"The future ain't what it used to be," as Yogi Berra said. That truism has never been truer than in the present logistics industry. Business trends and visionary advances in technology stand to revolutionize transportation as we know it. This article will discuss important business trends impacting the industry over the short- and medium-term, and potential technological transformations over the longer term.
Industry Consolidation and the Importance of Customer Service
Industry consolidation is the biggest business trend in transportation. Through the short-, medium- and long-term, larger conglomerates will gain market share by reducing transportation costs through scale. Small operators will be unable to compete with large conglomerates because of the rising cost of insurance, slimmer margins due to lack of discounts provided by vendors to conglomerates, increased costs of compliance and licensing, and an inability to recruit and retain talented employees. This trend will strongly impact the trucking and intermediary industries.
Ultimately, the trucking industry will consolidate, pressuring small fleets and independent drivers. First, small trucking companies have difficulty obtaining affordable insurance coverage. In the future, entrants to the industry will have strong incentives to purchase an existing operation with a DOT number, current insurance filings, no BASIC scores over the threshold, and a favorable loss history.
Second, larger trucking companies can increase margins by obtaining discounts on tires and fuel, using the cost savings to buy more efficient equipment. This competitive disadvantage will grow more pronounced.
Third, small fleets will have more difficulty complying with complex and ever-changing regulations such as MAP-21, the FMCSA's new driver training requirements, Hours-of-Service rules, environmental regulations, and, of course, paying increased federal and state taxes, tolls, licenses and permits.
Fourth, driver shortages will allow large trucking companies to outbid small companies for driver services. Currently, OOIDA estimates that 90% of the trucking industry is made up of small fleets with ten or fewer trucks. This percentage will decrease as owner-operators seek to reduce costs and increase their margins by leasing onto large fleets.
For all of these reasons, expect to see increased deal volume in the trucking space with companies trading at higher multiples.
The freight brokerage industry faces similar pressures to consolidate. The trend in the brokerage industry is for companies to become full-service 3PLs. Thus, large brokerages are adding service verticals and complimentary modes of transportation to become a customer's single-source provider. Small brokerages can only afford to grow organically and, accordingly, will not be able to offer their customers multiple lines of transportation.
As 3PLs add different services and modes, knowledge and customer service will increasingly differentiate a 3PL from its competition. As 3PL services become more sophisticated, the 3PL's agents will need to become equally sophisticated about domestic, international and over-the-road freight. Each customer service agent must be educated enough to handle the breadth of the supply chain. Successful 3PLs will blend these multiple touch-points on the supply chain with high standards of customer service. As 3PLs add service verticals, their training, customer service and knowledge base will need to keep pace.
Despite industry consolidation, smaller entities will compete with larger conglomerates if they provide white-glove customer service, niche market specialization and great information technology systems. As technology becomes more affordable, smaller entities will compete on technology and visibility systems currently affordable only to larger competitors. Access to affordable information systems will create parity at an operational level and open the door for smaller companies with great customer service.
Extreme Driver Shortage Will Cause Trailer Sizes to Increase
The future will see the current truck driver shortage become even more pronounced. The American Trucking Associations estimated a shortage of 30,000 drivers in 2014. The driver pool is aging. The average truck driver in 2013 was 45-54 years old, with 55.5% of drivers over the age of 45, according to the ATRI. As recently as 1994, 60% of drivers were between the ages of 25 and 44. Meanwhile, demand for over-the-road freight is projected by the DOT to grow by 43% by 2040.
This begs the question: How will trucking companies find qualified drivers? Perhaps increased wages will eventually draw new drivers into the sector. However, the trucking industry does not have a unified structure to recruit, train and place drivers. Thus, companies should position themselves now to ensure capacity of qualified drivers against a more pronounced shortage.
For example, freight brokers can form asset-light companies to manage customer capacity, while trucking companies can retain drivers by offering them aggressive lease purchase programs. Ultimately, the simplest, most efficient solution to combat tight capacity is to expand trailer sizes. Increasing trailer length by several feet, widening domestic containers and expanding weight restrictions should help alleviate some of the capacity issues. Some expect the DOT to promulgate new transportation regulations increasing trailer and container sizes within the next few years.
