Evaluation of U.S. Commercial Motor Carrier Industry Challenges and Opportunities

Final Report

March 31, 2003

ICF Consulting
9300 Lee Highway
Fairfax , Virginia 22031
Tel 703-934-3000
Fax 703-934-3740

Contact: Sergio J. Ostria

With George L. Edwards and Associates

Contents

1. Introduction
2. Industry Overview
3. Study Methodology
4. Rising Insurance Costs
5. Hours of Service Rule Changes
6. Fuel Price Variability
7. Urban Congestion and Travel Time Reliability
8. New Emissions and Fuel Standards
9. Driver Waiting and Loading Times
10. Security Concerns
11. Delays at Port Facilities
12. Summary

1 INTRODUCTION

1.1 Purpose

The U.S. commercial motor carrier industry is facing a number of challenges that threaten to erode its productivity and compromise the high level of service currently provided to shippers. Heightened security presents a challenge, particularly for carriers of hazardous materials. Marketplace shifts and deteriorating transportation system performance can contribute to difficult operating conditions for motor carriers. Other challenges include regulatory actions concerning safety and the environment that could potentially impose significant cost and service disruptions on trucking companies.

Because the motor carrier industry is so vital to the U.S. economy, these challenges demand attention. The purpose of this study is to identify and assess the challenges, and to discuss possible public and private sectors strategies to mitigate their negative effects.

The remainder of this section presents an overview of the study findings, focusing on possible solutions. Section 2 presents an overview of the commercial motor carrier industry, including a description of the industry’s principal segments, their basic operating characteristics, and some data on the size and level of activity of the various segments. Section 3 describes the study methodology, including the selection of issues for analysis and the characteristics of the organizations that were interviewed as part of this work. Sections 4 – 11 discuss each of the major challenges and issues assessed in the study, including the causes of the issue and its effects on the motor carrier industry, possible solutions, and needs for additional research. The last section is a complete summary of the study findings.

1.2 Summary of Findings

According to the motor carrier industry experts interviewed for this study, the issues that pose the greatest threat to trucking productivity¹ and service quality are: rising insurance costs, changes to the hours of service rule, and fuel price volatility. Nearly all interviewees placed these three issues near the top of the list in terms of importance. Interviewees identified three other issues as being somewhat less pressing but potentially having significant negative effects: urban congestion, new emissions and fuel standards, and driver waiting and loading times. Two other issues assessed in this study, security concerns and delays at port terminals, were not considered important by most interviewees, the former because major new security regulations have yet to be implemented, and the latter because the issue affects only a small segment of the motor carrier industry. A summary of the findings for each major issue studied is provided below.

Rising Insurance Costs – Rising insurance premiums are caused by two factors: poor performance of insurance company investments and an increase in expected pay-outs due to rising damage awards and the effects of 9/11. Many carriers feel the problem can only be solved though tort reform to limit damage awards. Carriers have responded to rising insurance premiums by relying more on self-insurance and forming risk retention groups. Many have also sought to bring down insurance rates by reducing their accident risk though driver safety programs. There may be a government role in promoting the expansion of existing industry safety programs to share information and voluntarily achieve higher safety standards.

Hours of Service Rule Changes – The nature of the expected HOS rule changes is not publicly known at this time. While HOS rule changes would likely increase highway safety, more restrictive rules could make vehicle and driver scheduling less flexible, and possibly raise the cost or lower the quality of service that trucking firms can provide. The greatest effect of a changed HOS rule would fall on the regional and long-haul for-hire truckload firms. Alternative approaches to regulating HOS have been proposed. Some policy-makers have suggested that the Fair Labor Standards Act should be applied to the motor carrier industry to require overtime pay. Another alternative, possibly to complement HOS regulations, is a voluntary program that encourages the use of best practices. Such a program could encourage information sharing and adoption of safety performance management practices through a branding program that would recognize firms that achieve a superior level of safety performance.

Notes on Technology

While we do not explicitly address the effects of technological change in our discussion of productivity, it is important to note the following: New technologies, such as advanced materials and alternative fuels, will likely increase the efficiency and productivity of the motor carrier industry over time. In many cases, new technologies employed to make the motor carrier industry more efficient will also improve safety, reduce vehicle emissions, or result in other socially desirable outcomes.

Fuel Price Variability – Many motor carriers have little ability to absorb rapid changes in fuel costs. Historically, trucking firm bankruptcies have been closely correlated with fuel price increases. Larger motor carries employ a number of strategies to hedge against changes in fuel price, including the use of swaps and options, or purchasing fuel on the spot market or at the wholesale level. While many view public sector intervention in the issue of fuel prices as inappropriate, several bills have been introduced recently in Congress that attempt to mitigate the effect of fuel price changes (particularly on smaller carriers) by requiring carriers to apply a fuel price surcharge on shippers.

Urban Congestion and Travel Time Reliability – Urban congestion causes an increase in travel times for motor carriers, and worse, a reduction in travel time reliability. If possible, carriers respond to congestion by selecting alternative routes, shifting to off-peak periods, or scheduling trips with a greater travel time buffer. A variety of strategies can reduce the extent of congestion or at least make it more tolerable. For example, truck drivers and dispatchers can make use of real time traffic information systems to help minimize delay. Greater benefits could be realized if carrier route planning systems were integrated with measures of travel time reliability. There has been recent interest in truck-only lanes or truck freeways as a way to serve goods movement, reduce congestion, and improve highway safety. Toll-financed truck facilities are being considered in Southern California and Virginia.

New Emissions and Fuel Standards – There is widespread concern that the new emissions standards for heavy-duty engines, which began October 1, 2002, will cause lower fuel economy, lower horsepower, and the possible need for more frequent engine maintenance. Because of these side effects, particularly uncertainty over engine reliability, motor carriers have been reluctant to purchase the newly certified engines. Instead, fleets have been purchasing larger numbers of older engines, and also holding on to their current trucks longer than they normally do. It is too soon to determine how the new emissions standards have affected fuel economy. However, it appears that the industry’s fears about fuel costs and maintenance problems with the new engines have been exaggerated. The emissions standards that will take effect in 2007 pose a far greater challenge for engine makers, and may generate more concern about reliability and performance.

Driver Waiting and Loading Times – Long waiting and loading times for truck drivers impose substantial costs on the motor carrier industry. For the most part, this problem affects for-hire truckload carriers only, and according to a Truckload Carriers Association study, is worst in the grocery sector². At its core, the problem results because shippers do not directly bear the cost of the driver and equipment delay they cause. One possible solution is to change shipper/carrier contracts so they address wait times and allow for detention charges if necessary. Other strategies involve changes to loading dock practices, such as allowing 24-hour delivery or providing a mechanism for the delivery of freight that arrives early. Some have argued that cooperative industry efforts or voluntary programs could help reduce wait times, such as an industry International Standard Organization (ISO) standard addressing loading and unloading practices in detail.

