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of their specialized natures, tractors
and trailers designed for a particular
application may have little or no value
in another segment. This becomes
a relevant issue for lenders that have
liens on rolling stock in evaluating
their collateral positions. If its collateral
has limited marketability, a lender
may find it prudent to stay the course
longer than it otherwise would.
Companies that must get their goods to
market recognize the strategic value of
the supply chain. Correspondingly, the
carriers that support the supply chain are
of strategic importance to the shipper.
The greater a shipper’s dependence on
a specific carrier in the supply chain, the
greater the strategic value of that carrier.
A trucking company—or any carrier,
for that matter—that is integrated into
a supply chain generally is not easily
replaced. Replacing a carrier creates the
potential for disruption in a company’s
supply chain. A carrier that solidifies its
position within a supply chain creates
a relationship of mutual dependency
with that customer—the carrier relies
on the shipper’s freight, and the shipper
relies on the carrier’s capacity.
The foundation of a trucking company’s
strategic value resides in its performance,
drivers, and trucks. A carrier’s record of
performance is key—a proven history of
delivering goods on time and damage-free is invaluable to a carrier’s reputation.
A trucking company with an outstanding
performance record is likely to have a
team of highly skilled and experienced
drivers, which is the most important
element of a carrier’s strategic value. A
large and well-maintained fleet of trucks
is also strategically important because
of the capital investment involved.
A trucking company in financial distress
is a threat to its shippers’ supply chains.
If its carrier has strategic value, a shipper
may be motivated to take extraordinary
measures to prevent a carrier shutdown
and avoid the potential disruption of
its supply chain. Circumstances may
present opportunities to garner support
for a turnaround effort from customers,
but a carrier should proceed cautiously
when considering that option. If the
carrier is not considered strategically
important by the shipper, the customer
may take preemptive action and move
its freight to other carriers. Therefore,
it is critical to understand where a
carrier stands with its customers.
Qualified and experienced drivers are the
most important and valuable resource in
trucking. Trucking is a service business
highly dependent on the driver to meet
the shipper’s service requirements.
The availability of drivers is generally
limited, and the industry has struggled
to recruit new drivers. Carriers offering
signing bonuses with attractive wage
and benefit packages have become an
industry norm. Given the challenges of
driver recruitment, a carrier with a stable
workforce of qualified and experienced
drivers has considerable strategic value.
Trucking is a capital-intensive business.
A tractor/trailer combination (rig)
may cost $250,000 or more. Although
refurbishment may extend the useful life
of rigs beyond 10 years, many carriers
follow a trade cycle of five to seven years.
Capital spending for fleet replacement is
most effective when it is accomplished
on a rational and consistent basis.
A carrier facing liquidity issues may
elect to defer fleet replacement and
allow its fleet to age. This practice,
if followed for an extended period,
can have disastrous consequences. A
company may reach the point that its
fleet begins to wear out faster than it can
afford to catch up with new equipment
purchases. If that happens, capacity
and volumes shrink, revenues decline,
and maintenance costs escalate. A
downward spiral that can be extremely
difficult and costly to reverse is created.
The passage of the Motor Carrier
Act of 1980 resulted in sweeping
deregulation of the trucking industry.
The law removed price controls and
opened the market to new entrants,
including carriers and brokers. Prior to
deregulation, the number of carriers
was limited, and most were unionized.
The costs of increased wages and
benefits negotiated through collective
bargaining were simply passed through
to customers in higher freight rates.
Deregulation had the desired effect
of reducing freight costs, increasing
competition, and forcing carriers to
become more efficient. Trucking is
now a highly competitive industry in
which shippers demand the highest
levels of service at the lowest possible
price. A significant number of carriers
went out of business over the past 30
years due to their inability to adapt to a
more efficient and competitive market.
Following deregulation, the number
of carriers increased dramatically,
and most new entrants were low-cost, nonunion carriers. In the post-deregulation era, unionized carriers
have steadily lost market share (and jobs)
to nonunion competition. However, a
number of unionized carriers survived
deregulation and adapted to compete
profitably in the market. Competitive
factors, such as price and service, rather
than union vs. nonunion affiliation
generally dictate carrier selection.
In some cases a union carrier may
have an advantage over a nonunion
carrier if the pickup or delivery point
is also unionized, but the same
principle may also apply in reverse.
A nonunion shipper may prefer to
work with a nonunion carrier. Thus,
either union affiliation or a lack of
it may enhance a carrier’s strategic
value, depending on the customer.
If a turnaround situation involves
a unionized carrier, the collective
bargaining agreement is a major factor
to address. Wages, benefits, and work
rules are significant cost drivers in a
trucking operation, and any changes
to them must involve bargaining with
union negotiators. Concessions are
difficult to obtain and are subject to
approval by a majority of the employee
members. Most union carriers are
also participants in multiemployer
pension funds (many which are
underfunded), and the potential for the
assessment of withdrawal liabilities is
a material exposure to be considered.
Profitability in trucking is highly
dependent on volume and the consistent
flow of freight. Because they operate
in a capital-intensive industry with
high fixed costs, trucking companies
face devastating financial results when
significant declines in volume occur.