When a Utah farmer named Chester Robert England decided soon after World War I that there had to be a better way to make a living, he bought a Model T truck and started hauling milk in the morning for a local dairy, then produce in the afternoon from farms to market.
Over the decades, England's two sons, their two sons, and then their six sons, joined the family business. After 91 years, Salt Lake City-based C.R. England Inc. has become one of the most established and successful refrigerated truckers in the land.
Yet Dean England, president of the privately held company and one of the third generation of Englands to work in the business, is under no illusions of how his grandfather would have fared if he began in 2011.
"Could he do it today?" England asks rhetorically. Then he answers: "I don't know. It might not work." England has three sons employed at the company.
Nearly 15 years after C.R. England got started, Earl Sr. and Lillian Congdon founded a Virginia trucking company with a lone rig hauling goods between Richmond and Norfolk. After Earl Sr. died in 1950, Lillian Congdon took over the company, joined by their two sons. In 1998, David S. Congdon, grandson of the founders, became president. He would eventually add the CEO title. His father, Earl, remains executive chairman of the board.
Today, less-than-truckload (LTL) carrier Old Dominion Freight Line Inc. is arguably the country's most successful trucking company and is completing one of the best years in its 77-year history. Yet as he surveys the landscape, David Congdon acknowledges how hard it would be for a new entrant to even begin replicating Old Dominion's network of 216 service centers in the lower 48 states.
"It would be relatively impossible today to start up an LTL company and build a network like we have," he says. "It takes a lot of time and capital."
Congdon is somewhat pessimistic about the future for the next generation of truckers. "I'm not sure I would encourage my children to start a trucking business," says Congdon, who nonetheless has two sons-in-law, a niece, and two nephews working for Thomasville, N.C.-based Old Dominion.
Ready to hang it up
The thousands of truckers that work the nation's roads each day likely share the sentiments of England and Congdon. Truckers today face a witch's brew of challenges: escalating asset inflation, higher insurance premiums, a looming driver shortage, increasing government regulations, volatile diesel fuel prices that as of mid-November had hit $4 a gallon, and difficulties gaining access to credit. Freight rates, though rising, are for many carriers just covering these higher costs. Faced with poor prospects for profitability, truckers are fleeing the market, and a generation of potential entrepreneurs is being deterred from entering an industry that has historically thrived on entrepreneurial activity.
A third-quarter 2011 survey by mergers and acquisitions advisory firm Transport Capital Partners (TCP) found that 11.8 percent of fleets would consider leaving the industry in the next six months if volumes don't increase. About 20 percent of smaller fleets—those with annual revenues of less than $25 million—would also consider exiting if business fails to improve during that time frame, according to the survey.
In addition, 28 percent of truckers surveyed are considering selling out in the next 18 months if conditions don't improve, the survey found. That's the highest total percentage since the survey began almost three years ago. Nearly 40 percent of smaller carriers are weighing an exit, compared with 23 percent of the larger carriers, TCP said.
Ben Gordon, managing director of BG Strategic Advisors, a Palm Beach, Fla.-based company specializing in logistics mergers and acquisitions, says his firm is working overtime in large part fielding inquiries from trucking companies interested in exploring a potential sale. As a result, "we expect to double our deal activity in 2012," he says.
"It just isn't fun anymore"
Ironically, smaller truckers are more optimistic than their larger brethren—and by a wide margin—about gains in freight volumes. Lana R. Batts, a long-time trucking executive and now a partner at TCP, says smaller carriers are more frustrated with higher costs and bureaucratic red tape than they are heartened by a rebound in freight demand. "In essence, it just isn't any fun anymore," she said in a statement.
Many trucking executives started their companies in the 1980s in the wake of trucking deregulation and have no interest in "relearning" the business at this point in their lives, Batts said in an e-mail to DC Velocity. Their children have no desire to inherit a business where the risks have become so high and the potential returns so small, she added.
If these trends play out, they will have implications that go beyond a particular bloodline, Batts warned. "The desire to leave ... will significantly change the face of the industry as well as the business models that depend upon smaller carriers providing hard assets," she said. It is estimated that 93 percent of all U.S. truck fleets operate seven trucks or less, with many of those being one-person, one-rig owner operators that drive under contract for larger fleets.
High-cost wheels
Todd Spencer, executive vice president of the Owner-Operators Independent Drivers Association, says the number of independents leaving the business is growing at "greater numbers than we've seen in the past." The association did not have data to quantify that claim.
For independents as well as for larger fleets, the biggest hit is the cost of the rig itself. Since 2001, the cost of a Class 8 tractor has risen to $124,000 from $84,000, according to data from investment firm BB&T Capital Markets. In addition, late-model used trucks—rigs built between 2007 and 2010—are in short supply. Today, there are between 350,000 and 400,000 fewer late-model used trucks available than at nearly any time in the past 15 years, the firm said.
The escalating cost of new trucks and the shortage of less-expensive rigs are putting severe pressure on independents that lack the economies of scale of larger, multi-unit fleets. In the past, about half of all owner-operators would buy new trucks as part of a typical business cycle, Spencer says. Today, that number has dwindled to about one-quarter, he adds.
Spencer acknowledges that today's rigs are better built, with longer life spans that don't require as much turnover as in the past. However, he says most of the decline is attributed to the rising tab for new trucks, which is making it harder for independents to swallow. Complying with federal engine emissions standards mandated by the Environmental Protection Agency alone contributes about $10,000 to the cost of a new truck, he says.
Environmental compliance costs are just one of several government mandates that have hit truckers' pocketbooks. Others include CSA 2010, the new driver safety grading initiative; potential changes to drivers' hours-of-service regulations that could force truckers to add more rigs and drivers to their fleets; and requirements for drivers to install electronic recorders in each vehicle to monitor drivers' compliance with hours-of-service requirements. The latter two initiatives are, or have been, subject to legal challenges by the industry.
"So much of the risk right now is coming from government regulations making life miserable for our business," says England.
No going back
Compounding the industry's angst are the accompanying costs of state regulations, as well as the proliferation of class-action lawsuits brought by plaintiffs' attorneys seeking heavy monetary damages in the wake of truck-related accidents. England says his company faces major liability issues in California, where its footprint is "two to three times larger" than in any other state.
England is confident that his company will work through the treacherous road ahead. But his optimism is leavened by the knowledge that the industry will never again be what it once was.
"We are going to find ways to be successful, no matter what," he says. "But is it going to be as much fun as it used to be? Probably not."
EXHIBIT 1: Market forecast for industrial robots - revenuesInteract Analysis
