Higher salaries keeping drivers at home
With trucking rates so high, companies are wrestling with the new reality that a truck driver doesn’t need to work a full schedule to pull in a decent salary, David Parker, chief executive of Covenant Logistics said in a recent call with analysts.
“We’re finding out that just to get a driver, let’s say the numbers are $85,000 per year,” Parker said. “But a lot of these drivers are happy at $70,000. Now they’re not coming to work for me, unless it’s in the $80,000s, because they’re happy making $70,000.”
What’s happening, he said, is that truck drivers are looking at the fact that they can make $70,000 “and stay home a little more.”
The result is a tightening of capacity. Parker said utilization in the first quarter at Covenant was three or four percentage points less than it would have as a result of that development. “It’s an interesting dynamic that none of us have calculated,” he said.
To put the numbers in perspective, Todd Amen, president of ATBS, which prepares taxes for mostly independent owner-operators, said the average tax return his company prepared for truck drivers’ 2020 pay was $67,500. He also said his company prepared numerous 2020 returns with pay in excess of $100,000.
Parker was firm that this was not a situation likely to change soon.
“There’s nothing out there that tells me that drivers are going to readily be available over the next one to two years,” he said.
Paul Bunn, the company’s chief operating officer, echoed what other executives have said recently: Additional stimulus benefits are making the situation tighter. He said that while offering some hope that as the benefits roll off, “that might help a bit.”
What the Government Giveth
But what the government giveth the government can sometimes taketh away. Bunn expressed another familiar sentiment in the industry today, that an infrastructure bill adding to demand for workers would create more difficulty to put drivers behind the wheel. Construction, Bunn said, is “a monster competitor of our industry” and if the bill is approved, “that’s going to be a big pull.”
Labor is going to be a “capacity constraint” through the economy, Bunn said, while conceding that trucking is not unique in that.
And because of that labor squeeze, capacity in many fields is going to be limited. “The original equipment manufacturers (OEMs) have limited capacity,” Bunn said. “They’re not ramping up in a major, major way because of labor, because of commodity pricing, because of the costs.”
All that means is that capacity growth is going to be “reasonable,” Bunn said. “It’s not going to be crazy with people growing fleets by significant amounts. It’s all you can do just to hold serve.’’
While the driver situation is tough, it didn’t notably hurt the first quarter performance of Covenant. Joey Hogan, Covenant’s co-president, highlighted some of the company’s first-quarter numbers: a 6-percent growth in operating revenue on a strategic reduction in the number of company tractors and the best first-quarter net income figure in its history.
Beyond the Market
Beyond the market for drivers, Parker said the freight market is “hot” and likely to stay that way.
“We are at 7 percent, 8 percent GDP growth, that goes to 5 percent, well, probably, or it could stay 7 percent or 8 percent,” he said. “But it’s still going to be numbers that you and I have never felt from a freight standpoint. And so I don’t see that letting up, I see that a solid couple of years of being in that kind of environment.”
Given that, Parker and other Covenant managers used the occasion of the earnings call to drive home with more detail a point the company made in its earnings statement a day earlier: It intends to get higher rates out of some of its dedicated customers.
While the company’s expedited division saw its operating ratio improve to 91 percent from 102.3 percent a year earlier, the dedicated division saw its ratio remain above 100 percent.
The dedicated division, Bunn said, has two types of customers. One is a group with high returns, “and we want more of those,” he said. “We’re going to go to the customers where we have that and say, ‘Can we have more of your business?’”
The other are customers that Bunn referred to as “commoditized.” Those customers are going to need to “value” the dedicated service providers “or we’re going to give those trucks to somebody who’s in the first bucket.”
Trucks won’t just get “yanked” out, Bunn said. But “we’re not going to run Dedicated with a 98, 99 or 100 ratio,” he added.
But even though Covenant, like other carriers, has leverage in negotiations given the tight market for capacity, it does need to be handled with a certain degree of aplomb, Hogan said.
Hogan was talking about the company’s expedited division when he said that in price negotiations, a company needs to be “respectful” as prices get up to “that line where they say, ‘Well, I’m going to grow my own transportation.’”
Another possibility is rail. “When does the price push them to the rail?” Hogan asked.
However, the expedited division is “in a good spot for at least a couple of years,” Hogan said. That’s aided by the fact that inventories are “stupid low” across the supply chain, he added.