The Rise of Truckload
Rebels With A Cause
On the 25th anniversary of trucking deregulation, this special issue chronicles how truckload carriers altered the face of transportation.
Deborah Lockridge, Senior Editor
Twenty-five years ago, only a dozen of the top 100 for-hire motor carriers were truckload carriers. Today, 50 of the top 100 for-hire motor carriers are truckload carriers. The biggest reason? Deregulation of the trucking industry in 1980.
"In order to understand the growth of the truckload carrier, you have to understand that its origins were mired in economic regulations from 1935-1979, and that its explosive growth was a direct result of economic deregulation in 1980," says Lana Batts, former president of the Truckload Carriers Assn. (TCA) and an employee of the American Trucking Assns. (ATA) at the time of deregulation.
The roots of that regulation go back to 1887, when Congress created the Interstate Commerce Commission to oversee the railroad industry. Trucking was added in 1935, partly due to lobbying by the railroads, which had been losing business to the fledgling trucking industry.
"By the 1930s, it was clear that the trucking industry was no longer just an urban and short-haul transporter," Batts says. "It was now competing head-to-head for long-distance movements."
Under the Motor Carrier Act of 1935, new trucking companies had to seek a "certificate of public convenience and necessity" from the ICC. Truckers already operating in 1935 could automatically get the certificates if they could document their prior service. New trucking companies, however, found it extremely difficult to get operating authority.
The law required motor carriers to file all rates, or tariffs, with the ICC 30 days before they became effective. Anyone was allowed to protest the filed tariffs, including competing trucking companies or the railroads.
Another force for trucking regulation, Batts says, was the Roosevelt Administration's National Recovery Act of 1934. This act sought to establish good business codes among industries during the depths of the Great Depression. Many of the code's principles on rates found their way into the regulations established by the ICC.
The regulatory environment changed again in 1948, when Congress passed the Reed-Bulwinkle Act to prevent the Department of Justice from pressing an antitrust case against the railroads. The act exempted not only railroads, but also trucking, from antitrust laws. This allowed trucking companies collectively to set rates through rate bureaus.
So between 1935 and deregulation in 1980, rates, routes, commodities and new entrants for interstate movements were regulated by the ICC.
"The beneficiaries were the already established companies, unions, suppliers to the trucking industry, and shippers in small communities in out-of-the-way locations who were subsidized by shippers in larger communities," Batts says. "The losers were contract carriers who were limited to eight contracts, entrepreneurs with new ideas, minorities and women-owned businesses who had not been in the trucking industry in 1935, and small shippers in large communities."
What 'Regulated' Trucking Was Like
Until the industry was deregulated in 1980, it was very difficult to get new or expanded authority to transport goods. All existing routes were held by large companies, and you had to prove to the ICC that there was a need for you to enter the industry. To convince the ICC, you had to get the support of many companies who would testify that they wanted you in the market hauling their goods.
Nearly every application for authority was protested. Even if the proposed service was not being offered by existing carriers, if an existing company said it wanted to carry those goods on that route, it should be given the opportunity to do so instead of allowing someone new to do it.
"Anyone who was an established carrier could protest the giving of that authority," Batts says. "They'd say, "I'm already serving that lane, it doesn't need any more capacity,' or they could say 'the rate is unreasonably low and I'm going to be hurt as an established carrier.' The new guy had to show [existing carriers] were not adequate, nor could they in the future, handle that commodity in those lanes. If Yellow wasn't serving that lane, they could say they were intending to serve that lane."
Companies that could afford it paid lawyers lots of money to apply for ICC operating authority, defend their applications from competitors who protested, and likewise protest the operating authorities of other companies.
Pat Quinn, co-CEO of U.S. Xpress, was one of those attorneys. "It really got kind of stupid," he says, "because all you had to do was say the right words and you could win the case. But you still had to go through a six- or nine- or 12-month process. You might have someone that has a need for you today, but by the time you got the piece of operating authority to serve them, they might have been out of business, or their business changed and what you asked for was not now what they needed."