Security Concerns – The events of September 11, 2001 focused attention on trucking security, including border crossings, hazardous materials transport, potential contamination of food shipments, and the potential use of a truck trailer to deliver a weapon. Although the heightened focus on security has changed the operating environment for motor carriers, our interviews suggest that, at the moment, motor carriers are not generally feeling adverse productivity effects. Many carriers appear to welcome the increased emphasis on security. New security procedures and regulations for trucking are expected, however, and may result in more significant industry effects. For example, new hazmat carriers regulations being considered include requirements for hazmat carriers to provide armed escorts, pre-notify states about hazmat shipments, track trucks using GPS transponders, employ e-seals, and equip tractors with electronic ignition locks. If adopted, the cost and productivity effects of some of these proposals (such as armed escorts) would be significant. Some carriers have suggested that federal action is needed to revise the definitions of hazardous materials because the current definitions are excessively broad and may prevent attention and resources from being focused on shipments that pose the greatest threat

Delays at Port Facilities – Delays at port facilities and poor chassis condition at ports are serious issues, but affect only a small segment of the motor carrier industry. Similar to shipper loading docks, port facilities can impose long wait times on truckers with impunity since the ports do not bear the economic cost of the delay. But the long wait times at port facilities are caused by a set of factors that are fairly distinct from the wait times encountered at other shipper facilities, including lack of sufficient gates, limited hours of terminal operation, poor chassis maintenance, connector road congestion/poor roadway design and vessel bunching. Overcoming some of the barriers to more efficient port gate operation, such as longer operating hours and full automation of paperwork, will require a negotiated settlement between labor and port management. Other more practical solutions include use of reversible gates, two-stage gates, specialized gates, or terminal staging areas. Some policy makers have proposed to fine terminal operators whose operations regularly require port drayman to wait in long lines to enter terminals, and such a bill was recently signed in California. Several states have passed laws to address the issue of poor chassis condition at ports, and ATA has urged implementation of a national rule on chassis roadability.

2 INDUSTRY OVERVIEW

Trucking is the backbone of the nation’s freight system, carrying 85 percent of domestic cargo by value and 70 percent by weight.³ Even freight carried by other modes often depends on trucking to provide access to air cargo, railroad, and seaport terminals. The flexibility of the motor carrier industry has allowed trucking to serve nearly every freight transport market, meeting shipper demands with high levels of service.

The motor carrier industry has evolved tremendously since the Motor Carrier Act of 1980. As a result of deregulation, trucking rates declined significantly, and a more responsive and flexible trucking industry emerged. The elimination of regulatory barriers to entry, and particularly the requirement for route and commodity-specific operating authority, permitted the rise of the truckload sector that has brought huge gains in productivity. It was this development that allowed guaranteed just-in time (JIT) deliveries and all the other features that brought the evolution of advanced logistics systems and supply-chain management.

Over the last decade, growth in trucking ton-miles has accelerated significantly and at a faster rate than GDP, but in line with growth rates in manufacturing. As shown in Figure 1, both goods production and intercity trucking ton-miles have nearly doubled since 1980.

Figure 1: Change in Trucking Ton-Miles and U.S. Goods Production Since 1980 ⁴

In addition to absolute growth, trucking has been gaining a larger share of the freight market. Trucking’s share of domestic intercity freight ton-miles (non-pipeline) grew from 29 percent in 1980 to 35 percent in 1998.⁵ Reasons for this mode shift include:

• Just-in-time inventory practices. Manufacturers that employ JIT systems strive to minimize on-site inventory by coordinating their supply deliveries with production schedules. This requires smaller, more frequent and more reliable inbound shipments – characteristics that typically favor trucking over rail.
• Manufacturing and warehouse location patterns. Manufacturing and warehousing have migrated from urban areas to suburban or rural locations, often in search of cheaper land and labor. Longer hauls by truck carriers are required to connect more distant supply, production and consumption facilities. At the same time, these facilities are increasingly inaccessible by rail.
• Reliable highway network. The completion of the Interstate Highway System has linked virtually the entire nation by a safe and reliable network of four-lane highways ideally suited for truck transport.

The flip side of the competitive, responsive trucking industry is that some carriers are very sensitive to changes in the marketplace and regulatory environment. Profit margins among publicly traded truckload motor carriers are typically close to or under five percent. Driver turnover is high in some industry segments. As a result, it’s possible for significant changes to the business environment to force large numbers of motor carriers into bankruptcy. Because so much of the U.S. economy relies on trucking, such a development could ripple throughout the economy with profound effects.

The remainder of this section further describes the trucking industry. We sub-divide the industry into its principal segments, describe their basic operating characteristics, and provide some data on the size and level of activity of the various segments. The principal sub-divisions of the industry, together with associated revenue and VMT estimates for 2000, are shown in Table 1.

There are three major lines of division within the industry. One is between long haul and short haul: between companies that provide primarily intercity services and companies that provide service within a metropolitan region and its outlying areas and perhaps to nearby cities. Second, there is the divide between the for-hire and private-carriage segments. The former is the firms that move the goods of others for payment– probably what most people think of as the “trucking industry.” The latter are firms that use their own trucks and drivers to move their own goods. When their trucks are returning empty, many private carriers will move the goods of others for hire; some will not. The third division splits the for-hire segment into two principal classes: truckload (TL) and less-than-truckload (LTL). TL carriers move truckloads of goods direct from origin to destination. LTL carriers consolidate, haul, and distribute goods through a network of terminals in less–than–truckload lots. These segments are discussed below in greater detail.

Table 1. 2000 Revenue and VMT Estimates by Industry Segment (billions) ⁶

	Long-haul and regional				Short-haul and local
	For Hire			Private	For Hire	Private
	TL	LTL	Other7
Revenue	$96	$26	$31	$173	$76	$122
VMT	77	8	N/A	81	30	50

2.1 Long Haul and Short Haul

One major division within the industry is between long haul and short haul. Selecting a point of demarcation is inherently somewhat arbitrary. For the estimates in Table 1, we have chosen 150 miles as the average length of haul that is the border between short haul and long haul. Note that many industry observers will speak of a distinction between local and short haul carriage, the latter having longer moves. Most truckers also make a clear distinction between regional and long haul operation, the latter having the longer runs. The estimates in Table 1 do not make these distinctions.

2.2 For-Hire Service

The major division in the for-hire industry segment is between truckload (TL) and less-than-truckload (LTL) service. The distinction is a simple one. A truckload firm moves a shipment, a full truckload, or close to it, directly from origin to destination. A LTL operation collects small shipments from local pick-ups, moves them over the road between terminals in truckloads, breaks them up at the destination terminal, whence it makes local deliveries. For-hire firms also include household goods and parcel-delivery firms.

Truckload companies

Total TL revenue is about $110 billion, of which about $97 billion is from long-haul service. These firms own an estimated 770,000 tractors; of these, approximately 660,000 are in long-haul service. There are approximately 53,000 TL firms. This is a stark contrast with the LTL sector where there are fewer than 1,000 firms in total and less than 40 firms account for almost all the business. Among the TL firms, 40,000 are very small, with five or fewer tractors. This group includes the owner-operators, those that are genuinely independent firms with their own customers. There are roughly 300,000 owner-operators in total, but the great preponderance of them are working under leases to larger TL companies such that they are, in effect, part of the capacity of those companies and not firms seeking business for their own account.

Aside from the owner-operators, there are still 13,000 or so TL companies, a large number compared to any other segments of the for-hire business. As shown in Table 2, a substantial share of the revenue is with small and middle-sized TL firms. Assuming annual revenue of $125,000 per tractor⁸, a company with 100 tractors has revenue of $12.5 million—not a big company. But firms with fewer than 100 tractors have around 43 percent of sector revenue. If we go up to 500 tractors, revenue of $62.5 million, we find 68 percent of total TL revenue going to firms with less revenue than that.

