When electronic logging devices (ELDs) became the law of the land in the United States two years ago, trucking rates edged up as capacity left the market after drivers used to cheating the system were sidelined by stricter enforcement of hours-of-service rules.
But the federal Drug & Alcohol Clearinghouse, set to launch on Jan. 6, will have an even greater effect on capacity, according to top industry executives, because of the number of drivers who will no longer be eligible for a job.
“I think a 3% capacity reduction within the first six months of the year is realistic and will have a material impact on what the supply-demand dynamic looks like in 2020,” Derek Leathers, president and CEO of Werner Enterprises [NASDAQ: WERN], told FreightWaves.
“A winter storm that lasts one or two days and covers a four- to five-state area is plenty big enough to cause capacity constraints that ripple through the entire network and take multiple weeks to work out of. So even at a time where capacity has been looser in 2019 than in 2018, it is still within a point or two of equilibrium. And it doesn’t take much to affect that balance.”
The clearinghouse, to be administered by the Federal Motor Carrier Safety Administration (FMCSA), will close a loophole that currently allows drivers who are fired for failing a drug test to get hired by another trucking company by lying about failing the test. Driver consent records will be retained in the database for three years, which means it will take at least that long to fully populate the system. Once that happens, the industry could see an even bigger shakeout.
“It won’t be a Day One [capacity] fallout, but once [the clearinghouse] gets populated, I think you’re going to have up to 10% of the driver population being excluded” based on current drug test failure rates, predicted Eric Fuller, president and CEO of U.S. Xpress [NYSE: USX].
Tighter capacity immediately followed strict enforcement of ELDs in April 2018. Source: SONAR
“That’s not only going to affect the current pool of drivers, but also greatly minimize the pool of people available to come into the industry. So there’s going to be some significant headwinds on a go-forward basis as it relates to getting the numbers of drivers that we need in our market. But we also don’t need someone actively using drugs driving an 80,000-pound truck down the road at 65 mph.”
While he agrees that the FMCSA clearinghouse will likely have an even bigger effect on trucking capacity as did ELDs, Dean Newell, vice president of safety and training at Maverick Transportation, also views the new regime as a positive for safety.
“I think it’s probably going to take people off the road, so from a capacity standpoint I think there could be more trucks sitting empty,” Newell said. “But it’s also going to make it much more difficult to hide” positive test results, he said.
While trucking rates tend to shift upward when capacity exits the market – a good thing for carriers – there’s a downside to having cabs sitting idle. “The cost of equipment is more expensive than ever, and if you have unseated tractors, it’s difficult to survive for very long,” Leathers said. “Depreciation doesn’t stop, and the bills don’t stop coming in for that equipment.”
Fuller pointed out that to avoid the expense of unseated trucks, many carriers will resort to hauling inferior freight or participating in less desirable lanes. “The next step would be to sell that piece of equipment to avoid that fixed cost,” he said. “Strategically you wouldn’t see a lot of people parking trucks and keeping them in their fleet. They’d want to divest of them or do whatever they had to do to keep that truck operating and producing revenue.”
To give state motor vehicle agencies more time to work out how their IT systems will interact securely with the clearinghouse to ensure privacy, the FMCSA recently extended the compliance date for state agencies by three years, until Jan. 6, 2023.
“The compliance date extension allows FMCSA the time needed to complete its work on a forthcoming rulemaking to address the states’ use of driver-specific information from the clearinghouse and time to develop the information technology platform through which states will electronically request and receive clearinghouse information,” the agency affirmed in its Dec. 12 rulemaking.
But Dave Osiecki, president and CEO of Scopelitis Transportation Consulting, cautioned that delaying the deadline for state agencies weakens the ability of the clearinghouse to be effectively enforced – which could mitigate the constricting effect on capacity.
“There are three enforcement mechanisms with regard to the clearinghouse – the employer, law enforcement using roadside checks, and the state law enforcement agencies,” Osiecki told FreightWaves. “If the state agencies aren’t part of the equation, it becomes, for the most part, an industry-based enforcement system. The state agencies are a major cog in the wheel, and when that’s taken out, the wheel doesn’t turn as smoothly as it should.”
The hair-test effect
Industry executives emphasize that an even larger capacity shakeout is lurking – the effects of which could begin as early as the fourth quarter of 2020 – once hair follicle testing becomes a federal requirement.
A survey released earlier this year by the Trucking Alliance (of which U.S. Xpress is a member) projected with a 99% confidence level that more than 300,000 truck drivers currently on the road would fail or refuse a hair analysis, effectively knocking them out of industry.
Top 10 states with highest controlled substance violations by latest month (November 2019), including year-over-year percent change. Source: SONAR
David Heller, vice president of government affairs for the Truckload Carriers Association, considers a 10% hit on capacity using hair testing “fairly conservative and has the potential to be higher, considering what some of the fleets that already are using hair follicle testing have reported,” he said.
Draft guidelines for government-wide hair testing “have been distributed to all federal agencies for a second round of comment and review, and the length of time for review will be determined by the Office of Management and Budget,” the U.S. Department of Health and Human Services confirmed in early December. After OMB approval, the FMCSA would be required to propose a rulemaking on how a hair follicle testing regime would apply to motor carriers.
Filling the driver gap
The American Trucking Associations (ATA) stepped up efforts this year to crack down on drug use in the trucking industry, particularly marijuana and opioids, by creating a Controlled Substances, Health and Wellness subcommittee, with the goal of better informing lawmakers and regulators about the safety implications of drug use on the nation’s highways.
A big proponent of hair testing, ATA President Chris Spear acknowledges the effect on trucking capacity if hair testing were to be incorporated into the Drug & Alcohol Clearinghouse.
“That’s why I think being able to hire under-21 drivers is extraordinarily important,” Spear said. “Driver retention is important. Urban hiring is important. Veteran and existing military service people is important. These are all key things we need to be doing collectively in order to supplement the effects of the clearinghouse. I’m not too concerned about the capacity question so long as we’re doing these other things.”
The carriers least concerned about a capacity shakeout once the FMCSA’s clearinghouse gets rolling are those that have already put themselves in position to take advantage of the supply-demand changes that the new system is expected to bring.
“You have to have your trucks seated and ready and then realize the opportunity for rate relief that is required and needed right now,” Leathers emphasized. “Those will be the companies that will come out winners.”