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Chapter 5The Motor Carrier
Industry
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1
IntroductionBrief history
Important role in development of 20th century U.S. economy Industry emerged at time of WW I Industry greatly benefited by rapid development
of highway system, particularly the Interstate system
Rapid growth of economy following WWII corresponds with rapid growth of trucking industry
Dominant mode of freight transport today
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Industry OverviewMeasures of Industry Significance
Expenditures for trucking services$645.6B or 83.8% of total expenditures in
U.S. for freight transportation in 2006
Truck share of freight transportAbout 31% of total ton-miles
Approx. 8.7M people employed in trucking industry
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3
Industry OverviewTypes of Carriers
Several classification schemesLegal form of carriage
For-hire vs. private Common, contract or exempt for-hire
Local vs. intercity operatorsTruckload (TL) vs. Less-than-truckload (LTL)
Heavy LTLClassification by type of commodity hauled
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4
Industry OverviewNumber of Carriers
Large number of relatively small carriers.6M operators, most with 6 or fewer
vehiclesNumbers vary significantly by sector
Very large number of TL carriers Low capital requirements for entry into TL
Much smaller number of LTL carriers High capital requirements for LTL due to
terminal network and pick-up and delivery fleet Explanation of LTL operation Yellow dominates national LTL market
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5
Industry OverviewTypes of Commodities Hauled
Dominates transport of high-value manufactures Food and manufactured products, consumer and
industrial goodsMost transported relatively short distances (less
than one day driving time)Dominates transport of live animals
These shipments move very short distancesMoves substantial quantities of bulk materials
These shipments move very short distances
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6
Operating and Service CharacteristicsGeneral service characteristics
Trucking has an advantage on most service-related characteristics
AccessibilityDoor-to-door service
Speed (transit time)Enables lower inventory levels
Connections to other modes: universal connector
Smaller carrying capacity – inventory advantage
Lower damage rates than rail© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7
Industry OverviewCompetition and Market StructureIntense rivalry within trucking sectors and
from private carriersFew capital or other constraints on entry
Exception at national LTL level Partial exception for specialty commodities
carriersDespite capital constraints on entry, national
LTL segment faces intense competition from other transport segments
Market structureTL is monopolistically competitiveNational LTL is oligopolistic
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8
Operating and Service CharacteristicsEquipment
Equipment-related advantagesTechnical features enable service
advantagesFlexibility, smoothness, small capacityRapid loading/unloading capability
Principal equipment decisionsType of tractor (power)Type of trailer (length and type)Where and when to position equipment© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9
Operating and Service CharacteristicsTypes of Vehicles
Line-haul vehicles Used for long distance transportTypically tractor-trailer combination with 3+
axles Typical trailer lengths are 45, 48, or 53 feet
Maximum length and weight can vary by state Fed. max. gross vehicle weight is 80,000 lbs. Some states have grandfathered rights to allow more Some loads may be more under permit
Carrying capacity: function of vehicle dimensions and density of cargo
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Operating and Service CharacteristicsTypes of Vehicles
City (straight) trucksSingle units used for pick-up and delivery
(PUD) Typically 15-20 foot cargo unit
Growing use of 28 foot line haul trailers (pups) for PUD Saves multiple handlings of cargo and time
Special vehiclese.g., flatbed, tank trailer, refrigerated, high
cube
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
Operating and Service CharacteristicsTerminals
Pickup and delivery terminals (satellite or end-of-run terminals) in LTL operations Peddle run networks
Peddle time and stem timeShipment consolidation and distribution
operationsVehicle dispatch operationsOther services
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Operating and Service CharacteristicsTerminals
Break-bulk terminals in LTL operationsConsolidate and re-sort shipments
Designed to facilitate higher utilization of vehicle capacity
Disadvantage: slows transport time, adds handling, reduces reliability
Driver domicileRelay terminals
Necessitated by hours-of-service regulations“Slip seat” and sleeper team alternatives
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17
Operating and Service CharacteristicsTerminal Management Decisions
Number of terminalsDesired degree of market penetrationTrade-offs with length of peddle runs and with
level of customer service Trend has been to reduce number of terminals
Locations of terminalsInfluenced by hours-of-service regulationsConsideration of backhauls between terminals
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
Cost StructureFixed vs. Variable Cost Components