Table 2. Truckload Carrier Revenue by Firm Size

Number of Tractors	(millions) Revenue	Percent
1 – 5	$9,768	8.9%
6 – 24	$12,369	11.2%
25 – 99	$25,597	23.3%
100 – 499	$27,250	24.8%
500+	$35,059	31.9%
Total	$110,042	100%

The truckload business is an example of an industrial sector where something like atomistic competition actually prevails. This fact is reflected in the tight average operating ratio of this segment, 95.0 percent. A truckload company is analogous to a tramp-steamer company in the ocean-freight business. The trucks do not operate on fixed routes and schedules; they go where the loads are. It is a bit difficult to generalize about operating patterns of TL firms. Some firms will concentrate in a particular region, some in very specific traffic lanes, and some will criss-cross the nation, taking the best loads, in a business sense, as they find them. A TL company’s dispatching staff live in a complex world, where they are constantly trying to make optimal decisions as to how to allocate their equipment and drivers to the available loads, bearing in mind a host of cost considerations.

Regarding the 40,000 owner-operators noted above, those with five or fewer tractors can support neither a sales force nor a dispatch center. Typically, such companies function in one of two ways. Some of them will get their business from one or two customers with whom they have contracts, or some kind of arrangement, to haul loads among a few points. Others may put their principal reliance on trucking brokers who provide, in effect, their marketing and dispatch functions. As companies increase above the minimal size, there will be at least one person devoting time to sales and dispatch, and then as revenues increase, there will be groups for these functions.

Truckload companies do not have terminals in any meaningful sense. Most companies will have a home terminal, but it is principally a site for offices, maintenance facilities, and a place to park tractors and trailers when they are not on the road. Some companies that serve large geographic areas will have multiple bases, but others will not.

Note that many TL companies are plagued with a very high rate of driver turnover; retention of drivers is a major issue in the TL sector. This is not generally the case in LTL and private operations. Part of this stems from better pay and benefits in these latter sectors; and part of this is because many of these companies either employ union drivers or must compete with union employers to obtain good drivers. But high driver turnover among TL carriers is also likely due to the irregular and often-shifting work times of TL operation and the amount of time on the road and away from home that drivers must incur.

Less-than-truckload companies

As already noted, LTL companies are a sharp contrast with TL firms, both in degree of concentration and in mode of operation. Thirty-five companies receive 85 percent of LTL sector revenue. The seven largest LTL concerns have combined revenue of $13.7 billion, about half the sector total.

While the LTL sector has a much higher degree of concentration than does the truckload business, it is much smaller, with total revenue of $27 billion, compared to about $110 billion in the TL sector. There are over almost 500 LTL companies that list themselves as having average hauls of less than 150 miles. Some of the service they provide would be local LTL movement in the sense that actual origin and destination are within 150 miles of each other. A good part of their service would also be provision of pick-up and delivery service under contract with a larger LTL company that uses a local concern to avoid investing in a terminal in that area.

In order to operate its business, whether regional or national, a LTL firm requires a set of terminals. Each terminal will have a force of pick-up and delivery drivers. Typically, they go out in the morning with loaded trucks, make deliveries, spend the afternoon picking up loads, and return to the terminal at the end of the day with outbound loads. These loads are moved across t Wolfe, Michael, for delivery the following morning, when the pick-up and delivery cycle is repeated. Some loads may be going out of a carrier’s region; they would be handed over to another LTL firm for onward movement to a destination at one of the other company’s terminals. That is the general pattern of operation in a regional LTL company.

For the “national” LTL firms, those that provide long-haul service and have average lengths of haul in excess of 1,000 miles, the operation is somewhat more complicated. These companies will have a set of major hub terminals, each of which has a large number of satellite terminals. Line-haul moves will often be from satellite to hub to hub to satellite. In some circumstances, a trailer may go directly from a satellite to a hub in another region. Where the line-haul is more than 500 miles, moves are frequently handled with either teams or relays. (The national LTL companies are usually thought of as Roadway Express, Yellow Freight System, ABF Freight System, Overnite, and FedEx Freight.)

2.3 Private Carriage

For-hire truckers are in the business of carrying other people’s goods. Private carriers are firms that choose to carry their own goods. Generally, private carriers do this because they are very sensitive to requirements for timely and reliable service, either because of their own methods of supply-chain management or those of their customers. Some private carriers also use their drivers to handle delivery to customers as part of their customer-relations efforts.

Private carriers pay a price for moving their own goods. The alternative in most cases would be for-hire truckload service; private carriage is somewhat more costly than truckload – a premium of a little more than ten percent on a truck-mile basis.⁹ Several factors may account for this difference: the high level of service that private carriers provide themselves which would include a higher ratio of empty miles to loaded miles; economies of specialization realized by truckload companies; and generally more expensive pay-and-benefits packages for private drivers. Many private carriers try to offset this cost differential by seeking loads on a for-hire basis for their backhauls that would otherwise be empty.

Information on private carriers is more limited than is the case with for-hire carriage. Private carriers are not treated as trucking companies by many data gathering efforts. Private carriers may range in size from a handful of small trucks used in local delivery to thousands of tractors in long-haul service. We estimate that about 700,000 tractors and drivers are employed in private, long haul service. Perhaps 100,000 tractors are in short-haul service together with a much larger number of straight trucks. Imputed revenues have been estimated for private carriage: $123 billion in long-haul service and $122 billion in short haul service.¹⁰

An important point is that private short-haul operations include a great deal of truck movements that do not involve carriage of goods. These involve trucks that carry people and equipment to places where they are needed to provide services of one kind or another. This includes: service trucks belonging to utility companies; trucks of a variety of types of service contractors—plumbers, electricians, roofers, landscapers, etc.; trucks taking crews and equipment to construction sites; dump trucks; trash trucks; and other like vehicles. Otherwise, a great deal of short-haul private carriage is local distribution—movement of snack foods, baked goods, beverages, fuels, etc. to wholesale or retail points, and retail deliveries to households and offices of many kinds of goods.

It is difficult to generalize about private-carriage patterns of operation. In short haul service, a driver starts from a store or warehouse and makes a circuit of deliveries in the region, frequently covering the same approximate route every day. In long-haul operations, there can be considerable variety. A firm may ship, for example, from a single national point to a small number of regional distribution centers which, in turn, ship to a large number of stores or more distribution centers. Multiple drops are quite common: a driver leaves a factory or warehouse with a full trailer and makes several delivery stops before returning home. Some runs of this nature require the driver to spend several days on the road, just as a TL driver would. There will be other private operations in which the drivers never spend a night away from home.

Some firms arrange for their private carriage on a contract basis; they outsource their carriage to a contractor, usually a truckload company that dedicates an agreed number of trucks and drivers to a private carrier's service. Since the equipment and drivers are under the control of the private carrier, such an operation behaves in the same way as any other private carrier.

3 STUDY METHODOLOGY

3.1 Issue Identification

The intent of this study is to focus on the most important issues facing the motor carrier industry. A screening process was used to identify these issues. We first created the following comprehensive list of all possible issues through a review of industry trade publications, discussions with industry experts, and internal staff brainstorming.

