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California volumes collapse, capacity tightens in front of AB5; is it a coincidence?

Photo: Jim Allen - FreightWaves

Chart of the Week: Outbound Tender Volume Index, Outbound Tender Rejection Index – California SONAR:OTVI.CA, OTRI.CA

The California market exploded in 2019, with volumes averaging almost 30% higher from February through October according to FreightWaves Outbound Tender Volume Index (OTVI) for the state. This is a substantial increase in any year, but it especially impressive considering the 2019 freight market was considered a shadow of the previous year. In November, however, those volumes fell off the proverbial cliff, with volumes falling 18% in the first week of November. Strangely, capacity tightened as demand fell, with tender rejection rates increasing from under 3.5% to over 5% as volumes fell. Could the approach of Assembly Bill 5 (AB5) have something to do with this counter-intuitive movement?

Last week a California state court decided the AB5 legislation cannot apply to the trucking industry due to being overridden by a federal law. This is a strong indication that trucking companies will not be forced to treat independent owner-operators as full-time employees in the state.

Owner-operators are drivers that own or lease their trucks independent of a trucking company. They are free to decide when and where they use their equipment. Many owner-operators will contract with a larger carrier, however, in order to utilize the larger carriers’ customer base for sourcing freight. This is mostly a symbiotic relationship where the carrier does not have to take on the burden of full-time employee costs, and the operator maintains independence and flexibility.

There are situations where this relationship is not considered fair. For instance, when the carrier leases the vehicle to the driver in a lease to own scenario, requiring the driver to work off the cost of the vehicle before they can stop working for the company. Some may consider this relationship more like a title loan where the lessee is put in a situation where it is unlikely they will ever be able to pay off the truck. This of course depends on the terms of the agreement.

Regardless of where one stands on the nature of the relationship between carrier and owner-operator, if owner operators are forced to become full-time employees, the carriers will be forced to take on significant costs to operate in the state and owner operators will lose some amount of independence.

Even though it appears this law will not go into effect for trucking companies at this point, carriers needed to prepare for this potential prior to the planned January 1st enforcement date. Prime Inc, a major nationwide carrier, reportedly offered 6,000 drivers relocation packages to exit the state and remain independent contractors. Many owner-operators probably already made the decision to exit the state.

California is already notoriously expensive to operate and live in relative to the rest of the U.S. Regulations and taxes are more prevalent here than in many other parts of the U.S. With trucking being an interstate business and Los Angeles being one of the largest long-haul freight markets in the country, with loads averaging over 880 miles from origin to destination this year, it makes it difficult to operate in a state whose costs are so disparate from the rest of the country.

National carriers will be at an advantage as they will be able to blend their rates with lower cost areas, while regional and intrastate carriers will be forced to pass along the full brunt of the cost increase or exit the state.

The average length of haul for loads from Los Angeles has increased from around 800 to almost 1,000 miles in the last four months. Chart: SONAR – Outbound average length of haul

Looking at the average length of haul for the Los Angeles market, however, we discover a hidden fact. The average length of haul for freight originating in the area surges as volumes fell in November. Longer haul freight is more disruptive to capacity as trucks move further away, making it less likely for their return.

Earlier in 2019, the average length of haul was almost 200 miles lower as regional freight was more prevalent. The trade war pull-forward that had many shippers importing in preparation for additional tariffs hit the western ports and cramming warehouses with goods to avoid increasing costs. November is typically the time where goods move across the country to hit the major population centers in the East.

Although, it would make sense that many independent operators would leave the state to avoid forced employment, capacity was drained quickly due to the nature of the freight movements shifting to a longer mileage, at least in November.

Currently, volumes remain 18% under previous year levels out of California, but tender rejection rates are around 2% higher at 6.35%. There is still room to believe capacity was diminished as a result of this proposed legislation. It also makes sense operators finally got tired of the looming threats of additional regulation from the state. With the impact of the trade war receding, and California volumes returning to “normal” the answer will become more apparent in the subsequent months. A hearing will be held on January 13th concerning the California Trucking Association (CTA) challenging the legality of AB5.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week a Market Expert will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on for future reference.