Cost structure: mix of fixed and variable costsVaries depending on the type of trucking
operationFor long-distance, tractor-trailer operation
70-90% of total costs are variable Fixed costs relatively low % of total costs
Public investment in highway system Small increments of capacity can be added Few terminals needed
For LTL operation, fixed costs are higher due to terminal system
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
Cost StructureLabor Costs
Principal variable cost categories Labor Fuel MaintenanceHighway user charges
Note: these are the principal costs associated with daily operations
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Cost StructureLabor Costs
For a long-distance, tractor-trailer operationTotal operating cost: $3.75/mile (2006)Driver cost: 20% of total operating costs
Mileage rate for distance traveled (local delivery drivers paid an hourly rate)
Hourly rate for loading/unloading, operating delays
Total labor costs consume approximately 55% of each dollar of revenue
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22
Cost StructureLabor CostsDriving time regulations
Federal limits on the maximum hours an individual may drive or do “on-duty” work
Maximum limits 11 hrs driving, 14 hours “on-duty” No driving after 60 hrs on-duty in 7 days or 70
hours on-duty in 8 days Drivers must be off for 10 consecutive hours before
working the maximum hour limits
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
Cost StructureLabor Costs
Qualified driver shortageMajor impact on TL carriersContributing factors
Federally imposed commercial driver’s license (CDL) requirements Imposed nationally in 1992
Stringent rules on drug and alcohol abuse Demanding, unattractive life-style
Industry efforts to attract drivers
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24
Cost StructureFuel Costs
Fuel costs in 2006 averaged about 48 cents per mile of operation12.8% of total operating costs
Fuel costs include federal and state diesel fuel taxes imposed as part of highway user tax structureFederal tax is 24.4 cents/gallonState diesel fuel taxes average 24.5 cents/gallon
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Cost StructureEconomies of Scale (EOS)
No major EOS in truckingSome purchase economies may be available for
large scale operationsLarge scale operations may have higher labor
costs i.e. diseconomies of scale, due to unionization
Economies of utilization (use)Present in LTL operations where fixed costs are
higher due to terminals, IT systemsIT systems requirements also adding to fixed costs
of TL carriers
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26
Cost StructureFunding
System of federal and state highway user taxes and fees used to fund the provision of highwaysUser fees principle: those that benefit most
directly should pay for the systemCovers construction and maintenance costs of
most non-local roads Revenues from federal user taxes and fees deposited to
Federal Highway Trust Fund (FHTF) State user fee revenues used to match FHTF
distributions
Debate: does each user category pay fair share?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
Current IssuesSafety
Improved safety means improved profitabilityFMCSA publishes rules for motor carrier
safety fitness inspectionsCarriers classified as satisfactory, conditional,
or unsatisfactory If unsatisfactory, carrier given reasonable time to
correct deficiencies FMCSA has power to stop operations if
improvements not madeFitness findings influence carrier selection
process
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29
Current IssuesSafety
Alcohol and drug abuse Industry response: substance abuse testing,
treatment, and prevention programsPrograms focus on health and safety dangers,
abstain from moral judgments. Include: Consistent, enforceable policies applicable to all
employees Known policies for violations Counseling and rehabilitation services
Hours-of-service and driver fatigueVehicle size and weight concerns
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Current IssuesTechnology
Impact of satellite technologyGPS systems for vehicle tracking and onboard
computers for communications Enhance management control Enable more efficient and timely communications
between driver, management and customer Status notification Responsiveness to routing and delivery time
change requests made by customersEnhancement of environmental safety in
movement of hazardous materials
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31
Current IssuesLTL Rates
LTL rates are market driven, much discountingLimited anti-trust immunity
Immunity for commodity classifications, mileage guide rules, and general rate adjustments
No tariff filing requirements Carriers must maintain rates, rules, and commodity
classifications and furnish to shippers on requestBut rates need not be in writing to be enforceable
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Current IssuesFinancial Stability
Many carriers have high operating ratios, exceeding 95%Industry overcapacity is a recurring problem
Problem worsens during economic downturns Puts much pressure on carriers to discount rates to
maintain market share Alternatively, some carriers try to build market share
through mergers and consolidationsEach year, 1,500+ carriers file for bankruptcy
Evaluation of carrier financial stability is now an important aspect of carrier selection process
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33