• Urban congestion and travel time reliability
• Access to port facilities
• Hours of service rules
• Security concerns
• Safety concerns and NAFTA
• Driver turnover
• Rising insurance costs
• New emissions and fuel standards
• Truck size and weight limits
• New ergonomics regulation
• Introduction of truck toll roads
• Fuel price volatility
• Long driver waiting and loading times
• Shortage of vehicle mechanics
• Growth in time-sensitive delivery requirements
• Growth in intermodal/containerized freight
• Demands for new information technologies

3.2 Issue Selection

We identified the following criteria for assessing the importance of each issue and the appropriateness of including the issue in the study:

• The issue has potentially significant effects on motor carrier productivity.
• The issue is an emerging issue, likely to grow in importance in the future.
• The issue is likely to have present or near-term effects.
• The issue warrants additional study.
• There are opportunities for a public or private sector response to the issue.

Upon further review, the following three issues were determined to be inappropriate for study consideration: growth in time-sensitive delivery requirements, growth in intermodal/containerized freight, and demands for new information technologies. These issues are fundamentally different from the others in that they reflect customer-driven market shifts internal to the industry, rather than external forces that bear on motor carriers. In other words, they represent a long-term shift in the nature of the market rather more than a disruption to the industry. As such, there is little opportunity for public or private response to these issues other than to serve customer demands.

We presented a list of potential issues to seven motor carrier industry experts (primarily trucking company executives) and asked them to rank or discuss the issues in terms of importance. Industry experts were asked to apply the five criteria listed above in making their assessment. Interviewees were provided the opportunity to identify additional challenges that were not on the list.

Table 3 shows the ranking of each of the issues provided by the interviewees as well as an average rank and an overall rank. Two respondents declined to numerically rank the potential issues, preferring instead to discuss the potential effects of each issue and qualitatively assess its importance. To integrate these responses with the numerical rankings, we assigned issues with “high” importance a score of 3 and issues with “low” importance a score of 10. Responses were fairly consistent, with some notable exceptions. Rising insurance costs were ranked first or second by all but one respondent. Four respondents ranked fuel price volatility in the top three issues, although it ranked low with the two largest carriers. All interviewees placed the hours of service rule among the top six issues. Most interviewees gave urban congestion and travel time reliability a rank of between fourth and seventh. There was more variation in the assignment of rank to driver waiting and loading times and security concerns.

Some of the differences in responses are undoubtedly caused by differences in carrier type. For example, the ergonomics issue is more important to LTL carriers, who do more loading and unloading of vehicles on their premises. Rising insurance costs may be more significant to smaller carriers, who are unable to self-insure. Larger firms may be less concerned about fuel price volatility because they are better able to use strategies that provide some insulation against fluctuations.

Table 3. Issue Ranking Interviews

Issue	Mid-sized TL	Mid-sized TL	Mid-sized TL	Mid-sized LTL	Retired Industry Expert11	Broker-3PL	Large LTL	Average	Overall Rank
Rising insurance costs	1	1	1	7	2	3 (High)	3	2.6	1
Hours of service rules changes	3	4	5	1	6	3	3	3.6	2
Fuel price volatility	2	3	2	10	1	10 (Low)	10	5.4	3
Urban congestion and travel time reliability	5	5	4	5	7	3	10	5.6	4
New emissions and fuel standards	4	6	7	3	10	3	10	6.1	5
Driver waiting and loading times	10	2	3	9	4	10	10	6.9	6
Security concerns	11	10	8	4	5	3	10	7.3	7
Truck size and weight limits	9	14	10	11	11	3	3	8.7	8
Driver turnover	6	8	6	13	8	10	10	8.7	9
Ergonomics regulation	8	7	14	2	15	10	10	9.4	10
Safety concerns and NAFTA	13	9	11	6	12	10	10	10.1	11
Shortage of vehicle mechanics	7	11	12	12	9	10	10	10.1	12
Introduction of truck toll roads	12	12	9	8	14	10	10	10.7	13
Delays at port terminals	14	13	13	14	13	10	10	12.4	14
Insufficient knowledge of cost structure					3

We recognize that the motor carrier industry is diverse, and that this interview process does not account for all the variation that exists between carriers in terms of fleet size, operating range, geographic location, cargo type, etc. However, the general consistency of the interview responses and close correlation of these responses with issue coverage in industry publications suggests that an extensive survey would result in the same top issues.

The results of the screening interviews were presented to FHWA. After discussions between FHWA and the consultant team, it was decided that the study should focus on the seven top ranking issues, plus delays at port terminals. Port terminal delay did not rank high in importance in any of the screening interviews, probably because the issue affects only a very narrow segment of the motor carrier industry – port drayage. Most port draymen are owner-operators, and their perspective is obviously not reflected in interviews with firms. Delay for truckers accessing ports is generally acknowledged to be getting worse, has potentially significant productivity repercussions, and can potentially be addressed through public or private responses. Thus, it was agreed that the issue of port delay meets the criteria for inclusion in the study.

3.3 Issue Analysis

Assessment of the selected issues was conducted primarily through literature review and interviews with motor carrier industry experts. The purpose of the literature review was to gain a more comprehensive understanding of each issue, its potential effects, and possible mitigating actions, and also to identify the specific industry segments most affected by the issue. Reviewed literature includes trade publications, research studies, and congressional testimony.

Interviews were conducted with 14 motor carrier industry experts, primarily trucking company executives and representatives of trucking industry associations. Interviewees were promised anonymity; their characteristics are shown in Table 4.

Table 4. Characteristics of Interviewees

Carrier Type	Freight Type	>Operating Range	>Power Units
Truckload	Dry van	Long-haul and Regional	45
Truckload	Dry van	Long-haul and Regional	160
Truckload	Flatbed	Long-haul and Regional	110
Truckload	Dry van (retail goods)	Regional	168
Truckload	Liquid and dry bulk	Regional	129
Truckload	Hazardous liquid bulk	Long-haul and Regional	60
Truckload	Dry van	Long-haul and Regional	1,000
Truckload	Dry van	Long-haul and Regional	2,670
Truckload	Dry van	Long-haul and Regional	225
Drayage, ports	Dry van, containers	Regional	61
Drayage, ports	Dry van and dry bulk	Regional	425
LTL	Dry van	National	4,500
LTL Trade Association	N/A	N/A	N/A
Owner-Op Trade Assn.	N/A	N/A	N/A

The following eight sections discuss each of the issues we assessed, presented in the order of importance based on our issue screening interviews (Table 3). We describe each issue, including its causes and effects on the motor carrier industry. Then we discuss potential solutions that could help to avoid or mitigate some of the negative effects on motor carrier productivity and service quality. In addition to government actions, we discuss private sector solutions, recognizing that there may be a government role in supporting private sector solutions. Finally, we identify some areas of needed additional research for each issue.

4 RISING INSURANCE COSTS

Insurance rates for the motor carrier industry have risen steeply over the last several years. Most of the trucking companies we interviewed identified this issue as the number one problem they currently face.