The Technology Transformation
The DOT predicts freight volume to grow by 45%, to 29 billion tons annually, by 2040, fueled by rising population and expanding trade. If that is true, the logistics industry has 25 years to find a way to transport that extra 9 billion tons through a system already stressed by traffic congestion, aging infrastructure, rail chokepoints, and too-small ports. These trends, however, can't improve without technological advancement and investment in infrastructure.
Technology, at least, stands ready to meet the challenge. Imagine fleets of driverless trucks, controlled by onboard computers, linked both to each other and to central command centers that analyze second-by-second feedback to calculate routes, optimizing delivery time, fuel efficiency and profits. Similar technology is in development for aerial drones and unmanned ships.
Or consider the possibility of freight pipelines or hyperloops significantly expanding rail capacity. These technological changes could transform the logistics industry as we know it.
The trucking and ground freight industry is developing a number of possibly transformative technologies. Connected vehicle technology is one example. It envisions wireless communication not only between vehicles, but also between vehicles and infrastructure, like traffic signals. When connectivity marries with sophisticated analytics, drivers will receive real-time traffic information to select optimal routes that maximize fuel efficiency and minimize delivery delay.
And by spreading traffic across more routes, the technology also stands to reduce congestion and resulting costs across the transportation system.
In 2009, drivers spent 4.8 billion hours in traffic on U.S. highways, costing $115 billion in fuel and lost time, according to the DOT. Even moderate gains from such technology will yield massive savings. On a smaller level, connected vehicle technologies may even save fuel by informing vehicles and drivers when to brake or accelerate.
Beyond fuel efficiency, connectivity also promises to improve safety. There were 333,000 large truck crashes in the U.S. in 2012, according to the NHTSA, resulting in roughly 4,000 fatalities. The DOT estimates that connectivity could eliminate 81% of crashes. Connected vehicles will inform drivers of upcoming hazards. Braking vehicles will automatically signal to following vehicles to decrease speed in response to what would otherwise be unexpected, sudden braking, and possibly a collision.
In one example of connectivity, companies, agencies and academics are all developing platooning technology. Platooning involves a convoy of vehicles, with a computer system driving trailing trucks, following the lead truck, automatically braking, accelerating and turning in response to feedback from sophisticated sensors. The platoon reduces wind resistance. One developer, Peleton Tech, which has already performed road trials, anticipates fuel savings of 4.5% for the lead truck and 10% for each rear truck.
Others are taking platooning connectivity further, developing fully autonomous vehicles. Google has developed car prototypes, with 700,000 miles of road testing as of 2014, with a projected commercial release sometime between 2017 and 2020. A driverless car developed by Delphi recently drove coast-to-coast. Mercedes is developing the Future Truck, in which the driver can cede control to an auto-pilot, but expects another decade of development. Widespread use of this technology is likely even further away, but according to the Center for Automotive Research, driverless trucks could save 15% to 20% in fuel efficiency.
As another upshot, some have predicted that driverless vehicles could eliminate 90% of collisions. Robots do not tire, become distracted, or use drugs and alcohol. They stand to substantially resolve these problems with human drivers, which are flashpoints in the present debates over highway safety and regulation, although new regulation of driverless vehicles is certain to follow.
All of this technology promises to improve the bottom line, at least for companies that can afford it. Increased fuel efficiency from connectivity and analytics will substantially improve margins. Less frequent collisions will reduce exposure from litigation, and possibly lower the costs of insuring that risk. Driverless vehicles could further expand margins by avoiding costs of compliance with current driver regulation and slashing labor costs. In all, some estimate that driverless technology alone could save $100,000 per truck, annually.
