck accident (pretty obvious to most of us). But at least the love fest has cooled; and while truckers got rolled on CSA and HOS, perhaps going forward ATA will not so willingly bit its lip.

The hint of lawsuits certainly represents progress.

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Thursday, March 17, 2011

Lease Purchase - A Black Eye on The Trucking Industry

To illustrate the shame otherwise known as the truck lease purchase business, let’s use a different illustration:

1.)Let’s say your boss offers to sell you the PC on your desk.

2.)Let’s further say that the boss arbitrarily assigns a purchase price to
that PC of $500 more than it’s worth.

3.)Finally let’s say the boss insists on the following stipulations:

a.You must pay for the PC via monthly payments over the next three years.
b.You must restrict your use of the PC to company business.
c.You must maintain the PC at your expense.
d.You must purchase insurance on the PC and further name the boss as an additional insured under your policy.
e.If you miss a payment regardless of how many you’ve previously made, ownership of the PC reverts back to the boss.

Assuming you accept the terms, you then become the proud owner of the bosses’ former PC. Now let’s examine what he gets in the bargain:

1.)He has transferred a formerly depreciable asset off his books and onto yours. All future depreciation and the aforementioned maintenance now falls to you.

2.)He has booked an immediate $500 profit for an asset that would normally have little if any residual value.

3.)Having sold you the tools of the trade, he now feels secure in re-classifying you as an independent contractor rather than an employee. By extension all previously paid employment taxes and benefit costs shall henceforth come out of your pocket not his.

4.)Oh yeah. Let’s not forget the immeasurable satisfaction he earns in having helped a poor credit unworthy soul like you become a member of the asset owning class. If not for his generosity, what chance would you have? Besides that PC was starting to make a strange noise.

But wait there’s more. Let’s say three months later a co-worker accidentally spills coffee on your PC. It fries the circuitry and renders the whole damn (funny how that adjective often accompanies asset ownership) machine worthless: a total loss if you will. For the boss such misfortune translates into a cash flow win fall. The insurance you purchased pays him off - lump sum - 33 months ahead of schedule. This in turn sets the stage for the boss to sell you another overpriced PC thereby starting the cycle all over again.

Now 25 payments into your second deal the economy begins to slow. The money you previously raked in as an independent computer operator dries up. Eventually you miss an installment. This unforeseen circumstance triggers forfeiture. You lose all your previous payments. You lose your PC. You have nothing in the bank and nothing on your desk. You’ll have to seek a new livelihood. But of course you have only yourself to blame. You should have understood the rules of the game before you took the plunge. Meanwhile the boss sells your PC to the next easy target for $500 more than it’s worth.

Obviously no office worker in his or her right mind would entertain such a deal, which certainty begs the question: why do so many truckers? Lease purchase in trucking has become as common as diesel fuel. Even the smallest of trucking companies have slithered into the act. A Google search on the phrase “Truck Lease Purchase” turns up over 544,000 results.

I understand the allure for trucking companies. Pawning used tractors for $10,000 over resale makes for attractive economics. Churn out enough of these deals - ala the big boys - and the money really piles up. In fact I have begun to suspect that moving freight for a lot of large trucking companies serves only to facilitate their seemingly real business of selling overpriced used trucks to inexperienced drivers.

When it comes to favorable outcomes few business models can beat truck lease purchase. If a contract actually plays out, the trucking company books a huge gain. If a lease purchase truck is wrecked mid-contract, the trucking company books a huge gain plus an immediate cash payment via insurance. And in the best of all worlds – default - the trucking company books a gain on forfeited lease payments, then books an additional gain by re-selling the repossessed truck to the next victim. Talk about turning lemons into lemonade. What other industry has figured how to profit so handsomely from a combination of poor credit, accidents and forfeitures?

But it takes two to tango. Drivers don’t enter these deals at gunpoint. So what gives? I suspect it has something to do with DNA. Beneath the cautious if not at times cynical veneer, most drivers actually seem predisposed toward optimism, freedom, and faith in the American economy. By extension this mindset makes them more entrepreneurially inclined than say the average cube based office worker. Lease purchase plays to the mindset well. It makes the American dream tangible. Your truck is parked right there. Just sign. (Don’t worry it’s all boiler plate language – No we won’t do a credit check). What easier route to professional independence and riches?

Unfortunately, the combination of big dreams, poor credit and fine print rarely yields a pleasant outcome. I won’t deny a profusion of lease purchase success stories. A few trucking companies actually have workable programs. Still way too many of these deals fail, and when they do only one side loses. That some of the most admired trucking companies in the country have come to embrace a scheme that would make the average payday lender blush seems… well sad. I look at some of those industry leaders wandering about the TCA annual meeting this week and can’t help but reflect; could you possibly bank your fortune without preying on the inexpert? Maybe trucking should direct more of its focus toward driver education as opposed to exploitation?