Motor carriers are required to have insurance policies for liability, physical damage, and workers compensation. Firms also purchase umbrella policies to obtain additional coverage above that provided by their primary insurance. A recent survey by the American Trucking Associations (ATA) confirmed that insurance rates have increased substantially for both primary and umbrella policies.¹² Table 5 shows average percentage rate increases over the prior year for 2000, 2001, and for before and after 9/11.¹³ The survey found that average primary insurance rates increased by 17 percent in 2000 and 32 percent in 2001. For umbrella policies, rates rose by 33 percent in 2000 and 87 percent in 2001. The ATA survey did not control for the level of coverage obtained, but rate increases adjusted for coverage are likely to be higher, because many carriers are reducing their coverage to control costs. Steep rate increases continued in 2002. In our interviews with motor carriers, many reported increases of 35 to 45 percent over the last two years.

Table 5. Insurance Rate Increase by Year and Insurance Type

Insurance Type	2000	2001	2001 before 9/11	2001 after 9/11
Primary	17%	32%	30%	37%
Umbrella	33%	87%	74%	120%

4.1 Causes and Industry Effects

Insurance premiums are driven by two primary factors: performance of insurance company investments, and loss experience and expected losses. Insurance companies invest in bonds and stocks, so there is an inverse relationship between investment returns and premium levels. As a firm’s investment income rises, it can afford to give up some premium income and, thus, can be more aggressive in pricing for market share. Insurance companies can, and do, sustain losses on premiums when investment income is high enough. Conversely, as investment income falls, firms must seek higher income from premiums and some firms will sacrifice market share in order to do this. We are now in a period of very low investment returns, which has placed upward pressure on insurance premiums.

Regarding loss experience, trucking accident rates have been falling but damage awards have been rising with a concomitant increase in pay-outs. Further, many observers believe there has been a substantial September 11 effect, especially in the reinsurance market. Reinsurance is priced, not on the experience in any particular industry, but on the market’s overall perception of risk; the level of risk perceived in this market has been significantly higher since the attacks of last year.

Rising insurance rates are a critical issue for the motor carrier industry for several reasons. The conditions causing rates to rise do not appear likely to be mitigated in the near future. Indeed, the low investment returns, increased risk of terrorism, and increased damage awards could cause further rate increases in the future. Additionally, competition in the trucking industry makes it difficult for carriers to pass these costs along to their customers in the form of higher prices. Insurance rate increases reduce the profitability and productivity of the motor carrier industry, and may force marginal companies out of business. Rising insurance rates were one of the factors cited by Consolidated Freightways as a cause of their recent bankruptcy.

Not everyone sees the rising insurance rates as a crisis, however. An executive with the Owner Operator Independent Drivers’ Association (OOIDA) noted recently that owner-operators have long paid higher insurance rates, and that rates for larger firms are only now catching up.¹⁴ Others claim that insurance was underpriced through much of the 1990s and is now reaching comparative levels in inflation-adjusted terms.

4.2 Possible Solutions

Although insurance costs were identified as a very serious problem by nearly all motor carriers interviewed, few were able to suggest public or public-private solutions to the problem. Some carriers believe the only way to address the problem is to reduce the incentive for lawsuits through tort reform. Others see the problem as primarily market-driven, and anticipate a market correction in the future. Historically, periods of high rates have eventually attracted more providers to the market, which increases competition and exerts downward pressure on rates.

Until rates come down, many carriers are taking steps to reduce their insurance costs by, for example, reducing their level of coverage, employing self-insurance, or focusing more of their resources on improving safety. These strategies, and a possible government role, are discussed below.

Private sector solutions

Self-insurance is a strategy that larger carriers with sufficient resources can employ. Some smaller carriers can also reduce coverage levels and choose to bear the risk of claims. Recently, risk retention groups have become popular. Groups of carriers with superior safety performance establish these organizations as captive insurance companies to reduce their insurance costs. One example is the American Trucking and Transportation Insurance Company (ATTIC) risk retention group, established initially by six carriers. Each member must undergo a fleet safety standard inspection audit, achieving a minimum score of 67 percent in each of 30 categories of fleet safety operation. The inspection is conducted at six month intervals and fleets who don’t maintain the required minimum score can face penalties and eventual expulsion from the group.

Many firms have sought to reduce insurance rates by reducing the risk of accidents. Firms that self-insure often have the most extensive safety management programs to reduce risk. These firms frequently maintain stringent hiring criteria, taking on only new drivers with good records, good log audits, and good roadside inspection histories. Once hired, driving records are reviewed every six months and problems are addressed proactively. Other steps taken by carriers to reduce accident risk include:

• Driver training programs that include retraining and refresher courses.
• Human resources policies that provide drivers with regular schedules and allow drivers to decide when they are too tired to drive.
• Dispatchers who are paired regularly with the same drivers, who are involved in the company safety program, and provided bonuses tied to safety performance.

Public sector solutions

Insurance companies themselves are often integrally involved in promoting new technologies and systems to improve safety. There may be a government role in promoting the expansion of existing industry programs to share information and voluntarily achieve higher safety standards. An example is the 1-800-How’s My Driving program, operated by SafetyFirst. Insurance companies make participation in this program a requirement for obtaining coverage and provide the service at no cost to fleets. Another example is DriveCam Video Systems partnership with National Interstate Insurance Company (NIIC). DriveCAM will market its driving feedback system to NIIC-insured passenger transportation fleets, with NIIC reimbursing 50 percent of the cost of installation for fleets. DriveCam’s system records what drivers see and hear during unusual driving instances.¹⁵ If the safety benefits of adhering to higher standards can be documented, trucking firms and insurance companies will have significant financial incentives to achieve higher standards.

Tort reform is one policy action that could significantly affect insurance rates. The U.S. tort system is more than twice as expensive as those in other comparable industrialized countries, according to the Council of Economic Advisors. For all civil cases, approximately 53 percent of verdicts are decided in favor of the plaintiff. For those cases involving trucks, 80 percent of the verdicts are for the plaintiffs.¹⁶ Currently the law allows for both compensatory damages for economic losses, pain and suffering, and punitive damages designed to punish the defendant. One proposed reform would allocate punitive damage awards to a public fund that would remedy related problems, instead of giving them to the plaintiffs and their lawyers, thereby reducing the incentives for litigation. Federal legislation would be required to fully reform the system, although some state reforms have already taken place. Under Florida law, for example, 60 percent of punitive damage awards are given to the state.

Other legal reforms, such as clarification of insurer exposure to Motor Carrier Safety Form 90 (MCS-90) requirements, could also reduce underwriting costs and hence improve carrier rates. MCS-90 differs from a conventional vehicle insurance policy in several ways; for example:

• MCS-90 is a Federal requirement for interstate carriers.
• Under MCS-90, the insurance company indemnifies (stands as a guarantor of the payment of liability), and the insured reimburses.
• MCS-90 does not impose a duty on the insurance company to defend the insured.

The Federal Motor Carrier Act of 1980 requires interstate motor carriers to provide evidence of financial responsibility. One way to achieve this is to obtain a MCS-90 endorsement from an insurance company. An MCS-90 endorsement makes the insurance company a guarantor of the motor carrier’s ability to pay liabilities it may incur, including bodily damage associated with its drivers and vehicles, or property damage associated with pollution losses (for example, from hazardous materials spills). The primary purpose of requiring motor carriers to demonstrate financial responsibility is to ensure that liabilities incurred in hazardous material spills, for example, will be paid, even in the event of the bankruptcy of the responsible motor carrier.