In order to prevail, trucking companies often struck deals with other carriers, agreeing to drop a protest of one company's ICC application in order to get the reciprocating company to do the same.
Because it was so difficult to get operating authority approved by the ICC, buying the authorities of existing trucking companies became a common way to enter a particular market. By the 1970s, the authority to carry certain goods on certain routes was selling for hundreds of thousands of dollars. The ICC was not happy about this "trafficking" in rights. It was hostile to mergers and purchases and tried to restrict authority as much as possible.
"The result was often bizarre," writes Thomas Gale Moore in "The Concise Encyclopedia of Economics" of the Library of Economics and Liberty, www.econlib.org.
"For example, a motor carrier with authority to travel from Cleveland to Buffalo that purchased another carrier or the carrier's rights to go from Buffalo to Pittsburgh was required to carry goods destined for Pittsburgh through Buffalo, even though the direct route was considerably shorter."
Truckers with authority to carry a product, such as tiles, from one city to another often lacked the authority to haul anything on the return trip.
To understand the regulated environment, you also have to understand the difference between a common carrier and a contract carrier. Common carriers were able to haul freight for any and all customers, Batts explains. "You established a rate, and you had to charge that rate for everybody."
A contract carrier, on the other hand, operated on specific contracts with specific shippers. By law, he could only have eight customers. "So unless you had a huge customer, you were forever bound to be small," Batts says.
Why would you even want to be a contract carrier? Because that was typically the only type of authority the ICC would hand out to new entrants. "Unless your grandpa was going it in 1935 (when regulation began, and companies were "grandfathered" in with common carrier status), you were never going to get common carrier authority," Batts says. "That's why there were no women, no blacks, no minorities, because those groups were not in business as entrepreneurs in 1935."
Most common carriers were less-than-truckload, while most truckload carriers were contract carriers, Batts says. "There were in fact common carriers that were truckload, but most of them were contract," Batts says. That's why the truckload industry was severely hampered in its growth before deregulation.
The less-than-truckload industry dominated the marketplace before deregulation. Among the top 100 regulated motor carriers in 1980, only 12 were truckload carriers. The ATA was dominated by the LTL carriers. "I remember the truckload guys basically standing on a chair in the back of the room trying to get recognized," Batts recalls. The two ATA conferences representing truckload carriers - the Common Carrier Conference - Irregular Route and the Contract Carriers Conference - were dwarfed by the Regular Common Carrier Conference.
But if you were able to use the system to your advantage, there were some benefits to being a trucking company in a regulated environment. For one thing, it was very stable, notes John Smith, president and CEO of Iowa-based CRST.
"The purpose of regulation was to be nondiscriminatory," he explains. "You provide the same service, the same rates, for basically all customers. And I think we did. The problem was, it became high-cost, average service - but it was the same.
"The industry was more stable. You knew who your competitors were, you knew the routes they ran. I knew my four or five competitors and I didn't have to worry about 10 more calling on my customer trying to get his business."
Regulation also allowed carriers to easily pass along increased costs to shippers, especially labor costs.
The Push For Deregulation
Some economists were critical of regulation right from the beginning. From James C. Nelson's series of articles starting in 1935, through the book "The Economics of Competition in the Transportation Industries," published in 1959, economists pointed out the inefficiencies of the system.
Studies showed that regulation increased costs and rates significantly. Products exempt from regulation moved at rates 20% to 40% below those for similar products that moved under ICC controls. For example, Moore says, regulated rates for carrying cooked poultry, compared to unregulated charges for carrying fresh dressed poultry, were nearly 50% higher.
Over time and with the changing needs of commerce, more and more academics started to question whether there was a need for Depression-style regulation. Commerce had changed, and trucking had changed. For example, the average length of haul increased from 177 miles in 1945 to more than 490 in 1980, a 177% increase. By comparison, the railroad average length of haul was only 100 miles more.
