Rates may go higher, but not because of ELDs

Experts at Stifel suggest the impact of ELDs may be 2 years away

The pending coming electronic logging device (ELD) mandate has been viewed by some as a possible game-changer for trucking. Capacity reductions of up to 20% have been predicted as truck drivers must begin using the devices to track hours-of-service compliance beginning Dec. 18, 2017.

The theory goes that drivers have been pushing and even exceeding the limits of allowable drive times for years. Those days will be over once an ELD-compliant device is installed in the truck, automatically recording every movement of that truck.

But, is it possible that all this doom and gloom – of capacity reductions and corresponding rate hikes – is just fantasy? What if the industry faces no shortage of available driver hours? What if freight continues to move with no disruption? What if?

Well, despite all the gloom and doom reports, analysts with Stifel in their latest industry update pose a different question: What will the industry do when there is no significant hit to capacity?

“We are not saying there can’t be a significant supply crunch over the next couple of years, but we do not believe, if we see one, that it would be due solely to the ELD rule removing a sufficient amount of truckload capacity to drive rates significantly higher,” they write. “In addition, we agree that full implementation and enforcement of ELDs should require more drivers and more trucks to move the same amount of freight, all else equal. Our summary view is that the real squeeze will be felt in the next upturn, as it is easier to remove capacity (and some removes itself) in a downturn.

“Most investors and industry participants we speak with believe this should tighten capacity significantly in the trucking industry, as it should finally force the thousands of small trucking companies who are currently falsifying their log-books out of business, driving rates up big,” the analysis notes. “But there are disagreements around the timing and magnitude of the impact.”

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ELDs and the insurance impact

The brief, written by John Larkin and David Ross, lays out a scenario where an ELD-related capacity reduction may not hit until 2019 or 2020.

The brief discusses both the near-term and the longer-term impact of the ELD rule.

In the short-term, three reasons are cited as to why a capacity hit will not take place immediate. They are enforcement, the “kick-the-can” mentality of Washington, and possible ELD production constraints.

“If the thesis is that all of these small carriers who’ve been running illegally will be put out of business were they to comply with this mandate, there is no incentive for them to comply, so it will become an enforcement issue, which will likely take time,” the analysis notes.

Secondly, Larkin and Ross see a possible scenario where there is fear in Washington that the implementation date will cause an economic recoil as freight movement suddenly slows and what does move will cost significantly more due to rate increases. This “kick-the-can” mentality could trigger a delay in implementation, much like what was done when the railroad’s positive train control mandate was delayed three years.

“Other reasons it could be delayed are problems cited with the hours-of-service provisions,” the brief adds. “For example, current truck parking shortages eat into drive time, and truckers object to the non-stop 14-hour on-duty clock, preferring driver control of duty/driving hours to maintain flexibility to use some of it to find safe parking once done driving.”

The third reason cited is potential delays due to production of the devices.

“If many fleets and independents wait until the last minute to order an ELD, they may end up placing their orders all at once,” the analysis surmises. “And we don’t expect manufacturers to pre-build a bunch of devices in the hopes the small trucker chooses them. Therefore, we see a situation where a trucker may try to order an ELD ahead of the deadline and be told there’s a backlog until March/April 2018 for delivery.”

This could trigger some delay in enforcement until there is sufficient product to meet demand.

The counter argument explained in the brief is that ELDs will have an impact on capacity. It is possible that insurance companies will force compliance, although that is not likely a major impact.

“As long as the trucker is paying the premiums, we don’t think the smaller insurers will care too much about ELDs,” the brief says. “Insurance premiums have been increasing – but mainly on excess coverage, which doesn’t impact the small fleets that operate on minimums.”

Shippers could require ELD compliance, but again, if the shipper has goods to move, the goods need to move. The more likely scenario is that shippers might switch to using more brokers and leave them to deal with the ELD concerns.

“We believe other factors at work could have a more meaningful impact than ELDs,” the analysts note. “Capacity has already been coming out after too many trucks were built just as we went into an industrial recession at the beginning of 2015. Large fleets are removing trucks while the size of the small fleets has remained relatively steady. If this trend continues, and if freight grows, supply/demand should tighten and pricing improve, even absent any ELD impact.”

They also cite infrastructure spending, the labor market and driver shortage as other factors. The result may not be less capacity, but just higher rates.

“If our choice as a small fleet or independent operator is to one, raise rates or two, go out of business, we might try and raise rates first,” they write. “One could say the shipper will just go somewhere else in that case, but the shipper is only with that carrier, in theory, due to his low rate. Either way, the shipper will pay more post-ELD, in our view. Significantly higher rates are coming to the truckload market – we just don’t know when – but we don’t think the ELD mandate will be the near-term trigger.”