Key Points
• With the federal government set to announce, in a matter of days, a downward revision to hours of service (HOS) for truck drivers, we offer a few thoughts on ramifications, carrier responses and other elements. This Note does not exhaust all scenarios nor explore every element of HOS. Rather, it is a framework for investors on some of the key issues. In general, HOS changes have a much more dramatic impact upon TL carriers, although LTL carriers tend to benefit from tightening TL supply.
• Just because the government is likely to announce proposed changes does not mean they will occur by the July 2011 deadline. After the proposed regulation is published in the Federal Register, comments will be issued by the public and it could take weeks or months to sort through them, some of which might be incorporated into a tweaking of the final regulation. Even if the regulation becomes final next summer, there will be a transition period to allow for technological adoption, employee training and other adaptations. In short, HOS is likely to impact trucking supply and demand more in 2012 and beyond as opposed to 2011.
• What might happen? Current regulations limit truck drivers to 14 on-duty hours each 24-hour period, including a maximum of 11 hours behind the wheel. In addition, drivers are limited to 70 hours of drive-time in an 8-day period. At that point a driver must wait 34 hours before re-starting service. There is no clocking on and off duty during non-drive times (meals, breaks, loading, unloading, etc.) like what existed prior to 2004. While not finalized yet, the new regulations could entail something like this: 10 hours of drive-time in a 24-hour period; either a 44-hour or 48-hour restart period; and some sort of mandated break period. The latter could take many forms such as a one hour mandated break (or even two 30-minute breaks) while on-duty, although it is not clear whether the break would be on top of the 10-hour active duty or subtract from it. In other words, if it subtracts from the 10-hour drive time, then drivers would really only have 9 functional hours to drive. Finally, it is conceivable that the drive time could be cut below 10 hours.
• Such changes will likely hurt asset utilization and will require changes to minimize the impact. Possible remedies include, but are not limited to: a) raising speed limits by 3 to 5 MPH (many fleets restrict speeds to somewhere between 62 and 65 MPH); b) utilizing slip-seating, that is having more than one driver use the tractor during a set period; c) an expansion of driver relays; d) an increase in drop and hook operations, which theoretically allows a driver to drop off a load and pick-up another load more quickly. Not all fleets are comfortable with these potential solutions and some, like higher MPH, have negative fuel burn and safety ramifications. For many slip-seating is often used in under 5% of their OTR and regional trucks (dray service and short-haul dedicated are often higher percentages). Numerous fleets have told us that increasing slip-seating to 20% to 25% of OTR and regional trucks would be an ideal goal with fewer HOS, but that is easier said than done given today’s driver recruiting challenges. In addition, increasing detention fees and shortening equipment holding times (by reducing loading and unloading times) would be pursued by carriers and shippers. Also, some fleets would likely increase the trailer-to-tractor ratio, especially in the refrigerated and flatbed sectors. To be sure, some van carriers would do that, too, but so many van carriers shrunk their fleets this cycle faster than their trailers that there is still room to bring that ratio down before thinking about increasing it. Lastly, many loads don’t use the entire 11 hours to get delivered. Vulnerability exists on freight that consistently takes 9.5 to 10.5 hours to deliver. See page 2 for potential ramifications for earnings, consolidation and two charts with the latest inventory ratios.
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