MCS-90 indemnification is usually attached as a rider to other insurance coverage that motor carriers are required to have, but is distinct and separate from such coverage. Under MCS-90, the insurance company evaluates the credit risk of the firms it covers. It only becomes responsible for “hazard” risk when these firms become bankrupt, or otherwise unable to pay. In addition to MCS-90 indemnification, motor carriers also purchase insurance coverage that obligates the insurance company to reimburse them for liabilities and costs associated with accidents or hazardous spills.

Recent judicial interpretations of the MCS-90 requirement have created legal uncertainty as to parties that this coverage might apply to. For instance, the 9th and 10th circuit courts have ruled that MCS-90 should cover the permissive users of trailers owned by a third party.¹⁷ In a recent case, a trucker hauling a trailer owned by a third party collided with a bus. Although the third party’s insurance policy did not cover any liabilities incurred during the permissive use of the trailer, the court ruled that the insurance company was responsible for the liabilities incurred pursuant to its MCS-90 indemnification. The uncertainty over the scope of coverage provided by the MCS-90 indemnification has increased the risks of providing this coverage. Industry advocates have argued that Congress should clarify the law and eliminate coverage of permissive use of trailers, which would reduce underwriting costs associated with issuing MCS-90 endorsements.¹⁸

4.3 Research Needs

Some industry proponents have argued that better data on insurance rates are needed to help trucking firms assess surcharges to account for unanticipated price increases. Data comparing rates across different industry sectors, such as household goods, hazmat, or tank trucks would enable trucking firms to determine average levels of insurance rate inflation. This publicly available insurance rate index could then be used in contracts to set surcharges.¹⁹

Research and analysis of the potential for industry voluntary programs to improve safety could help to promote innovative private sector solutions. These could include risk retention groups, enhanced private sector vehicle technology, human resource policies, or other safety systems. Areas where there are legal or market barriers or data needs could be identified.

Finally, there is a lack of published information on the safety performance improvements of new vehicle technologies and management systems. Research that more fully documents the effects of these developments on safety could help to speed their adoption.

5 HOURS OF SERVICE RULE CHANGES

The Hours of Service (HOS) regulations apply to motor carriers (operators of commercial motor vehicles, or CMVs) and CMV drivers, and regulate the number of hours that CMV drivers may drive, and the number of hours that CMV drivers may remain on duty before a period of rest is required. The current regulations are divided into “daily” and “multi-day” provisions, which can be expressed as follows:

• Operators can cumulatively drive up to 10 hours or be on duty up to 15 hours since the end of their last 8-consecutive-hour break.²⁰
• Operators can cumulatively drive or be on-duty up to 60 hours over the last 6 consecutive 24-hour periods plus the current 24-hour period, or 70 hours over the last 7 24-hour periods plus the current 24-hour period.

Several categories of motor carriers and drivers are exempt from parts of the HOS regulations or from the entire HOS regulation under the National Highway System Designation Act of 1995. There are special exceptions for agricultural haulers, construction firms, and utilities. Other exemptions include oilfield operations, the State of Alaska driving and on-duty rules, the adverse driving and emergency conditions exceptions, the retail store deliveries provision, and the natural gas or oil well location sleeper berth exception.

A number of arguments have been made for changing the HOS rule. The FMCSA estimates that hundreds of fatalities and thousands of injuries occur each year on U.S. roads because of fatigued CMV drivers. The current HOS regulations are not based on a 24-hour day work cycle, and do not allow sufficient off-duty time for drivers to obtain eight hours of sleep. The HOS regulations have existed in their current form since 1962. Since that time significant changes in highways, equipment, and transit time demands have occurred. The high volume and speed of CMV operations on Interstate highways and the higher traffic conditions in local and regional environments require a high level of driver alertness. Also, the results of scientific studies into fatigue causation, sleep, circadian rhythms, night work, and other relevant matters were not available when the current HOS regulations were developed.

The DOT proposed a new Hours of Service rule in 2000. That rule sought to eliminate the distinction between on-duty and driving time and reduce the maximum allowable time on-duty. It also required “black boxes” to implement electronic record keeping and limit the ability of drivers to forge their record of duty status. The proposed regulation created five categories of drivers to which the rule had different applications. Although an Act of Congress halted this rule making, the FMCSA is currently planning a new rule-making in the near future. The new rule is now under review at OMB.

5.1 Causes and Industry Effects

Changes to the HOS rule could have significant effects on motor carriers. Until a new HOS rule is adopted, we can only generalize about these potential effects. More restrictive rules could possibly make vehicle and driver scheduling less flexible, and possibly raise the cost or lower the quality of service that trucking firms can provide.

• If the FMCSA proposes to reduce the number of allowable on-duty or driving hours, it could increase transit time for some shipments or increase the cost of maintaining that time. This would increase the number of drivers and equipment required to move existing freight volumes. The larger driver workforce required would also entail increases in the cost of driver recruitment.
• Depending on the magnitude of these cost and service effects, potential secondary effects of rule changes could include mode shifts and changes to other modes of business operation. Increases in the price and transit time of trucking service could drive firms to shift freight to other modes, such as rail. Alternatively, firms could also choose to increase inventories and reduce the frequency of shipment deliveries, effectively substituting warehousing for trucking services.

Criteria for Motor Carrier Policy Decisions

Our discussion here focuses on the economic effects on the motor carrier industry. It is important to note that motor carrier policy decisions should be based on other criteria as well, such as the following: Explicit short-term financial burdens on the industry may be counter-balanced by long-term improvements in safety. Improvements in safety performance can lead to lower insurance rates, reduced cargo damage, and better service reliability. Regulatory measures that effectively remedy market failures ultimately improve social welfare.

The effect of HOS rule changes would vary across industry segments. Local trucking operations rarely, if ever, reach the 10-hour driving limit, though some reach the 15-hour on-duty limit in peak periods. LTL line-haul operations rarely exceed 12 hours for on-duty shifts and driving times are always within 10 hours. The regularized nature of LTL and private carrier operations generally make it easier for these types of firms to comply with the existing rule or adapt to changes. But the spacing of these firms’ terminals and distribution facilities are based on the 10-hour rule; any significant reduction from that limit could have serious repercussions. The greatest effect of a changed rule would fall on the regional and long-haul for-hire truckload firms. They have the highest miles per driver and miles per tractor in the industry. Much of their traffic is not routine, and there is always pressure, especially on small operators, to drive a little longer or a little faster to get one more load.

Rule changes that move drivers to a 24-hour clock could increase safety and allowable driving hours at the same time. This is because the current rule may have a tendency to cause drivers’ schedules to rotate through different hours of the day over time. Provisions that allow drivers to keep a regular schedule and reduce nighttime driving can often allow drivers to get more sleep during their hours off.

In 2000, FMCSA proposed weekend provisions that required drivers to obtain a block of rest equivalent to a weekend after they reached their weekly hours limit. In the previous rulemaking, there were concerns that these “weekend” provisions could force motor carriers to operate during peak periods of congestion. The enhanced accident risk of operation during congested periods could offset accident risk reduction from the implementation of expanded rest periods. Additionally, some have argued that demand for more drivers would require the use of inexperienced drivers, further increasing accident risk.²¹

5.2 Possible Solutions

Because changes to the HOS rule have not been adopted, it is difficult to identify strategies that could mitigate their effects. At this point, a number of organizations have proposed modifications to the HOS rule in the name of improving safety and/or improving motor carrier flexibility. For instance, the National Sleep Foundation has suggested that limits on nighttime driving instead of total driving hours would have a greater effect on reducing accident risk. Others have argued that any new rule should include a 24-hour reset provision that would reset a driver’s weekly clock after 24 hours of rest. The Insurance Institute for Highway Safety has argued that any rule changes should include a 12-hour break after the exhaustion of the daily allowable hours on-duty.