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  1. Owner Operator Ca

    What boggles the mind, how a truck in California can run any loads less then 1.90 mile? It’s not a math question on AB5 it’s a moral question. Will this law guarantee higher rates or will it mean O/O are out? In my year experience being independent I like to say it’s been very cool when you get freight that actually pays. Mainly seasonal work has paid my Bill’s and a little help from the man upstairs. If, we could join together as a Trucking organization to establish grounds on the cost and regulations, it would benefit our buisness from taking the dollar a mile higher and more push back on new unjustified laws. I Would rather pay towards a cause that benefits the hard working American and not for roads that never do.

  2. SuperTruckerMike

    If you think an increase in rates will mean an increase in driver wages…then you are dreaming. More money in the companies pockets…little to none passed on to drivers.

  3. Sibrian

    CARB is the problem…trucks with engines older than 2010, cannot renew registration after 2020. Expect a massive exidous out of CA. This requirement will kill the independent owner operator… The fix is completely cost prohibited!

  4. Art

    Employees paid as 1099 independent contractors are the reason wages are stagnant.

    1099 independent contractor is an immigration and employment loophole scam.

    Construction, trucking, manufacturing gets away with cheap undocumented labor while citizens get left with the tax bill.

    Leased on owner operators are company employees with truck payments.. no freedom to work for whoever.
    If you want to be an independent OO get your own authority.

    1. Bmburds

      I am leased to a carrier, pull what loads i want, and can book same loads as you if i want, just compared to when i had my authority, cost are 50 percent less, no outstanding balances on books, no headaches collecting from shippers, and lot better on cost of fuel and parts, ive done both and profit at end of year basically same but with 1/4 of the headaches, i gross less yes, but bank more with half the work, js

      1. Mike

        You totally missed the point Art made, and it is an accurate one. 1099’s are not meant for drivers, but actual contractors. These 1099 drivers, mainly foreigners, do drive the wages and the rates down. The companies that employ this strategy are mainly based off shore, they run the entire operation from Eastern Europe or India, pick your region. They have no skin in the game and can afford to haul that cheap freight, and they do.

  5. Bill Barred

    Won’t an increase in driver wages be passed on With higher consumer good pricing?
    Higher store pricing means the trucker’s wage increase will go to increase prices of their own life essential purchases.
    Sounds like running in place

    1. Noble1

      In essence that’s how it pretty much works . True inflation per year is quite high in boom times . That’s why the poor get poorer and the rich get richer . The rich have most of their capital invested in the markets . Therefore they profit from inflation(fiat currency model/monetary policies ) while the 99% generally don’t .

      This is why I advocate for truckers to unite and restructure themselves through an Alliance that generates income from more places than one without the need to be dependant upon a proverbial “wage” and or “rate” . In essence they become their own “Bank” , their own Hedge Fund(investment/trading entity) etc. .

      The problem with typical wages is that they don’t follow inflation . If they did , then a typical truck driver employee would be earning a little more than $40 an hour at this point . That being said , there is no wage structure in trucking either . The only true wage “structure” is obtained through an organized labour union due to bargaining power . Due to deregulation rendering trucking road transportation a fierce cut throat competitive model , it has become what it is . As we can see fierce completion also escalates unethical behavior . Unethical behavior engenders regulations , and innovation .

      In my humble opinion ………..

      1. Noble1

        I omitted mentioning fiscal policy . Corporate tax advantages plays an important role . It’s an attempt at incentivizing corporations into expenditures . These expenditures can lead to increasing employment and improving an economy . Sometimes corporations will prefer to and decide to use these tax breaks for share buybacks .