In the meantime, for anyone set on becoming an owner operator; all the power to you. Just make sure you understand the business. Also I suggest you consider purchasing a well conditioned used truck from a respectable dealer. Put no less than 25% down. Maybe purchase a maintenance warranty. If you find you can’t swing the deal, do not get discouraged. Take it as a sign that you probably shouldn’t own a truck quite yet.

Of course that makes you a perfect candidate for lease purchase.

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Friday, August 27, 2010

Why Doesn't Every Owner Operator Have an iPhone?

Since the beginning of time man’s ability to communicate has correlated directly with human progress and standards of living. The better the means of communication the more advanced, powerful and wealthy a society becomes. More impressive still, incremental advances in communication tend to confer the most benefit upon people at the margin. Build a cell tower in Los Angeles and you might save some dropped calls. Build one in rural Africa and you might save some lives.

The analogy extends to the trucking industry. Twenty years ago big carriers jumped on satellite tracking to their great advantage. The new found ability to follow shipments and communicate with drivers in real time ushered in a huge wave of productivity. Unfortunately, those living on the margin - owner operators and small trucking companies - failed to catch that wave as the high cost of satellite tracking kept them out of the game.

Today, that game has changed owing to the emergence of smart phones. The owner operator with an application rich iPhone (or similar device) no longer needs a clunky satellite keyboard in his cab. He can communicate with anyone from virtually anywhere via voice, data or text. He can generate turn by turn directions to nearly any destination. He can relay his position in real time to any number of followers. He can plot a route around traffic jams. He can snap pictures from an accident scene and initiate a claim with his insurance company. He can store images of his expense receipts. And unlike his larger competitors, he can do all these things - by no means an exhaustive list - without an IT department. In sum new smart phones give owner operators all the communication capabilities of large trucking companies at a fraction of the cost. If utilized to full effect, we’re talking a new wave of productivity for the little guy that has the potential - for the first time in history - to tilt the scales of trucking more in his favor.

Of course there’s just one problem: owner operators won't use these things. Sure they all have basic cell phones, but that's where it stops. Even more discouraging, many owner operators exhibit a perverse sense of pride in remaining technologically disengaged. “I don’t have an e-mail address.” “I don’t know how to send a text message.” “I don’t know anything about computers.” These catchphrases - all more or less accurate quotes from owner operators who attended MATS 2010 - encapsulate a disheartening attitude that fails to comprehend a fundamental truth about the profession. Owner Operators are not truck drivers. They are business owners. And like all business owners, they must constantly assess new ideas, tools and technologies to retain a competitive edge.

This verity leads me to float some unpleasant conjecture. Might the recent decline in owner operators have more to do with foot wounds than recession? Certainly for any given business the scars of missed opportunities always look suspiciously self inflicted.

Even in the worst of times our economy remains dynamic. Anyone unwilling to adjust to new ways of business will sooner or later find themselves pushed out to the margin. Most owner operators see the writing on the wall, but for some strange reason too many choose not to read it. Let's hope this mindset changes. The trucking business has never suffered the satisfied and complacent too kindly.

In the meantime, I need to send you an important form. You can sign it electronically. Hey, what's your e-mail address?

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Monday, May 3, 2010

Of Oil Slicks and Illegal Immigrants

You can't solve either problem until you stop the flow.

Sunday, November 29, 2009


A trucker friend of mine once remarked that prior to deregulation you could make money in the trucking business despite yourself. Back in those “good ole days” government protected routes bequeathed an industry with LTL powerhouses, high paying Teamster jobs, and healthy profit margins. Today the trucking industry operates largely under a free wheeling TL and increasingly intermodal template with nonunion drivers and owner operators. Profit margins if they exist at all generally come down to pennies on the dollar. It goes without saying that only the most productive trucking companies have survived this transformation - painful, but a net plus for consumers.

Now contrast the competitive untidiness in trucking with the inert if not orderly nature of the truck insurance business. Life pretty much continues as it always has: same structure, same production model, same economics. Where convention breeds productivity, it certainly makes sense, but with truck insurance, convention has only meant unnecessarily high premiums.

Broadly speaking the structure of the truck insurance business breaks down into two segments: agents (including brokers) and insurance companies. Agents solicit and service business, while insurance companies underwrite, issue policies and pay claims. Agents make money on commissions. Insurance companies make money on favorable underwriting results and investment income.

