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.
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
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