But more important, some of the regulations just didn't make sense. For instance, it was difficult to identify what was a raw agricultural product and therefore exempt from regulation.
Batts cites the example of her father's livestock trucking company, which hauled cattle out of Montana as an exempt carrier. He sometimes brought back regulated commodities as part of so-called agricultural "co-ops."
"I will never forget being in the seventh grade when my father was arrested by the ICC for hauling reconditioned steel drums for one of these co-ops," Batts says. "The case went to trial and the jury found him not guilty, even through the co-op was clearly a sham. In essence, the jury nullified the law because they couldn't understand why government regulation made my dad return to Montana empty."
A more famous example of the absurdity of regulation was the famous Yak Fat case. A motor carrier - Leroy Hilt of Omaha, Neb. - filed a rate with the ICC to haul the fat of the Tibetan yak. After he filed for this nonexistent product, the railroads predictably protested and the ICC found the rate to be unreasonably low. Hilt then called Time magazine and had a field day posing in front of the Yak statue at the Omaha Zoo. The ICC and its regulations came off looking pretty foolish.
In 1962, President Kennedy's Special Transportation Message called for the abolition of minimum rate regulation in the shipment of bulk commodities, but it was buried in Congress, opposed not only by truckers, but also by barge operators and the ICC.
By the early 1970s, the country was hearing from the free market economists, such as Thomas Gale Moore and Alfred Kahn, who saw no need to regulate any transportation mode - airlines, railroads or trucking. Articles were written, and symposiums and Congressional hearings were regularly held to point out the faults of the 50-year-old system.
Deregulation proponents argued that the existing system kept rates artificially high in trucking and too low in railroads. It created inefficiencies by limiting carriers to specific routes and commodities, which resulted in excessive miles as well as empty backhauls. Regulation crushed any innovation in transportation. And finally, the system thwarted entrepreneurs, minorities and women who wanted to enter the trucking industry.
Free market economists claimed that there was an additional $16 billion in annual truck transportation costs because of economic regulation. "Ironically during this time, most carriers' operating ratios - whether truckload or LTL - were about 94, and carriers had a difficult time seeing how they could reduce costs any further or become any more efficient," Batts says. "Little did they know."
"Shipping rates were ... held far above real costs," noted the New York Times in a 1983 editorial praising deregulation. "Trucking companies and unionized drivers split some of the surplus. But much of it simply went out the exhaust pipes of trucks forced to return home empty because they lacked the proper license to haul the available freight."
In 1971, the Nixon administration prepared a comprehensive trucking deregulation bill, labeled the Transportation Regulatory Act. It would have liberalized entry and allowed much greater flexibility in rates, as well as nullified the Reed-Bulwinkle antitrust provisions. The proposed bill died in committee when the Nixon administration withdrew its support to gain Teamster approval in the 1972 presidential election.
President Ford sent Congress the 1975 Motor Carrier Reform Act, which called for a drastic reduction in requirements to join the industry. The legislation never got out of committee.
What ultimately helped lead to deregulation was not legislation so much as administrative moves. Ford's administration altered the membership of the ICC by adding two commissioners who were committed to deregulation.
This trend continued under President Carter, who appointed a majority of commissioners who favored deregulation. Carter reportedly rejected a legislative strategy to achieve deregulation because he believed it would fail, as the attempts of Kennedy, Nixon and Ford had failed before him. His strategy worked. Between 1975 and 1979, the number of applicants for entry increased 700% - and the number approved grew by more than 800%.
"Particularly in the truckload market in the late '70s, it got more and more difficult to stop [other] carriers from getting authority," says CRST's Smith. "Say Amana refrigeration wanted to bring in another carrier, they could do it. The burden of proof over time switched from the shipper to the protester. We had the burden to prove it would somehow harm us more than it would help the shipper" to give another trucking company operating authority.
By the time the Motor Carrier Reform Act of 1980 was passed, it basically preserved the new status quo, with a few concessions to placate special interests (such as organized labor) and congressional interests.
