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An analysis of the changing nature of the deregulated trucking industry.

Trucking deregulation became a reality more than a decade ago. As a smiling President Jimmy Carter signed the new Motor Carrier Act of 1980, he referred to the legislation as "a momentous event for our country." After 10 years of restructuring caused by the entry of new carriers, route and service expansions by existing truckers, intense rate competition by almost everyone, and numerous bankruptcies, the industry bears little resemblance to that which existed in the summer of 1980. Deregulation has created not only numerous opportunities for logistical managers, but also many potentially dangerous and costly pitfalls.

The debate preceding the passage of trucking deregulation had been both emotional and vociferous. The proponents of deregulation predicted a future utopian trucking industry where the shipping public would gain both greater carrier choice and lower prices. Many industry observers, however, prophesied that the new law would lead to disaster for both carriers and shippers.

With more than 10 years of hindsight, it seems fairly obvious that we have neither a utopia nor a total disaster in the motor carrier industry. We most definitely have a mixture of results, both positive and negative, depending upon the particular aspect of the business one chooses to analyze.

One major shortcoming during the congressional debates leading to trucking deregulation was that the industry was treated as a very homogeneous entity. There was essentially no differentiation made between the truckload (TL) and less-than-truckload (LTL) sectors of the motor carrier industry. Another problem was that the proponents of deregulation focused primarily on entry and pricing, with little or no regard for service quality issues. Also, the deregulators did not consider the financial health or stability of the industry to be an important consideration. These are the reasons that parties on both sides of the issue can claim that they were "correct" in terms of their suppositions and predictions.

One cannot say that trucking deregulation has been either a success or a failure. There are instances where the projected benefits have materialized very much as promised. Conversely, there have been a number of unexpected and unpleasant surprises in light of all the optimistic predictions.

Truckload deregulation appears to have been fairly successful. However, to the surprise of the deregulators, two vastly different segments have developed within the TL sector. One is the price-sensitive market dominated by small firms, often one-truck operations. Re other TL outcome has been the emergence of sophisticated service-oriented companies, which some observers have labeled Advanced Truckload Carriers." These firms had originally been quite successful, but some are now experiencing difficulties.

Unless a firm is one of the three largest carriers, the situation in the less-than truckload sector may well approximate the disaster" scenario that industry executives predicted. Mere has been a virtual bloodbath in the LTL sector, with a large number of bankruptcies and closures. Related to this is growing concentration in the industry, with the very largest firms commanding an ever-increasing share of LTL freight.

Another result of deregulation has been the rapid, some might even say explosive, growth of truck freight market intermediaries. Brokers have rapidly multiplied to help shippers and carriers alike take advantage of the new transportation marketplace that has been enabled by deregulation.

THE TRUCKLOAD SECTOR

There has been a tremendous amount of entry into the TL portion of the industry. The total number of firms increased from 22,270 in 1981 to 39,602 in 1989, for an increase of 77.8 percent. Compared to the 16,874 carriers in existence in 1978, the 1989 number represents a gain of almost 135 percent.

However, all of this growth has been in the small Class Ill carriers which increased by almost 100 percent between 1981 and 1989.

Classes I and II actually decreased in numbers during the period. Class II companies fell from 2,293 to 1, 189, for a 48 percent loss. The larger Class I carriers saw their numbers thinned from 1,031 in 1981 to 886 in 1989, a decrease of 14 percent. While the statistical time series is not kept on the basis of LTL versus TL carriers, some generalizations about the situation can be observed. Virtually all of the new entrants into the Class Ill category were truckload operators, where it is more feasible to start operations with very limited financial and physical resources.

Conversely, most of the decline in the numbers in the Class I category were LTL carriers. Keep in mind that all of the LTL carriers also handle truckload freight, even though this side of their business has been steadily decreasing since deregulation. The LTL carriers have apparently chosen not to fight aggressively for TL shipments against the truckload specialists. On the other hand, it is a very rare situation where a TL carrier will handle LTL freight. The end result has been that the very largest carriers have evolved into LTL specialists with relatively little TL freight in their systems.

The truckload portion of the industry has developed into an almost dichotomous situation. At one extreme is a very large number of small carriers, many of whom must rely on brokers to solicit freight. This is the price competitive sector of the industry that very much matches the deregulators' predictions as to how a totally free market type of trucking industry would function. The deregulators, however, apparently did not foresee the need for the intermediary broker to provide market information and match traffic with available vehicles.

At the other end of the spectrum is another type of truckload carrier. These are fairly sophisticated operators, much larger in size, with their own sales forces. While pricing is certainly not irrelevant for these firms, they tend to emphasize service and dependability, with rates often being a secondary consideration. These type carriers are another apparently unexpected result of deregulation. However, as is obvious from their success and rapid growth, they fill a vital niche in the nation's logistics system.

THE LESS-THAN-TRUCKLOAD SECTOR

While the truckload sector has been growing and generally prospering, as witnessed by the expansion of older carriers as well as the entrance of a number of new firms, the situation on the LTL side of the motor carrier industry has been nothing short of a virtual bloodbath. By the end of 1986, 33 of the largest 53 LTL carriers in 1979 were no longer in existence. Of the 100 largest carriers in 1985, 34 had a negative ordinary profit margin, while an additional 19 carriers had a positive margin of less than 1.0 percent.

Logistics executives are increasingly choosing the largest carriers, which puts additional stress on the remaining smaller companies. In short, shippers increasingly seem to prefer to deal with the larger carriers with the most extensive route networks.

Additionally, the greater the volume of freight being tendered to one carrier, the more likely the shipper will be able to negotiate an advantageous rate and service package. The end result has been that the smaller carriers have an extremely tough battle to retain existing customers, let alone regain lost freight. Shippers are generally using fewer carriers than before deregulation and are working more closely with those carriers.

DEVELOPING A HEALTHY TRUCKING INDUSTRY

The changing structure of the trucking industry has had major implications for logistical managers. During the first hectic years of deregulation, carriers and shippers were serious adversaries. Fortunately for both parties, recent relations have become more amiable. In fact, the trend has been towards partnerships and strategic alliances. Carriers are emphasizing customer service, and shippers are doing what they can to assist carriers in keeping their costs down and cooperating for their mutual advantage.

For these concepts of partnerships, cooperation, and commitment to work, communication is of paramount importance. All major carriers have installed Electronic Data Interchange to provide maximum communication capability for their customers. Instantaneous shipment tracking and rate information is an absolute requirement for many shippers.

Third-party firms such as brokers, logistics companies, and multi-modal operations have also been beneficiaries of deregulation. It appears that more and more shippers are open to innovative third-party options that will provide custom logistical activities at a lower cost.

The trucking industry will continue to change and probably in the same directions that have already become evident, i.e., a dichotomy in the truckload sector with more sophistication on the part of the larger service-sensitive carriers and concentration in the LTL sector. The large LTL carriers will become larger, and many of the smaller regional firms will continue to struggle to survive.

As far as logistical managers are concerned, choosing a course of action will be more than a matter of simply reacting to a changing structure.

More importantly, the changing structure of the trucking industry will be an opportunity to be pro-active in creating new strategies that will help in the development of a healthy industry. Logistics managers themselves will be an important factor in determining the shape, structure, and capabilities of the motor carrier industry of the future. N
COPYRIGHT 1991 University of Memphis
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Southern, R. Neil; Rakowski, James P.
Publication:Business Perspectives
Date:Mar 22, 1991
Words:1491
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