Other institutions have proposed that rule changes should include provisions that increase the flexibility of the rule. The American Frozen Food Institute (AFFI) would like the HOS rule to provide for unscheduled absences by drivers that affect their employers and other drivers.²² To enable motor carriers to meet delivery schedules when unanticipated absences occur, AFFI has suggested that every CMV driver be accorded a number of exemptions from the hours of service restrictions on an annual basis. CMV drivers could use those exemptions as they see fit throughout the year to meet increased driving demands attributable to driver or equipment shortages or other circumstances.

Changes to labor standards

Alternatives to the current regulatory system exist. Some policy-makers have suggested that the Fair Labor Standards Act (FLSA) should be applied to the motor carrier industry to require overtime pay. This would provide economic incentives for firms to reduce the hours their drivers work. Motor carriers are currently exempt from the FLSA and are not required to pay overtime to their employees, although many private carriers and LTL companies do pay overtime. Truckload firms pay by the mile; LTL line-haul drivers are nominally paid by the mile, but they usually drive the same distances every day, so the effect is not very different from hourly pay.

Requiring motor carriers to conform to standard FLSA provisions would provide a self-policing mechanism to reduce driver work hours; it would also make trucking firms much more aggressive in dealing with waiting and loading delays. In general, motor carriers have argued that this would have disastrous effects on their business operations.

Voluntary initiatives

Some policy makers have argued that voluntary programs may be a better way to promote safety through hours of service. Many features of motor carrier safety make it a desirable target for employing voluntary initiatives, including the difficulty of enforcing existing rules, uncertainty over the most effective remedies, and a diverse industry that makes it hard to craft a single rule. Some private sector incentives already exist to encourage industry to improve safety performance.

The industry has significant economic incentives to reduce fatigued driving and its associated risks. Large trucking firms internalize a substantial component of accident risk in their insurance premiums, and many firms, not all of them large, employ a variety of practices, such as safety bonuses, driver training, or in-vehicle monitors to improve safety performance. Such monitors are in wide use by firms with 100 or more tractors.²³ In many cases, the best solution will be defined by the usage and operating patterns of each carrier’s fleet. For instance, the FMCSA recently initiated a voluntary program that allows trucking firms to use on-board recorders, rather than the traditional log book, to comply with the hours of service regulation. Many private fleets have voluntarily adopted this technology, although its penetration into other markets has been limited.

A voluntary program that encourages the use of best practices and information sharing on safety management practices could complement current regulatory programs. Participation in such a program could be encouraged through a labeling program that would allow carriers to certify their product as adhering to a higher level of safety. Ideally, if program participants could be shown to have significantly safer operations, participation in the program might also be associated with lower insurance rates.

5.3 Research Needs

Additional research could help to inform the debate over alternatives to HOS regulation and help to identify potential mitigating responses.

• The expansion of existing voluntary programs focused on motor carrier safety should be studied. Opportunities to promote best practices, facilitate the exchange of information on safety performance management, and utilize safety labeling and branding programs should be examined in more detail. For instance, are there opportunities for carriers to collect and exchange information with insurance companies so those companies employing the best safety management practices are rewarded? Are there legal or market barriers that prevent carriers from collecting and sharing data to assess the effectiveness of best practices? Could FMCSA’s existing data collection and safety rating system be improved to convey more information to insurance companies or purchasers of trucking services?
• A survey of best practices for reducing fatigued driving could be used to assess the effectiveness of private efforts to improve safety. Research could explore the feasibility of a performance based safety program that would exempt carriers from certain types of regulatory scrutiny if they voluntarily implemented a set of best practices, or achieved a specific level of safety performance.
• Behavioral research and driver data analysis could be used to identify drivers who are exceeding reasonable parameters including incidents of hard braking, moving violations, complaints from the public, or HOS violations. Research that could help firms identify those drivers who would be likely to violate the HOS rules or other safety regulations could help firms better manage their driver recruitment and retention strategies.

6 FUEL PRICE VARIABILITY

Many of the motor carriers we interviewed cited fuel price variability as the second or third most important issue affecting their profitability. Because fuel accounts for up to 20 percent of the operating cost of a trucking company, a sudden increase in fuel prices can have a substantial effect on a firm’s bottom line.

Unlike rising insurance prices and HOS rule changes, fuel price volatility appears to be less of a concern for larger carriers. While most of the smaller carriers interviewed for this study identified the issue as critical to their ability to stay in business, larger firms are generally better able to cope with fuel prices change by using some of the strategies discussed in Section 6.2 below. One large carrier reports that fuel price fluctuation is not a problem because it affects all their competitors equally, including the railroads.

6.1 Causes and Industry Effects

Fuel price volatility is driven by a number of factors. Recent geopolitical developments, such as instability in the Middle East and Venezuela, have moved world oil prices higher. In the U.S., insufficient refinery capacity and demand for boutique fuels²⁴ has caused regional fluctuations in prices. Seasonal demand for heating oil in the winter and gasoline in the summer also has an important effect on fuel prices.

Public policy plays affects fuel price variability. Section 211 of the Clean Air Act expresses the intent of Congress to promote a national diesel fuel standard, but allows EPA to grant waivers that permit states to mandate alternative fuel formulations under extraordinary circumstances. California has received a waiver that allows the state to require an alternative diesel formulation. Providing this boutique diesel fuel has resulted in substantial diesel price increases for California motor carriers. The average cost of California diesel has been 27 cents higher than diesel in other states in the West, and this price disparity has been as high as 40 cents. These price disparities have existed even though the production cost of California diesel has been estimated to be only 4 cents more per gallon.²⁵

The motor carrier industry has resisted the introduction of boutique diesel fuels because they reduce competition among refineries, resulting in price increases. Because not all refineries will produce a diesel fuel that is required for a particular state, boutique fuels limit the number of competitors and increase the pricing power of refineries. Additionally, product shortages cannot be remedied by importing diesel from other regions of the country. Boutique fuels are thus susceptible to price spikes caused by an “inflexible” market. Limiting the proliferation of boutique diesel fuels could reduce both diesel prices and their variability over the long run. This assumes that states and regions can find other ways to reduce emission levels.

Industry advocates also argue that stringent environmental regulations have inhibited the development of new refinery capacity. No new refinery has been built in the U.S. in over two decades, and the number of operating refineries has been cut in half during that period.²⁶ Declining domestic oil production and reduced domestic refinery capacity has been paired with increasing demand for diesel. High capacity utilization at existing U.S. refineries has limited the ability of the market to adapt to unexpected increases in demand.

With average operating profit margins of five percent, the industry has little ability to absorb changes in fuel costs. While predictable and long-term price increases can be passed onto customers, where firms face unanticipated price increases and have long-term contract obligations to deliver freight, they may be unable to adjust their prices quickly enough to recapture these costs. It is not surprising that trucking firm bankruptcies are correlated with fuel price increases, as illustrated in Figure 2.

Figure 2

6.2 Possible Solutions

There are a number of public and private sector strategies to mitigate variability in fuel prices.