        Share buybacks are in shareholders best interest . Insiders are shareholders . Buybacks increase share value . Insiders often distribute stock options to themselves . When share value increases , insiders exercise cheap stock options at a higher share value and pocket the difference as a salary and or bonus . This also contributes to inequality and favors the “rich” over the poor .

        That being said , organized labour unions should include EMPLOYEE stock options in their collective bargaining negotiations when dealing with corporations listed on a stock exchanges .

        In my humble opinion …….

    2. Keep trucking

      This law does not increase rates, it only increase money in pokets of whoever is behind this law for example the union’s representative they pushing this law so bad so that they push they’re union fees to workers once they become employee so no I don’t buy that . They don’t really care bout the hours we work or if we getting ripped off they just using this law as a way to fill in they’re pockets more so nooooooo on ab5

      1. Noble1

        THE AB5 LAW gives you an opportunity to join an ORGANIZED LABOUR UNION through correct classification as an EMPLOYEE !

        When you’re a UNION MEMBER ,the higher your “wage” , the higher the union dues due to union dues being based on a percentage of your WAGES ! Therefore it’s in the union’s best interest to negotiate better wages for their members ! However, members vote .

        Union reps/leaders must abide by the “majority’s” desire(s) . Union reps/ leaders can and may make recommendations to their members , BUT , it’s the majority of the members that have the last word .

        Secondly , not only do UNIONIZED EMPLOYEES have a chance at earning higher wages and increased benefits etc , the government will also be assured to obtain MORE INCOME TAX due to diminished EMPLOYEE misclassification !

        Everyone wins except for the ignorant and greedy !

        The LAW in this case “protects” and assures the employee of certain “benefits” . The actual “increase” in wages comes from unionizing and then demanding higher wages through the union aside from government protection through Labour Laws/Codes.

        Furthermore , if you’re discontent with a “union’s” performance in representing you(members) , you can vote for a decertification election and DISOLVE & DECERTIFY the union . Unions aren’t blindly given carte blanche to do as they please , nor are they set in stone .

        Remember , a union is paid through union dues to protect and represent you ! Union members , collectively, are the union . Not the other way around .

        In my humble opinion …………..

    3. MrBigR504

      Thank you Bill Barred! Noble 1 is hoop’nin and holler’n like that so called rate increase will set the drivers for life! California taxes and just keeping a roof over your head and truck maintenance will balance out those rate increases. Hell, a driver will be lucky not to owe anything when its all said and done! And hopefully that new DEF truck won’t break down right? And pulling intermodal too? Awe man its just a matter of time before there’s a for sale sign in the windshield or they’re looking for greener pastures before that truck get repo’d!

  6. Noble1

    Well would YOU LOOK at that !

    AB5 is causing capacity to tighten and thus rates will increase BOOYAH !

    But O/O’s are complaining . They want to have their cake and eat it too , LOL !


    If a truck driver shortage really becomes a reality then rates will INCREASE ! If rates increase then driver wages will follow and increase as well as they did in 2018 due to tight capacity !

    Then this will in turn attract drivers and eventually equilibrium will set in before another bust occurs . Ad nauseam

    AB5 ! , AB5 ! , AB5 !!!! YEEEEEEE HAAAAAA !

    In my humble opinion ………..

    1. Art

      Drayage rates are garbage.

      I dont understand why drivers are against laws that will increase rates/wages.
      Must be propoganda by the intermodal and ocean businesses that CA is waging war on the poor helpless small business owner Owner Operator.

      Most drayage is done by illegals working as employees misclassified as 1099 IC to bypass immigration.

      Immigrants are exploited while the rich get richer and citizens pay more taxes.

      Without immigrants working as ICs, America stops.
      Neither Democrats or Republicans will stop this centuries old system.

Comments are closed.

Zach Strickland, FW Market Expert & Market Analyst

Zach Strickland, the “Sultan of SONAR,” curates the weekly market update. Zach is also one of FreightWaves’ Market Experts. With a degree in Finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. He has over 13 years of transportation experience, specializing in data, pricing, and analytics.