The ongoing driver shortage has been a hot topic lately, as we’ve reported. While everyone from drivers to politicians debate how to handle the numbers problem, the big players are making moves of their own.
Pundits project that in the new year over-the-road trucking capacity is projected to squeeze even further, so how exactly are industry operators going to respond? Furthermore, how will this affect transportation costs moving forward?
Big Moves From Big Players
Swift Transportation is one of the largest truckload carriers in the nation. Just six months ago Richard Stocking, their chief operating officer, said in conference call that they would be implementing a significant pay increase in the last quarter of 2014.
Stocking stated that “if the current driver shortages continued, driver wages may continue to increase, but probably not to the extent of the increase we are giving this year to our drivers.”
Swift Transportation employs almost 15,000 drivers and has almost 20,000 employees. They also contract with over 5,000 owner-operators. Yet even the biggest carriers aren’t immune. Swift went on to report that their inability to put more drivers in trucks limited growth and contributed to a 2 percent year-over-year drop in truckload revenue, and this was during a time when freight demand was strong.
The last time a major trucking company gave its drivers a significant pay increase was in 1997 when J.B. Hunt increased their pay by 33 percent on average. As the internet bubble was inflating, capacity was strained, and the annualized increase in driver salary was huge for the time.
With these moves by Swift, more companies are stepping up. Last year Kevin Knight, chairman and CEO of Knight Transportation, said that in order to remain competitive, carriers would need to raise driver wages by anywhere from 15 to 25 percent over the next few years.
“We are very aggressively taking a large portion of what we’re able to receive in terms of rates and making sure that we give that to our driving associates,” Knight said.
In 2013 the average U.S. tractor-trailer driver annual wage was $40,940, which comes out to 11.8 percent below the national average. When you compare that with 2001, when the gap was only 1 percent, it becomes clear that trucking wages have been increasing at a glacial pace. Perhaps the capacity squeeze is finally resulting in competitive wages for drivers, but how is this affecting shippers?
Big Increases for Shippers
While some of the wage increases can be compensated for by improving truck utilization and efficiency, for the most part carriers are going to be passing the costs on to shippers. By November 2014, line haul index rates had risen 6.7% year over year and are projected to rise even further this year.
The challenge for trucking companies will be to create a compensation structure that retains drivers while still getting shipping rates that justify the wage increases.
These facts point to tough negotiations for all parties involved. Truckload carriers are now at the point where they can pretty much pick and choose which freight they’ll haul. In this new climate they’ll obviously be choosing to go with the shippers that are offering the highest rate of return.
This could potentially mean that the rate increases trickle back to the consumer, as the shippers will be required to dig deeper into their book of business to find companies that will haul their freight without collapsing the bottom line.
When all is said and done, shippers with lean inventories will have to make a choice between higher upfront transportation costs, not delivering the product, or putting it on the shelf until costs level out. And while the relationship between carrier and shipper is one of the new points of debate, the squeeze will ultimately be relieved only when the driver shortage is adequately addressed.
Perhaps it’s for this reason that the discussion should always be turned back to how the industry can attract and retain motivated and qualified drivers. A rising tide of wages and increased driver participation may end up lifting all boats, from the loading dock to the cab. Will these proposed new wage increases do the trick or can we expect to still be having this conversation during this fall’s peak operating season? Only time will tell.