Contrary to the perception of truckers, operating profit margins for insurers tend to mirror those of most trucking companies. Where truckers have their operating ratio, insurers have their combined ratio. Both measures quantify operating profit as a percentage of revenue. In good years, both industries typically generate ratios between 90 and 100%, yielding operating profit margins of up to 10%.

By way of comparison, margins for the most successful truck insurance agents run as high as 20 to 40% in good times and bad: a nice return considering agents bare no underwriting risk.

But let’s not judge these economics too hastily. The truck agent has done an exceedingly splendid job of establishing himself as the ultimate purveyor of value for both trucking company and insurance company alike. Here’s the perception. From the insurance company’s viewpoint, the truck insurance agent provides an invaluable service in terms of producing business and servicing clients. Therefore, the insurance company feels quite justified in paying healthy commissions particularly on business that generates a combined ratio of less than 100%. Correspondingly from the trucking company’s angle the agent provides an invaluable service in terms of his knowledge of the insurance market and his ability to match a trucking company’s coverage needs with the most capable and affordable insurer. Why begrudge the man a living? Besides he always picks up the tab for lunch and golf.

However, with advances in technology, more and more only the insurance company matters. The Internet increasingly has relegated the agent to the status of tag along. He no longer serves as the conduit for exchange between trucker and insurer. Rather in an age of instant information, he increasingly gets in the way. Need a quote? Google it. Looking for accident statistics? Log on to Safersys. Curious about some insurance company’s rating? Pull up A.M. Best. Interested in the type of freight a company hauls and the location of its terminals? Check out their website. Concerned about your loss ratio? E-mail the underwriter. Fender bender? Snap a picture from your cell then fire off a text message to the claims department. It's so much more efficient than leaving a voice mail message with an agent.

Just as you no longer need a travel agent to book travel, you no longer need an insurance agent to buy insurance. Strangely, both trucker and truck insurer seem unwilling to acknowledge this fact. To a degree, custom plays a role. Historically, most contracts between agent and insurer specify that the agent owns the customer list. Thus, insurance companies generally remain hesitant to communicate directly with their insured’s. Also truckers are in the habit of dealing with agents not underwriters.

A simple step toward efficiency would have all truckers insisting that neither agent nor insurer can claim ownership of their account. This change in practice would set the stage for direct negotiations between trucker and truck insurer, and by extension pave the way for lower premiums.

Amusingly when it comes to extracting value, grandma who flies once a year on Southwest Airlines drives a tougher bargain than most trucking CEO’s. Grandma told the airlines to unload their travel agents a long time ago. Similarly shippers told truckers to cut the fat back in 1980. Will truckers ever ask the same from their insurers? Don’t look for your friendly truck insurance agent to broach the subject. But on the plus side there’s always lunch and golf.

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Wednesday, March 11, 2009

Second Thoughts on Greatwide Logistics

A few weeks back I posted an entry about Greatwide Logistics that painted a less than rosy picture. So when I received an e-mail from Dick Metzler, Greatwide's Chief Commercial Officer, asking me to call him, I half expected I might receive an earful. As it turned out, we had a very pleasant conversation. Dick did not dispute my larger point about the hazard debt poses to trucking companies. He merely wanted to share a bit more context into Greatwide’s ownership history and more importantly its recent emergence from a short stint in bankruptcy.

To paraphrase Dick (more accurately in spirit than in detail); Greatwide’s roots go back to a large refrigerated carrier called Transport Industries. Earlier in the decade the family that controlled Transport Industries sold out to a private equity firm called Fenway Partners. Fenway subsequently added several other trucking acquisitions to the mix, re-branded the whole thing as Greatwide, and installed a management team consisting of Dick, CEO Ray Greer and others to run the place. The deal could not have gone better: so well in fact that by 2006 Fenway decided to cash out for a huge profit. Accordingly a new group of private equity owners took over intent on making an even bigger killing by doubling down on the leverage. Unfortunately for the new owners conditions in trucking started to deteriorate around this same time. Ultimately the combination of less freight plus more debt proved too much.

Normally a non-asset based firm like Greatwide would enjoy a huge advantage over its asset based competitors in a declining freight environment. The beauty of an owner operator fleet is that capacity and overhead tend to adjust instinctively to declines in freight volume. Landstar Systems, the darling of the non-asset based sector, has thus far navigated the present economic climate quite fruitfully. Interestingly enough, Greatwide operates with a similar model. However, if a non-asset based company like Greawide carries massive debt it loses all advantage. Debt to a non-asset based carrier represents the asset based equivalent of parking trucks against a fence. It’s pure financial drain.

