Adjustments Ahead

Those darned analysts. They have a way with words don’t they? To call what’s happening — or about to happen — to our cross-border truckload sector an “adjustment” is like calling Titanic a boating mishap. If our dollar remains high for any length of time, we could see a sizable drop in the net value of the Canadian fleet coupled with an unparallel exodus of labor. The current business model is unraveling. And it’s unsustainable, especially as it relates to owner-operators.

There are an estimated 40,000 of them out there, and a very small percentage of them are truly flush today. I’d be willing to bet that two-thirds of them are at least two payments behind on their trucks, and most of those are living on borrowed money. As it relates to the structural soundness of this industry, the owner-ops’ position places us all at some risk, I think.

If we can’t adjust this situation somehow, the capacity owner-ops provide may simply evaporate. I’m not sure fleets could afford to replace that many trucks with company equipment.

Once viewed as “temporary capacity with almost no overhead,” the owner-ops’ role has changed. Some fleets now rely exclusively on contracted capacity, and wouldn’t be in business if not for owner-operators. They’re no longer a temporary part of the game plan, yet they’re seen as entirely dispensable. I don’t think any one of them ever had a gun put to their head, forcing them to go the route they did, but if we’re to rely on their services in the future, the owner-operator business model will have to change.

Trucks are too expensive now, and operating costs eat up the margins owner-ops once lived on. It’s just a massive shell game with big expenses and only the faintest hope of a return on the investment (see this week’s lead headline NewsFirst story ‘Upside Down Trucks’ for more).

To make it work, the owner-operator has to pay at least as much as the truck declines in value over time. You could do that in three years, not that long ago. Today, it can take up to five years, and there’s often a balloon payment at the end. Most trucks aren’t worth much at or beyond five years of age. The equity an owner could build in his or her business, at one time, has been eroded by the increase in the price of equipment.

The prudent owner-op could afford to set aside a fund to deal with contingencies like maintenance and repairs, and they were very aggressive with the repayment schedules, often paying considerably more in the early months while the truck was fresh and warranty applied.

Today, they’re taking as wages money that once would have been earmarked for maintenance — and even income tax. They’re forced to spend tomorrow’s money today, so who can be surprised that they come up short?

The finance companies did the owner-operators no favors by fiddling with trade-in values and rolling old debt into new trucks. All that did was create a never-never plan where the owner-op financed 110 or 120 percent of the real value of the truck. In order to keep the payments below the threshold of pain, repayment terms began creeping out to five, and even seven, years in some cases. Those creative financing options began surfacing at a time when what was really needed was rate increases.

We might have kept this charade going for a few more years if it wasn’t for the downturn in the market, coupled with the rising dollar and the crash in the value of used trucks. With the equity all used up in extended payment terms and fancy financing, many owner-ops are now significantly upside down. We have a small army of people whose businesses are suddenly no longer viable. The whole owner-operator business plan is falling apart.

If owner-operators are to remain player in this game, adjustments need to be made. Rate increases are necessary — significant ones, too. Fuel surcharges have to be passed through in their entirety. Owner-ops should have to qualify for appropriate credit rather than being hosed because they’re risky borrowers. Those that don’t qualify, need to be turned down. Flat. Maybe we need some kind of entry controls, too, to protect the serious players from the flakes.

If something isn’t done, we’ll all lose a lot more than a few thousand over-valued trucks.

— (Be sure to also check out Jim Park’s “Down the Road and Around the Corner,” this week’s online weekly feature, for a detailed 2008 outlook).