The Battle
Both the Teamsters Union and the ATA strongly opposed deregulation. Supporting it was a coalition of shippers, consumer advocates such as Ralph Nader, and liberals such as Sen. Edward Kennedy.
"The guys who had those routes that were assigned by law were not particularly happy to have the Johnny-come-latelies like J.B. Hunt walk into the game, and they fought tooth and toenail" against deregulation, Batts says.
"I think the people in the business were afraid they couldn't compete," says CRST's Smith. "I don't think anyone ever said that, but I think there must have been that fear. I think there was some legitimate feeling that in a deregulated environment, things would be chaotic even for our customers, and service would suffer."
Safety was another concern voiced by deregulation opponents. "How would a regulatory agency ever be able to watch after the increased number of carriers to make sure they were running safe?" Smith says.
But those that opposed deregulation were fighting a losing battle.
"Regulation run amok - like the Yak Fat case - could neither pass the red face test nor be explained to the average American," Batts says.
In addition, events simply eclipsed the industry's arguments. For one thing, the 1978 deregulation of the airline industry had been a success. Just as economists had predicted, small communities were still being served, fares had dropped, and new airlines were entering the field. In addition, consumer groups headed by people like Ralph Nader were finding their advocates on Capitol Hill and in the press. In the White House, Ronald Reagan was well known for his free market, anti-big-government views. To make matters worse, inflation and interest rates were at an all-time high.
"To argue politically that rates and routes should be controlled by the federal government, and the number of customers should be controlled by the federal government - it was a losing battle," Batts says.
Many trucking companies had mixed feelings about deregulation.
Deregulation "was kind of a mixed blessing," says Don Oren, CEO of Minnesota-based Dart Transit, founded by his father. "Certainly opportunities grew on the plus side, but on the down side, rates started going down right away. I would say the greatest benefactors have been the shippers and the consumers - and they still are. It's been a good thing for the country; I can't think of another industry that provides such good service for such a good value as truckers do."
CRST's John Smith had just gotten out of graduate school in 1974 and was working for his father (Herald Smith's) company. "I saw that it was inevitable," he says. "As part of my studies [in graduate school], we had studied the economics of transportation. Just looking at the economics and the value it was going to bring to our customer base, it just became obvious to me that at some point there was going to be deregulation."
As a result, CRST was one of the few companies to speak out in favor of deregulation, and was one of the first companies to get nationwide authority under the new laws. "It's not because I thought it was going to be so wonderful for the carriers," Smith says. "I thought it was going to be a positive thing for the economy and for our nation."
Even Schneider, which prospered both before deregulation and after, was in favor of continued regulation, because it had invested so much in operating authorities that were going to be worthless if the industry was deregulated.
"When the rules changed, Don Schneider was enough of a businessman that he could play under any set of rules," says Batts.
Post-Dereg Blues
Proponents of deregulation predicted that there would be a lot more entrants into the industry - which there were, and the rates would go down - which they did, as trucking companies became more efficient. This was good for shippers and the American public, but it was extremely tough on the trucking industry.
"The results of deregulation were stunning and immediate," Batts says.
As predicted, hundreds of small, non-union truckload fleets flooded the market. The number of regulated trucking companies increased from 18,000 (which had been a relatively stable number since 1945) to more than 42,000 in 1989. Many, such as Werner Enterprises, had already been in the business, hauling primarily exempt commodities, such as fresh fruits and vegetables or livestock, and were not regulated by the ICC. Other regulated carriers expanded their operations. For example, contract truckload carriers, such as Crete Carrier Corp. and Cresco Lines, became common carriers and were now able to compete for all traffic, regardless of location or commodity.
Both these groups of fleets focused upon truckload freight being hauled by LTL carriers with union drivers through their LTL break bulk facilities. The truckload carriers offered service at substantially lower rates on a point-to-point basis.
