I was in Indianapolis the other day covering the Green Truck Summit and Work Truck Show, when I checked my voicemail and found a message from Steve Russell, chairman and founder of Indianapolis-based Celadon Trucking. My first thought was ‘Shit, what have I done to piss him off?’ You see, the real big wheels generally only call me when they take umbrage with something I’ve written. But in this case, Steve wanted to talk about the company’s growth plan for Canada and the fact I was in his backyard struck us both as far too coincidental to ignore.
I hopped in a cab and headed over to see him and ended up spending the better part of the afternoon with Steve discussing a wide range of topics. It was a visit that both inspired and energized me, and provided me with plenty of fodder for future blogs.
One of the things that’s been on my mind lately, as we have mourned the passing of trucking pioneers such as Don Schneider and Pat Quinn, is the fact there seem to be very few opportunities for ambitious entrepreneurs to build a trucking company in this current regulatory environment. If you look at the major players today, few were created in the last decade or two and many pre-date deregulation. Opportunities still exist, particularly in underserved niche markets, but the odds are stacked against anyone launching a start-up trucking firm.
It’s often been said that the barriers to entry have become more substantial in recent years. I tend to disagree with that. While the OEMs aren’t giving away new trucks on a promise, as they once were, it’s still easy enough to buy a used truck and find some freight to haul. The barriers to entry haven’t changed substantially, but in my view, what has changed is the barriers to success have gotten far more difficult to overcome.
Trucking companies today face an overwhelming list of societal, human and compliance requirements that didn’t exist in the past. At the same time, costs have risen and as a result, trucking operators no longer have any margin for error. None whatsoever. Think about this for a second: a small fleet or one-truck operator that’s involved in an accident will need to generate $200,000 in revenue to cover the $10,000 insurance deductible, assuming they’re running a margin of 5%. Good luck with that. And that’s not to mention CSA implications and all that other stuff. One mistake can put you out of business.
Another limiting factor when it comes to growth for a small company is the cost of new equipment. Steve grabbed a pen and paper and scribbled out for me the new trade-in formula: In 2006, he pointed out, a new truck cost $95,000 and a three-year-old truck was worth $50,000, so a company looking to upgrade would require a loan of $45,000, which was easy to get. Today, a new truck costs $125,000 and a three-year-old truck is worth $50,000, so the company requires a $75,000 loan and nobody will write it.
Because of this, fleets are hanging onto trucks longer. They then find themselves with a seven-year-old truck worth $20,000 and need a $100,000 mortgage to upgrade to a new truck. Meanwhile, the maintenance costs on a seven-year-old truck are 18 cents a mile compared to five cents a mile on a two-year-old truck, Steve pointed out. The only option for many smaller companies is to start trading in two or three older trucks for one new truck and suddenly a 180-truck company becomes a 150-truck company and so on. How do you grow a fleet under those conditions? It’s nearly impossible, which is why we’re seeing so many acquisitions, where trucks come packaged with drivers to operate them and customers to serve with them.
Steve expects to see the truckload industry undergo significant consolidation in the years ahead. There are currently thousands of truckload providers. Steve thinks there could eventually be only dozens, pointing to the rail and LTL industries of examples of where capacity is controlled by only a handful of providers.
Last month, I asked Dan Einwecther, founder CEO of Challenger Motor Freight if he would be able to replicate his own success if starting out in today’s environment. While he didn’t rule it out entirely, he admitted it would be much more difficult.
“Back then we had a much freer reign in many ways as an industry – whether from a regulatory perspective or compliance – we’d just go. It was definitely a different time,” he told me. “We have more responsibilities placed on our shoulders today, both financial and safety, employment regulations, how we treat our employees, our obligations to society – it’s dramatically more complex.”
When I asked Steve the same question, he was even more cynical. Steve started Celadon in 1985 by leasing 50 trucks at a cost of about $30,000, which by today’s standards would equate to maybe $200,000. Today, he said, to start a trucking company with 50 units, you’d need at least $3-$4 million just to get started. Who, in their right mind, would make such a significant investment for such meager returns?
“That’s why there are very few start-ups,” he said. “What start-up company can you name that has started in the last five years?” I certainly couldn’t name one.
I think of all the great trucking companies today, and how most were built upon a similar foundation: one guy with a truck, a vision and a truckload of ambition. I admitted to Steve I found it somewhat sad that the same opportunities don’t exist today and may never exist again. The glory days of trucking seem to have passed, which to me, as an observer with a passion for the industry, was a melancholic realization. Steve was less sentimental, more philosophical in his response. Look at Facebook founder Mark Zuckerberg, he said. He started from scratch and is worth $20 billion. Same with the founders of Groupon and other tech firms. There are still opportunities to build something substantial from nothing and to become incredibly wealthy, he said.
“But as an asset-based trucking company? Not a prayer.”
So I throw it over to you, folks. As the title suggests, have we seen the end of the trucking tycoon?
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