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ELDs have arrived, along with confusion and anxiety over impact

The ELD mandate is now in effect, but its overall impact on the industry remains uncertain.

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Nearly 17 years in the making since the Federal Motor Carrier Safety Administration first attempted to require electronic logging devices (ELDs) on commercial vehicles, the day has finally arrived for most of the nation’s 3 million plus driver workforce to begin using the devices.

Happy or not, it is now the law of the land, as last-ditch efforts to stop or delay the rule, including December appeals by U.S. Rep. Brian Babin (R-TX) and social media campaigns led by the ELD or Me group on Facebook have proven unsuccessfully. There has been some social media momentum to get drivers to park their trucks in protest, but that remains to be seen if any widespread protests will occur.

The question now becomes: what happens?

While estimates of rate increases and capacity shortages have swirled since passage of this version of the rule in 2015 have ranged as high at 20% on both sides, the likely impact is going to be a lot less by most accounts. And, ironically enough, with spot rates at near record highs and contract rates continuing to rise, there may be less of a capacity hit than many first thought as some small carriers and owner-operators choose to remain in the industry believing they can make money with the higher rates.

“[The belief] is that some capacity reduction is a function of fewer miles per truck and some is due to carriers concluding they can’t make money if they cannot bend the rules,” John Larkin, managing director - Transportation and Logistics, for Stifel Equity Research, tells FreightWaves. “With the recent boost in spot rates, we may see less capacity reduction. Carriers may decide they can make money in this tight supply/demand environment even if they don’t bend the rules — for at least as long as the spot rates remain elevated.”

Linehaul rates in November were 6.3% above November 2016, according to the latest Cass Truckload Linehaul Index, which measures a 131.2. The Index has risen for eight straight months on a year-over-year basis.

“In just the last five months, our pricing forecast has increased from -1% to 2%, to 0% to 2%, to 2% to 4%, and now giving us reason to believe the risk to our estimate may be to the upside,” stated Donald Broughton, analyst and commentator for the Cass indexes and chief market strategist for TransRisk. “The current strength being reported in spot rates is leading us to believe contract pricing rates should keep rates in positive territory well into 2018.”

DAT Solutions is also reporting higher spot rates, with van rates at a 3-year monthly high of $2.07 per mile in November and refrigerated rates at $2.43. Even flatbed rates are at higher-than-normal levels at $2.31 per mile.

Contract rates are also climbing, with reports of some carriers receiving double-digit price increases for 2018.

“Spot rates remain elevated while contract rate hikes are being successfully negotiated,” a Stifel research note last week said. “One otherwise price sensitive customer agreed to a 14% rate increase, after determining that their carrier was simply asking for rates to be adjusted up to the current market price. And, the tight supply and demand conditions are expected to tighten further [today] and thereafter, as the ELD mandate will have been fully implemented. Add in an accelerating economic growth rate, perhaps further propelled by stimuli, such as tax reform or an infrastructure program, and we could soon see early signs of a chronic shortfall of freight transportation capacity.”

In a blog post last week, DAT’s Pat Pitz wrote that the capacity hit will not occur right away, something that Morgan Stanley analyst Ravi Shanker agrees with.

“Our last ELD survey in mid-November pointed to 3.5% capacity impact but 40% plus of small carriers were still not compliant,” Shanker tells FreightWaves. “That number is probably 25% now, but that is still a huge number. We expect impact to start as early as Dec. 18 given the punitive fines and liability involved with running non-compliant [but] we expect the real impact to show up in February 2018 with the start of the seasonal produce season. We expect 3.5% capacity reduction and mid-single digit pricing improvement to be the minimum impact next year.”

Kevin Hill, CEO of CarrierLists, told a conference call audience two weeks ago that the compliance rate appeared to be about 75%, although smaller and regional fleets were lagging. In a Stifel note about the call, it was noted that some shippers who deal with smaller fleets may still not be aware of the regulation, potentially catching them unprepared. There have been several social media posts in recent days from brokers relaying stories that drivers they are dealing with are also unaware.

As of today, law enforcement will begin monitoring compliance with the rule, but overall enforcement remains a mystery.

“There is a lot of debate surrounding the extent to which different enforcement agencies will initially enforce the rule,” Larkin tells FreightWaves. “And whether a soft enforcement mentality will be adopted through April 1, 2018.”

“It’s one thing to not be in compliance, and it’s another to still be operating out of compliance,” said the Stifel research note. “The number of trucks running down the road every day, technically compliant or not, dictates the industry supply side of the supply/demand equation that determines rates. What was made clear on the call is that there remains a lack of clarity as to what enforcement will look like in the coming months.”

The Commercial Vehicle Safety Alliance (CVSA), which is responsible for coordinating commercial vehicle enforcement, announced this fall that drivers can be warned or ticketed for not having an ELD, but they will not be placed out of service until April 1, 2018. That, too, has led to confusion as some drivers are mistakenly believing they don’t need to comply with the law until April 1, and at least one state, Oklahoma, suggesting it will place non-compliant drivers out-of-service for 10 hours as of today.

“Enforcement will be up to either state police or highway patrol, being determined on a state-by-state basis,” the Stifel note added.

There is also the concern about compliant devices. Since manufacturers had to self-certify their devices, there is worry that some drivers may have purchased a device that FMCSA finds does not meet the rule. At an American Trucking Association event in October, Joe Joe DeLorenzo, director of the Office of Enforcement and Compliance at FMCSA, said that issues of drivers using a non-compliant device that was on the self-certification list when it was purchased would be handled on a case-by-case basis.

There will be additional issues, of course, but it seems that everyone at the moment can agree on one thing: there will be an impact to rates and capacity.

“Our view has been ‘no, not ELDs alone’ although we do expect capacity to tighten and believe trucking rates will continue to march higher,” the Stifel research note concluded. “ELDs are just one factor among many limiting industry supply in recent years. Drivers are the capacity constraint in the trucking industry, even more so than tractors, as we have spoken with several fleets that have a significant number of trucks parked because they can’t seat them with qualified drivers. In fact, trucking rates have spiked over the past two months due to supply disruptions and increased demand caused by Hurricanes Harvey and Irma. Driver wage pressure has also been on the rise all year, and we are seeing it hit for the first time in the LTL sector. So, whether ELDs remove a significant amount of capacity or just a little bit, we believe trucking rates are headed higher. One thesis has been that all these small non-compliant carriers running illegally will just fold, but ‘quit rate’ was very low in the survey. We believe the carriers are likely to raise prices before they just turn in the keys and park their trucks for good. But fleet failures or rising rates lead to higher transportation costs. Shippers should be on notice.”

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