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By: IBISWorld Analyst, Ashley Cruz
Regulations relating to logging hours of service, which are set to go into effect by the end of the year, threaten to raise operating costs for suppliers of trucking transportation, resulting in moderate price hikes for buyers.By
In 2015, the Federal Motor Carrier Safety Administration issued a mandate that all commercial interstate vehicles install an electronic logging device to ensure compliance with hours-of-service laws. These laws, and the subsequent ELD mandate, are imposed on all long-haul truckers and primarily affect the national trucking services market, although some drivers in the refrigerated trucking services and petroleum and chemical trucking services markets are also required to comply. The ELD mandate was put in place as part of an effort to reduce the number of accidents involving a commercial vehicle, which contribute to a significant percentage of all vehicle accident fatalities and are often caused by driver fatigue, inattention, or speeding. According to the FMCSA, there have been more than 3,500 fatalities in vehicle accidents involving a large truck or bus almost every year since 1975, the first year for which data is available. Though the deadline for ELD compliance is quickly approaching, a majority of the 3.5 million affected trucks have yet to procure or install the required devices. This delay in compliance is bound to cause a shake-up for the trucking industry and their customers in the coming months.
Driving up Operating Costs
The FMCSA insists that ELDs will save trucking companies a collective $1.6 billion per year by limiting paperwork costs and enhancing fuel efficiency. However, most carriers and independent operators claim that the mandate will increase their compliance costs. For example, ELD provider Omnitracs LLC estimates that new devices will cost carriers between $199 and $2,200 per truck, plus a monthly service fee of $20 to $60 per truck. While this might not seem prohibitively expensive for an established company, the largest players in the national trucking services market each have more than 10,000 trucks, all of which will require a new device and ongoing service. These costs can quickly add up; for a carrier with a fleet of 10,000 trucks, the service fee alone amounts to between $2.4 million and $7.2 million annually, not including the one-time costs associated with procuring and installing the ELD devices, which must be hard-wired into the trucks’ engines.
Owner-operators, which already generate razor-thin profit margins, often do not have the capital to purchase a new device outright. Many ELD providers are offering a financing program for their products, but owner-operators only require one ELD each, and thus do not meet the quantity threshold to be given financing options. Moreover, owner-operators are often subcontracted by larger trucking companies, and they do not have enough pricing power to increase their rates to cover the higher costs. These drivers fear that electronic devices will allow their contracting companies to exert more pressure and take advantage of independent drivers. This dynamic will likely exacerbate tensions that already exist between these two groups over whether full-time owner-operators should receive employment status and benefits.
IBISWorld anticipates that the combination of higher costs and stricter oversight will cause some industry operators to exit the market, thereby intensifying the current driver shortage, and forcing larger carriers to boost driver wages and invest in additional hiring efforts. Altogether, these trends will increase trucking companies’ operational costs, prompting them to pass these increases on to buyers in the form of higher prices. In fact, IBISWorld estimates that the price of national trucking services will rise 6.2% in 2017 alone.
Operators Slow to Get on Board
Many businesses have not yet fully equipped their fleets with the necessary equipment in hopes that the decision would be reversed or delayed. Unfortunately for carriers, the ELD mandate was specifically exempt from an executive order for federal agencies to freeze new regulations, and in June of 2017, the Supreme Court declined to hear a trade union’s petition to strike down the mandate on privacy grounds. On July 18, a new bill was introduced in the US House of Representatives that would extend the deadline for compliance to 2019. However, the bill has not yet made it out of committee and is considered an unlikely path to success for opponents of the mandate, especially before the existing deadline in December.
Even with nearly all legal options exhausted, carriers have still been reluctant to adopt the technology ahead of the deadline. Trucking companies operate in highly competitive markets and partake in fierce price-based competition. Thus, if a trucking company purchases their new devices and raises their shipping rates several months ahead of their closest competition, they are likely to lose business.
An inability to raise prices has been compounded by the fact that fuel prices have been increasing more slowly than expected. This trend limits price growth stemming from fuel surcharges, which are often expected and more palatable to buyers, and can therefore help to disguise price increases for other, less visible purposes. Thus, buyers of national and freight trucking services can expect to see moderate price hikes in the final months of the year, once ELDs are adopted by the rest of the market’s operators.
What’s Down the Road for the Trucking Industry
In an already highly regulated industry, truck transportation operators may find that a shifting of resources is necessary to adjust to the ELD mandate. IBISWorld anticipates that demand for outsourced compliance services and transportation management systems will rise as carriers’ tracking and reporting needs rise. Ultimately, as carriers’ depreciation, software and other overhead expenses make up a greater portion of their operating costs, the freight trucking industry is expected to enter a state of flux as resources, employment patterns and prices shift, thereby upsetting buyers across the country.