"It's just a more efficient way of handling freight - you go door to door, you don't go through terminals," says Dart's Oren. "It seems so simple today, but it wasn't that way. Compared to the LTL business, [truckload operations] are not tied to a terminal. There are certain efficiencies in being able to set up your own network so you can go places where you know you have a probability of return freight."
The LTL carriers that had dominated the for-hire business for decades were suddenly in trouble. Even as the truckload sector was taking away their big shipments, United Parcel Service and others began luring away the small ones. Add a recession to the mix, then an insurance crisis a few years later, and many big names in trucking fell by the wayside.
Among the first to go was LTL giant McLean Trucking of Winston-Salem, N.C. Today, you can see old McLean trailers being used for storage buildings. Other big LTL casualties of the early and mid-1980s included Ryder Truck Lines, PIE, Hemingway Transportation, and Spector-Red Ball.
Within a year after deregulation, the LTL carriers had lost both their truckload freight and special commodity freight (which was hauled by owner-operators), which was roughly 40% of their total traffic.
In addition, the idea of a "long-term" contract evaporated with the introduction of spot market contracts. Brokerage firms entered the market, many operating out of truckstops with only a pay phone, pad and pencil. As a result, pricing became irrational.
Between 1977 (the year before the ICC began to administratively deregulate the industry) and 1982, rates for truckload shipments fell 25% in real, inflation-adjusted numbers. Rates never really increased until the mid-1990s. And even though truckload carriers were becoming more efficient, typical operating ratios have never really fallen below their pre-1980 levels of '94-'95.
"I will tell you, deregulation was much more difficult and much harder than any of us anticipated," says CRST's Smith. "I really felt deregulation would be a mess for five, maybe 10 years, then I thought the marketplace would become a little more stable. Twenty-five years later, I have no idea what's going to happen next year. You've got to be on your toes all the time, otherwise you're not going to be around."
Among the top 100 regulated motor carriers in 1980, only 12 were truckload carriers. Of those, only four remain as stand-alone companies today: Schneider Transport (now Schneider National), which was No. 31; National Freight (now NFI Industries), which was No. 74; Frozen Food Express (now FFE Transportation Services), which was No. 78; and CRST, No. 99. (Ligon Specialized, now owned by Landstar, was No. 70. Midwest Coast Transport, No. 82, and Willis Shaw Express, No. 91, are now owned by Comcar Industries.)
"We knew it would result in rampant rate cutting and rate wars, and it did," says Todd Spencer, vice president of OOIDA. "All you had to do was look at how the unregulated sector of trucking worked then, which was fresh produce and agriculture, and that was basically a pretty cutthroat business."
Very few carriers were prepared for the steep learning curve of deregulation. Too many companies entered the market with too much equipment. Changes in size and weight in 1982 added almost 25% more capacity to the industry with the introduction of 48-foot-long, 102-inch-wide trailers. Because this equipment was introduced during a recession, carriers were not able to get a premium from the shippers for the more productive equipment.
"With too many trailers chasing too little freight, rates quickly fell below the level of inflation," Batts says. "As a result, truckload driver pay never kept pace with inflation, and the quality of the driver pool slowly diminished until truck driving was reduced to a profession of last resort. With too much capacity, accessorial charges were quickly negotiated away, resulting in drivers spending too much time waiting at shippers' and receivers' docks or loading and unloading freight."
Competition Versus Costs
But over time, despite the difficulties of deregulation, the truckload carriers - some old, many new - prevailed. They had the advantages of being non-union, negotiating individual rates with shippers, focusing on specific lanes or customers, and were run by hungry and eager entrepreneurs.
Truckload carriers that existed before deregulation, like Green Bay, Wis.-based Schneider and J.B. Hunt, took full advantage of the new playing field and began to dominate the highways.
They were joined by startups such as Arkansas-based Maverick Transportation. Steve Williams had learned the lessons of the trade from his steel-hauling father and worked for a steel hauling company in the '70s. When deregulation came in 1980, Williams went into business for himself with only one truck. Today, his company runs more than 900 company-owned trucks.