Private sector solutions

Motor carriers can employ swaps and options to hedge against changes in fuel price. An option is the right to purchase an asset at a specified price and date in the future. A swap is similar in that it guarantees the purchase price of an asset in the future. A swap sets an average price at which a company might purchase diesel fuel. If the firm’s actual purchase price exceeds this, the bank (or other institution) will make up the difference. If the average purchase price falls below this level, the firm is obligated to pay the difference to the bank. Overall, the purpose of these arrangements is to allow a firm to plan their pricing and reduce the risk that they will be locked into unprofitable agreements to deliver service. While options and swaps can help large firms reduce the risk of fuel price increases, small firms do not typically purchase sufficient volumes of fuel to employ them.

Another potential way for firms to reduce their fuel cost and their exposure to fuel price variability is to purchase fuel on the spot market or at the wholesale level and maintain their own distribution network. Purchasing on the spot market requires very large purchases, often over a million gallons of fuel. Purchase of fuel at the wholesale level is a more feasible option for smaller companies, requiring purchases as small as 3,000 gallons. Purchasing fuel in bulk quantities allows firms to avoid retail markup and local fluctuations in prices, but makes them responsible for transporting and distributing fuel. Environmental risks and liabilities associated with the storage and distribution of fuel can be significant. Many firms have found that making their in-house distribution network pay for itself is a management challenge.

Some firms have chosen to negotiate cost plus contracts with a large fuel retailer. Firms purchasing significant volumes of fuel can often obtain discounts, although these agreements still leave trucking firms vulnerable to fluctuations in the price of oil in the world market.

Public sector solutions

Fuel price variability is viewed by many as a product of market forces, and thus inappropriate for government intervention. However, several bills have been introduced recently in Congress that attempt to help mitigate the effects of fuel price changes. The Motor Carrier Fuel Cost Equity Act of 2002 (S. 1914) and its companion bill in the House, HR. 2161, would require motor carriers, freight forwarders, and brokers to impose a fuel surcharge on customers when the national diesel price exceeds a specific benchmark price. The Senate bill uses a benchmark price of $1.10 a gallon, while the House bill uses a floating benchmark based on the price in the previous 12 months. The law also prohibits reducing other payments to avoid passing through costs. The basic premise behind these proposed bills is that large carriers often include fuel surcharge provisions in their contracts, but small trucking companies may not have the bargaining power or clout to negotiate these clauses.

The Senate bill requires motor carriers to pay the surcharge to owner operators only if they can collect it from the shipper. The House Bill would require surcharge payments to owner operators in all cases. Some legal experts have argued that the law could open up a new arena for class action lawsuits against motor carriers.

There are, of course, some major potential downsides to the re-entry of government in setting truck rates, including hindering of competition. For example, mandatory fuel price surcharges could also prevent small carriers from making price concessions in hopes of capturing market share. The Senate bill is supported by the Owner Operator Independent Drivers Association and the Truckload Carriers Association. The Distribution and LTL Carriers Association has opposed government intervention into the market, arguing that their members have already worked out satisfactory contractual arrangements.

6.3 Research Needs

Research is needed to better understand how fuel price volatility affects the industry. While trucking firm bankruptcies are correlated with fuel price volatility, numerous other factors contribute to the failure of trucking firms. Indeed, fuel price increases are often correlated with other factors that have a more significant effect on the market for trucking services, such as levels of growth in manufacturing and other transportation intensive industries. More detailed study of the effect of fuel price volatility on business failures could disaggregate these other effects to obtain a more accurate measure of the cost to the motor carrier industry.

Additional research on the effect of boutique fuels on price volatility could document industry costs in more detail and contribute to the debate over future changes to fuel control standards. Such research could examine the dynamics of the diesel fuel market, and shed light on factors that could enhance the competitiveness of this market. Further analysis of the legal and market implications of the proposed fuel surcharge legislation is also warranted if the bill moves forward. The history of rate regulation in the trucking industry suggests that regulation of industry pricing is likely to have a number of unintended consequences.

7 URBAN CONGESTION AND TRAVEL TIME RELIABILITY

Congestion in America’s cities is an endemic problem. While congestion can be a sign of healthy economic activity and the full use of roadway infrastructure, for the motor carrier industry congestion leads to increased travel times and, worse, reduced reliability of travel times. Congestion also increases vehicle operating costs (e.g., lower fuel economy, more frequent engine maintenance, etc.)

The nature of the urban congestion problem is well known. According to the Texas Transportation Institute’s Urban Mobility Report, the delay per peak-period road traveler for the 75 largest U.S. metropolitan areas has nearly quadrupled in the last 20 years, from an average of 16 hours in 1982 to 62 hours in 2000.

A related issue, and one that is perhaps more important for motor carriers, is the deterioration in travel time reliability in many urban areas. Freight shippers have become used to receiving a high level of highway-freight service, and can demand and receive schedule reliability such that deliveries consistently arrive in time windows of 15 or fewer minutes, even on runs of ten hours or longer. Whole systems of inventory control and supply-chain management have been built around the expectation that this kind of reliability is a permanent feature of freight service. As a consequence, carriers can be crippled by unexpected delays. One recent study indicated that on average, carriers value savings in transit time at between $144 and $192 per hour, while savings in non-scheduled delay are valued at $371 per hour.²⁷ In other words, the time late (unexpected delay) was valued at roughly twice the rate of transit time. As congestion grows and a larger portion of roadway capacity is being used, highways are increasingly susceptible to this unexpected delay, with potentially serious implications for motor carriers.

In our interviews with motor carriers, most identified urban congestion as a problem that affects their productivity and service quality, but none put it at the top of the list. Clearly there is an expectation of some congestion in urban areas, and carriers adjust their operations to cope with it. What troubles some in the industry is the prospect that congestion will get worse, and thereby upset their logistical structure. For example, terminal locations and delivery schedules may be set up under the assumption of 500 miles of travel in a day, and large reductions in travel speed would force a costly change to this structure.

7.1 Causes and Industry Effects

The causes of urban congestion and poor reliability are well known and need not be reiterated here. The effect on motor carriers is an increase in operating costs. In response to congestion, carriers may (if possible) select alternative routes, shift to off-peak periods, or schedule trips with a greater travel time buffer. As traffic peak periods have expanded to include a larger fraction of the day, however, options for avoiding congestion have become more limited. When it can’t be avoided, carriers may face costly delays in traffic, missed pick-up and delivery windows, and possibly heavy monetary penalties.

A recent survey of for-hire and private motor carriers operating in California found that 19 percent of fleets often re-routed drivers in transit to avoid congestion and 27 percent of fleets often missed schedules often or very often as a result of congestion, as shown in Table 6.²⁸ The survey found that half of fleets were often required by their customer’s delivery windows to work during congested periods.

Table 6. Regularity of Congestion Related Problems

Congestion Related Problem	Never	Sometimes	Often or Very Often
How often are schedules missed because of congestion?	11%	62%	27%
How often are drivers re-routed because of road congestion?	11%	69%	19%
How often do customer time-windows force your drivers to work in congestion?	12%	38%	50%

7.2 Possible Solutions

Elimination of urban congestion is virtually impossible, but a variety of strategies are available to reduce its extent or at least make it more tolerable. These strategies include: investment in more highway capacity; measures such