Why Heavier Trucks Aren't the Answer

understanding truckload rates: spot rates vs contract rates
Author PhotoBlueGrace Logistics - September 12, 2017

While the American Trucking Association has been rallying in an attempt to get approval for heavier trucks on the road from Congress, they might not be aiming in the right direction. The obvious standpoint is that heavier trucks would mean better business. As U.S. trucks haul hundreds of billions of dollars across the country annual, a heavy truck would mean more freight can be moved and therefore better profit margins, right?

The trucking slump has nothing to do with the weight of the trucks

But the truth of the matter is that the trucking slump has nothing to do with the weight of the trucks, desired or otherwise, and everything to do with the pricing and the trucking environment as a whole.

A Necessary Change of Perspective

It’s no secret that the U.S. trucking industry is going through a pretty rough patch. The driver shortage alone produces a myriad of problems as trucking companies struggle to retain drivers against new regulations, time spent away from home, and adequate compensation. Even as the industry looks to employ female drivers in what is typically considered a male dominated labor force, filling the gap is proving to be more than difficult.

Driver shortage notwithstanding, the biggest issue that the industry is facing is when it comes to pricing, not the weight allotment 

“Some of the industry’s challenges with achieving adequate profit levels result from overcapacity because of a failure to realize that trucking depends on derived demand for volumes, and that lower freight prices will not stimulate more shipments if the economy is not growing,” says the JOC.

What many carriers aren’t understanding is that price is the one aspect they do have control over. Unfortunately, many of them had fallen into the trap of using a pricing model that was created before many regulations were passed, meaning they’ve had the power to change pricing for the past 30 years but simply failed to do so.

The Turning Point

That’s right. Most trucking companies are using a service pricing system that should have been phased out 30 years ago. Interstate loads were deregulated in 1980 and the same for intrastate loads in 1995. Parcel carrying companies charged based on distance and weight since 1985, leaving some gaps in their plan that didn’t account for oversized packages. During this time there were only five accessorial charges.

Now, 30 years later, parcel companies have shifted over to DIM (dimensional) weight pricing

Now, 30 years later, parcel companies have shifted over to DIM (dimensional) weight pricing. Now, not only can they capture the dimension of all packages they process, but the added charges based on the new pricing structure lead to higher revenue for carriers. Additionally, the accessorial charges have changed from five to 60, which makes up close to 11 percent of the parcel carrier revenue.

Weight Vs. Distance

While the LTL sector has made some changes to incorporate DIM pricing, it’s the FTL sector that is lagging behind. The problem is that the truckload segment is still relying on the distance to create their price point. While load weight does affect variable and fixed costs, the industry has yet to fully incorporate weight into price point generation. Because of this outdated model, shippers with lighter loads can subsidize the heavier loads of other shippers which are hurting the industry as a whole.

Since they’ve begun to incorporate DIM weight pricing, LTL carriers have seen a growth of 3.2 percent per hundredweight for the second quarter of 2017

So what results has the LTL industry seen for their changes? Since they’ve begun to incorporate DIM weight pricing, LTL carriers have seen a growth of 3.2 percent per hundredweight for the second quarter of 2017. This follows the average growth trend of 3.3 percent per year from 2013 to 2016 since the changes have been made.

The FTL sector, however, has seen a nominal growth of 0.5 percent for the second quarter, down from the 1.8 percent over the 2013 to 2016 period. This shows a proof of concept that taking control over the pricing structure can have a much greater impact than bickering over the weight limit.

“As noted, other industry segments have changed business processes and pricing to capture the cost associated with different shipments and value added for various customer groups. Instead of spending resources on uncertainty associated with getting legislative relief for heavier trucks, which will likely create a more negative image with the public, truckload carriers should focus on digging out of the pricing pothole, which is within their control,” the JOC added.

Overall rate costs would be negligible for shippers and manufacturers

While shippers might not necessarily be thrilled at the prospect of higher rates, the overall rate costs would be negligible for shippers and manufacturers. Even a modest 7 percent increase in shipping price would have a negligible increase in production cost, which can easily be passed on to consumers, thus increasing the quality of service and easing the woes of the trucking industry.

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