Fifty of today's top 100 for-hire motor carriers are truckload carriers (compared with 12 in 1980). The top truckload spot is still held by Schneider National at No. 7, compared to No. 31 in 1980.
There's no doubt that trucking companies became more efficient as a result of deregulation. It was either that, or die. "You talk to a lot of truckers who were in business then, and they say, 'If I was as efficient then as I am today I would have been making a lot of money,' " Batts says.
Part of the efficiencies came from being able to establish routes that made financial sense. Truckers could choose the shortest distance between two points instead of adhering to government-approved routes. The number of empty miles went down because truckers could get backhauls without worrying about getting authority to haul it. Equipment got better and cheaper.
Many trucking companies that thought they operated efficiently quickly found out different. "As I look back on it now, we had costs built into our system that had crept in over the years that didn't add value in a competitive environment," says CRST's Smith. "But sometimes you couldn't see it to eliminate it. We thought we were fairly efficient, and we really weren't. Our deadhead miles were too much, maintenance costs were too high, the number of miles per tractor were not enough."
Before deregulation, Smith explains, carriers were able to pass along inefficiencies and higher costs. That changed.
"The marketplace doesn't play favorites," Smith says. "Either you are efficient and are able to perform at expected levels, or you're gone."
Deregulation created competition, where before there had really been none to speak of.
"Everyone had to come up with their own rates, and you had to be able to sell those rates to a customer that would be willing to pay it," says Glenn Brown, chairman and CEO of Missouri-based CFI. "There was no competition prior to deregulation, and competition creates efficiencies. The only constraints after deregulation were the federal hours of service requirements. It gave everybody who wanted to the opportunity to work to the maximum hours of service that the government set.
"Those that fought deregulation died," Brown add. "Those that embraced deregulation flourished. Deregulation forced change, and those that didn't change didn't survive."
Operating in a deregulated environment required a total change in mindset.
"Under a regulated environment, our marketing was primarily acquiring a franchise, making it a larger franchise, and protecting your franchise," says CRST's Smith. "Our 'marketing' was more having a good law firm that helped us acquire these franchises and stopping others from getting them. In the deregulated environment, that was worth nothing, so you became much more sales oriented and customer focused."
Big Stores And JIT
Some other changes taking place in the U.S. business world at the time also helped the rise of the truckload sector.
"When deregulation happened, that was also right at the cusp of these Wal-Marts, Kmarts, Targets and large grocers of the world coming into being," says Randy Marten, president and CEO of Marten Transport. "Suddenly they were taking full truckloads of product instead of two pallets. As the mom and pop grocery stores went away and you ended up with the Albertsons and Krogers and other large grocery stores, that spawned some of the truckload business. Back at the time of deregulation, there were no Best Buys, no mega electronics stores. There was the small electronics store on the corner."
The truckload industry also grew with the advent of just-in-time manufacturing concepts. The availability of more flexible, expedited, point-to-point transportation options made JIT possible, and JIT made for continued growth in the truckload sector.
"Besides deregulation, the major factor that has impacted truckload growth in our country has been the recognition by manufacturers that reduced inventories reduces their cost," says CFI's Brown. "So instead of having several warehouses full of parts and pieces, if they can get dependable, predictable service, they can eliminate those warehouse costs. That recognition has created demand for truckload service, which has contributed to the growth of the truckload industry."
There are plenty of challenges still ahead for the truckload industry: the continued driver shortage, increased highway congestion, new regulations and new technology, among others.
"I think the challenge is always going to be, in a competitive industry as we have, how do we keep balance?" says Kevin Knight, CEO of Phoenix-based Knight Transportation. "How do we continue to keep the industry profitable and healthy? As you look at the last few years, a lot of our competitors have gone by the wayside. I guess you could say that's good for the survivors, but at the end of the day you need a healthy transportation system."
Also contributing to this story were Lana Batts and Evan Lockridge
Related Articles
Deregulation & The Teamsters
Drivers & Owner-Operators
