The drayage industry in the US is in trouble. Drivers are getting old, the industry is under capitalized and inefficiencies drag on each mile. But changes are coming, but are they coming fast enough? Wheels of fortune. RoadOne’s President/Founder/CEO Ken Kellaway has been in the drayage business a long time and seen the wheels of fortune spin more than a few revolutions. Kellaway started with his own family drayage business and was one of the principals in RoadLink, a visionary effort to build a national drayage company via investment capital. Now he is CEO and founder of RoadOne, which boasts some 1,200 tractors and 50 million sq./ft. of warehousing, distribution and transloading space. The wheels recently spun again as two weeks ago it was announced the private equity firm Tritium Partners had taken a “majority investment” in RoadOne. Interestingly, Ron Sorrow, one of the founders and CEO of the predecessor RoadLink, will join the management team as Executive Chairman of the Board. Sorrow was most recently a CEO-in-Residence with Tritium focused on supply chain businesses. Kellaway and his longtime business partner, RoadOne CFO David McLaughlin, regularly present at industry events a “State of the Union in the Drayage Industry” which rates as a “must see” for those following the industry. Key Takeaways on the “State” of the Drayage Industry
Ken Kellaway, Road One Logistics
Ken Kellaway, CEO - Road One Logistics
Some of the key takeaways from their latest address are alarming and throw a real twist in any hopes of supply chain efficiency in North America. One of the most interesting keys from Kellaway’s presentation is under the heading “Railroads are the New Truckers.” The presentation points out the stark contrast between rising demand (domestic intermodal rising 6.5% annually) and driver shortages (50% over the age of 45). This is giving rise to opportunities for railroads to target movements within the 700 - 1,100 mile bandwidth, traditionally a “trucks only” bracket. Higher trucking costs (across the board) limit investment in the business. On the other hand, railroads have increased investment in terminal networks, track quality and equipment. There are now far more viable origin and destination points because of terminal and corridor expansion. This has led to better rail speeds and service or “truck like quality”. Another takeaway is the relatively small size of the “intermodal” segment within the dry van universe. Intermodal represents only 6% of the total for dry van loads: split evenly 3% for international (drayage) and 3% for domestic. The takeaway being a driver shortage will be exacerbated in the intermodal segment over the general dry van sector. Put into an employment perspective, would you (the driver) rather drive a 53-footer on the open road or carry an ocean container to and from congested container terminals? Added into the mix is the new HOS (Hours of Service) rule, which significantly reduces driver hours and thus increases driver shortages. Despite the small market size, when it comes to international freight, trucks to and from the terminals shift a vast majority of the containers. As Kellaway says, international intermodal trucking is the bottom of a $10 trillion dollar funnel: Global Logistics, $7.3 trillion; US Logistics, $1.5 trillion; Port Logistics, $40-$50 billion; and at the bottom, international intermodal trucking is a mere $10 billion. According to estimates made by the Clarendon Group, there are about 5,000 for-hire intermodal trucking carriers with the top 10 independent providers operating only around 8% of total capacity. As these numbers suggest, the intermodal sector is highly fragmented, has high company turnover, and is undercapitalized with aging ownership. Overall the international side of the business stacks up poorly when compared to the domestic dry van operations, whether measured in terms of equipment, procedures or utilization. Added to the overall industry structural challenges, is the fact the chassis side of the business is transitioning from an ocean carrier dominated model to other strategies. While there are many ways to handle chassis issues, the bottom line is that the inefficiencies of multiple programs are creating cost for the drayage side of the business. This means more trucks, drivers and costs in the supply chain. Bob Costello, Chief Economist of the ATA (American Trucking Association) says of the efficiency problem, “every 3% decline in trucking productivity requires an additional 60,000 trucks to haul the same amount of freight.” Solutions and Trends While the challenges to the drayage business are clear, solutions are elusive as the drayage portion of the supply chain rarely attracts the same level of attention as other links unless strikes and work stoppages are involved. Ultimately, it is a supply chain long problem, that can’t be resolved without cooperation throughout the entire, diverse set of links. Shippers, carriers and third parties all have to be involved in the process. Many of the solutions simply revolve around making the movements more efficient. Solutions to problems that involve gate hours, chassis pools and the like are well within the ability of the marketplace to resolve. Still, the reality is that the cost for drayage must rise. In the presentation Kellaway suggests, “Pricing must rise equal to or greater than CPI and or cost increases in the market.” There are trends that suggest the actual structure of the drayage industry itself may be changing. Out on the West Coast Jonathan Rosenthal of Saybrook Capital, which owns the drayage company TTS (Total Transportation Services) announced it created a sister firm, Eco Flow Transportation, which would be 100% owned by employees. (see Stas Margaronis, AJOT article June 8, 2015 “Will Rosenthal and Eco Flow re-engineer harbor trucking?). This startling idea has a lot of people looking at it from the White House on down to the piers. And RoadOne “getting the band back together,” as Dave McLaughlin mused of the Tritium Partners investment, might also be part of a new trend. Drayage industry consolidation has been in the cards for quite awhile and the timing might be right for “a player” to emerge from the pack setting into motion a new look from “money” at a traditionally under capitalized segment of the trucking business.