Based on my observations of other debt laced trucking deals, I saw little escape for Greatwide. Dick, however, relayed something that previously had not occurred to me. When it comes to negotiating with debt holders, non-asset based companies have a distinct advantage. Essentially it comes down to this: there’s nothing to liquidate. Thus the normally trying task of inducing bondholders to swap out secured debt for unsecured equity becomes more of an exercise in making an offer you can’t refuse. According to Dick this state of affairs made for a speedy and relatively painless time in bankruptcy. The company has now emerged from Chapter 11 with its debt load reduced by more than 75%. Meanwhile all of the company’s vendors, owner operators and employees have come out completely whole.

As Dick shared these details another thought occurred to me. This man knows the trucking industry. He has a very impressive resume encompassing important career stops at DHL, Fed-Ex and American President Lines (APL) where he last served as CEO. Greatwide’s CEO Ray Greer has an equally impressive record. In other words, these guys are all about running trucking companies. How frustrating it must feel then when they end up working for owners who don’t truly understand the business.

With the meltdown on Wall Street, we’ve heard a lot about “the disconnect” between the professional management class and the shareholder class. Our blood boils when we learn about the salaries and bonuses paid to managers who run companies into the ground. Clearly, however, as Greatwide shows the knife can cut both ways. In this day and age of private equity deals great management teams can end up under the control of scalawag owners. On a larger scale, what chance does any company have when the interests of management and ownership fail to align?

Greatwide's debt for equity swap not only gives it a new lease on life, but also a new start with a fresh set of owners. Dick seems genuinely pleased with this development. Having gained a sense about this man's determination to succeed, I can only conclude that Greatwide's future looks markedly brighter today than it did just a few months ago.

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Tuesday, February 17, 2009

The Stimulus: Short-Term Gain for Long-Term Pain

Later today President Obama will sign his stimulus bill, which I oppose for two reasons. First, knowing full well that excessive debt lies at the root of our economic difficulties, I find it more than ironic that the proposed solution is – well more debt. We hear the constant refrain from policymakers about the need to get credit flowing again. How can that occur when the consumers and businesses most in need of credit make for terrible credit risks? Would you loan GM $1,000 bucks right now? Amazingly that’s exactly what the government hopes you'll do. Not surprisingly, the only consumers and businesses not in complete trouble at this juncture are the ones that have avoided excessive debt.

The economic pain we’ve experienced over the last nine months has resulted from the natural process of de-leveraging. If left alone eventually consumer and business debt holdings will re-balance at healthy and sustainable levels. Granted a lot of economic havoc might occur between now and then. Just the same this economic cycle will not go on forever. Unfortunately, with the stimulus plan the government now looks to juice the economy up before it has a chance to completely self correct. How that fixes the credit markets, I know not. At this point it’s like offering a beer to an alcoholic in rehab. Sure the stimulus bill might relieve the economic equivalent of the DT's. But does it really solve the greater problem, which is addiction to too much debt?

My second reason for opposing the President’s stimulus bill is that it runs counter-intuitive to everything I formerly took for granted about our national character. I have no argument with government safety nets behind a market driven economy. Still, our nation seems to have lost faith in its ability to solve big problems without government hand holding. Thus, we’ve created an empowerment vacuum that our politicians seem only too happy to fill – in exchange for our votes of course.

Here I may part ways with some of my colleagues in the trucking industry. No one suffers any delusions about the present challenges facing truckers. Competition has heated up. Used truck values have plummeted. New model equipment costs more than ever. And fuel prices while down from the peaks of last summer remain quite volatile. It’s more than a perfect storm right now. It’s nuclear winter. Certainly under these conditions one can empathize with the many truckers who might view the stimulus plan as cause for hope. After all massive government spending will in all likelihood throw off some residual loads. With truck capacity down, such loads could even mean FEMA style profit margins for those still in the game.

I refer of course to the FEMA generated business that occurred during the aftermath of Hurricane Katrina. Following the public relations fiasco suffered by the Bush administration the government started paying whatever it took to get relief supplies delivered to New Orleans. Consequently, truckers who hauled these loads made a small fortune and in the process created an unhealthy precedent. Hurricanes tracking across the Atlantic have now become not a cause for concern, but a cause for hope. Of course, that’s absolutely crazy and only goes to show how perverse thinking becomes when the government flashes its money roll. At best government spending represents a re-allocation of priorities. The money that paid for those FEMA loads ultimately came from somewhere else.

And so it goes with the stimulus plan. In a sense the government offers us a cynical upside to economic meltdown. Hey, I can live with a little meltdown if it means more freight. It’s almost like hoping for hurricanes. This type of thinking might serve the politicians, but it is not the mindset that gave us the modern day trucking industry.

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