Who Controls Capacity?

A good read from Jim Mele, Editor-In-Chief of Fleetowner:

Last month, Con-way Inc., the large LTL and truckload carrier, was purchased for $3 billion. Although the price tag is rather remarkable, consolidation in trucking has been fairly run of the mill for some time.

It started with deregulation way back in 1980, and gathered steam right up to that brick wall we now call the Great Recession. The motivation was fairly simple: Combining fleets brought economies of scale in a low margin business. Whether it was fuel contracts or equipment orders, being a bigger player than the competition brought significant advantages.

As the economy has slowly worked its way back to a semblance of health, the analysts expected to see consolidation again pick up as the big players moved to absorb whatever smaller fleets remained. This Con-way deal, however, is different. And if you’re running a fleet of any kind, that difference should be setting off alarm bells.

We’ve been talking about the driver shortage now for years, but aside from stepping up recruitment and stealing one another’s drivers, the industry has exhibited no real urgency to deal with it. The chickens are now coming home to roost, and the Con-way acquisition is the first tangible evidence that this chronic shortage is now about to fundamentally reshape trucking.

Con-way wasn’t acquired by another fleet. The buyer was a 3PL called XPO Logistics, a company built on the premise that not owning trucks was the better way to make a profit in transportation. It’s what they call “an asset-light” business, a model that avoids expensive capital investment so it can scale up or down quickly depending on freight demand.

So why did XPO, a company that reported revenues of only $2.4 billion last year, decide to plunk down $3 billion to buy a company that owns lots of trucks? The short answer—the driver shortage.
Wait, why buy trucks if you’re going to have trouble finding drivers for them? Another short answer—capacity shortage. 

XPO is getting ready for what its CEO Brad Jacobs predicts will be “the mother of all capacity shortages” in the next few years. The aging driver population and more restrictive regulations will only make the current driver shortage worse, and that means shippers and their 3PL service providers will be scrambling to find enough trucks to keep their businesses running and revenues flowing.

When that happens, “he who controls assets will do very well,” says Jacobs, who has now transformed his asset-light company into the largest freight transportation and logistics provider in the U.S.

Publicly, Jacobs says Con-way was particularly attractive as a hedge against future capacity problems because it has a relatively stable and well-paid driver pool with turnover rates of less than 10% in its LTL fleet and just 55% in truckload. And a quick survey of social media seems to support that with many current company drivers expressing little concern over the change in ownership.
So what does this mean for everyone else in trucking? Look for moves to secure truck capacity by both shippers and the 3PLs that they’ve come to rely on. Long-term contracts, expanding private fleet operations, new dedicated agreements, and of course further acquisitions are all going to come into play.