On a broader level, these changes would remake the trucking industry. "Truck, delivery and tractor driver" was the most common job in 29 states in 2014, according to census data. Driverless technology could not only alleviate the shortage of qualified truck drivers, but long-term, make the occupation obsolete for anything but last-mile hauling. With 90% of truck freight carried by companies with fewer than 10 drivers, automated vehicles would further strengthen the trend towards consolidation. Owner-operators and small firms will have to find resources both to acquire this technology—one estimate prices it as high as $200,000—and to service it.
Technology also stands to impact air freight. The DOT predicts that air freight will grow by 250% by 2040. Impediments to this growth include congestion of air space and airports, pollution, and weight limitations.
Most immediately, the FAA is developing NextGen, a series of initiatives ranging from improved air traffic management systems to data communications to airborne collision avoidance. In part, NextGen promises to use connectivity and analytics to improve communication between aircraft and the ground, streamlining air travel. It will open faster, more direct routes between airports, allow aircraft to fly more closely together, speed landing and takeoff to allow 8-12 more departures per hour at busy airports, reduce taxi times by 48%, and generally permit more aircraft to use existing infrastructure. All of these improvements will yield cost savings from fuel efficiency and decreased travel time for air freight. The FAA has already worked on NextGen for more than a decade. Some aspects of NextGen are scheduled to be operational within the next five years.
As with ground transportation, automated vehicles could revolutionize air freight. Amazon is famously developing and testing unmanned aerial drones for its Prime Air service, which would deliver small packages to customers in 30 minutes or less. The military has drones capable of lifting heavier cargo weighing up to one ton. While drones may someday be a cost-effective, fast delivery alternative, they are a long way from regular use. The FAA has proposed rules limiting commercial, nonrecreational drone use. These rules would require operators to be certified, permit flights only during daylight, and require drones to be kept in sight. The rules also appear to ban commercial drone deliveries for the time being.
Other potential innovations in air traffic are more dramatic. A number of companies, including Boeing and Lockheed Martin, are going back to the future, studying helium blimps to carry freight. And Aeros Corp. has spent 20 years developing the Aeroscraft—a scaled series of airships, the largest of which would be 920 feet long, capable of carrying 500 tons in a 1.8 million cubic foot cargo bay, and travelling 5,100 nautical miles at speeds of up to 120 knots. Because the Aeroscraft can take off and land vertically, it would not need a runway, and could avoid bottlenecks in hub-to-spoke logistics systems. But, as with drones, such technologies will need to maneuver a regulatory minefield.
Advancements in rail freight may also relieve current stresses on the system. Although rail is more fuel efficient than trucks and particularly important for the transportation of cargo, it suffers from infrastructure challenges, from chokepoints at major rail hubs to physical space limitations. In one frequently-cited example, freight can move from Los Angeles to Chicago in 48 hours, but takes 30 hours to cross Chicago. Even if newly-designed trains move faster, they are a limited solution to these chokepoints.
Some of these proposals could change the way freight moves by rail. For instance, CargoCap in Germany, GRID in Southern California, and the hyperloop envision underground rail-like systems, essentially subways for freight. GRID would connect the ports of Los Angeles and Long Beach by electric, automated trains running through enormous pipes designed to carry water. CargoCap would send cargo pods through pipes running between urban centers.
The hyperloop is the most ambitious of the three, proposing to shoot pods at 750 miles per hour through vacuum tubes running from Los Angeles to San Francisco. Although the hyperloop presently envisions carrying passengers, rather than freight, the concept could be extended. These technologies may help resolve bottlenecking.
As Dwight Eisenhower said, plans are useless, but planning is essential. These trends and technologies could transform the logistics industry. On the other hand, present business trends could reverse and once-promising technologies may never become viable. But, by planning for the future in the present, the logistics industry will hopefully prosper and find creative ways to meet its many challenges. Ultimately, only time will tell how the future of transportation resembles its present and past.
Enan E. Stillman is a corporate and transportation attorney and partner with Atlanta, Ga.-based Graham & Jensen LLP (www.grahamjensen.com), as well as a member of MH&L's Editorial Advisory Board. T. Brandon Welch is an associate with Graham & Jensen.