Private Fleets: Down but not out

Though they face serious competition from for-hire and dedicated operators, private fleets remain the mode of choice for many corporations.

By Jim Thomas -- Logistics Management, 7/1/1998

At a time in which most sectors of the trucking industry enjoy low fuel costs, near-capacity operations, and a comfortable rate climate, private carriage is still under the gun. Stories abound about outsourcing and businesses concentrating on core competencies. And even the staunchest proponents of private fleets admit that there are legitimate reasons to consider outsourcing today.

One of those reasons is cost. The price tag of a private fleet can be staggering when companies consider the costs of everything from the power unit to maintenance to regulatory compliance. Tony Vercillo, president of International Fleet Management Consultants Inc. of Ontario, Calif., estimates that it can cost between $8,000 and $15,000 a year just to keep a Class 8 truck compliant with environmental, OSHA, and Department of Transportation regulations.

And no one denies that it's easier to hand over operations--and the associated headaches--to someone else. "With outsourcing, you eliminate the cost of ownership, the liability of running trucks up and down the road, driver shortages, and labor management issues," says Danny Graham, vice president-sales, Transportation Services Group, Ryder Integrated Logistics. "And by reducing the investment in a private fleet, a company frees cash for other important uses."

For these and other reasons, private fleets face intense competition from for-hire carriers. Although private carriers claim 76.0 percent of the local cartage revenues, for-hire carriers now command 61.0 percent of all intercity truck revenues, according to Transportation Technical Services, a database information and consulting company located in Fredericksburg, Va. Observers say that the for-hire share of the long-haul market may grow as the availability and quality of alternatives (truckload, less-than-truckload, and intermodal) improve.

In addition, private-fleet managers must compete with dedicated carriage--arrangements in which the truck bears the customer's name and the driver wears the customer's uniform, yet someone else owns the equipment and controls the operations. Dedicated fleets offer many of the benefits of a private fleet, yet relieve the customer of all of the fixed costs associated with ownership. This can prove highly attractive to companies that are looking to minimize fixed costs and concentrate on the core business.

Maintaining Control

But that doesn't mean the private fleet's day is over. "Private carriers must operate under stringent cost pressures regardless of the economy," acknowledges John McQuaid, president and chief executive officer of the National Private Truck Council (NPTC). "But, in general, private carriers are performing very well despite rumors of their demise."

Certainly, there are some good reasons why private carriage remains attractive to companies. Service is the key consideration. Many companies claim they require a private fleet to provide the high levels of service their customers expect. "There are companies that decided to outsource their entire fleet, yet came running back to private fleets when the service was not what they expected," says McQuaid.

Another reason is control. If an emergency shipment requires pickup within an hour, the fleet manager has the ability to dispatch a company-owned truck instantly. At a recent meeting of the NPTC, many fleet managers expressed reservations over using for-hire carriage because they felt they could manage company drivers and company-owned assets more easily.

In fact, statistics show that these fleets remain a major player in the trucking market. A 1997 report by Transportation Technical Services, America's Private Carriers, places annual private-fleet revenues at $192.4 billion, over 10.0 percent greater than those of for-hire carriage. Private carriers generate 3.2 times more revenue than for-hire carriers in local markets ($101.5 billion vs. $31.5 billion), yet for-hire carriers receive the majority of intercity revenues ($144.5 billion vs. $90.9 billion). In total, private fleets represent 53.0 percent of the total trucking market. (See Figure 1.)

The TTS study also reports that private carriers handle 3.56 billion tons of freight annually, compared with 2.92 billion tons for for-hire fleets and 20 million tons for parcel carriers. But when it comes to freight value, the balance shifts a bit. For-hire carriers haul $2.8 trillion worth of freight annually, while private fleets haul freight valued at $1.8 trillion, and parcel carriers haul freight valued at $600 billion.

For-hire carriers also generate the most ton-miles of transportation, 630 billion. Private carriers generate 240 billion ton miles. This sharp contrast is consistent with length of haul. For-hire carriers average 470 miles, compared to a 51-mile average haul for private carriers.

At this time, in fact, it appears that private fleets are slowly shifting to both shorter hauls and smaller trucks. McQuaid says there has been a trend toward operating smaller power units among private fleets in recent years. "The heavy-duty private-fleet market has been estimated at between 25,000 and 40,000 power units," he says. "If you consider light- to medium-duty truck fleets, then the estimates increase up to 4 million vehicles. Much of the growth in private fleets is in the under 33,000-pound range."

The smaller trucks offer several advantages. For example, they often are better suited to just-in-time programs, which call for more frequent deliveries of smaller shipments. McQuaid also notes that developers have built shopping centers that do not provide access for larger vehicles. "When they were planning, they forgot they needed trucks to serve the stores," he says.

Having It All

Given that both private and for-hire carriage have their advantages, more and more managers are looking to have it both ways when it comes to highway transportation. "The idea of an 'either/or' scenario is a fallacy," says McQuaid. "Companies should use outsourcing where it makes sense--in a lane where there is a freight imbalance, for example."

In fact, McQuaid doesn't see outsourcing alternatives, such as dedicated fleets, as a direct threat to private fleets. "They do not operate at the expense of private fleets; they are another arrow in the quiver of the fleet manager," he says.

Regulatory Hurdles

While they ponder the future direction of their business, private-fleet managers also must deal with a changing regulatory landscape. For example, the debate over drivers' hours of service continues to rage. Yet the debate itself is slowly changing. "Today, we don't have to guess at the safety aspects of hours of service because we have science," McQuaid says.

Currently, the American Trucking Associations is administering an eight-month study with a North American Van Lines truck-driving simulator to gather data. The program is mandated by the Federal Highway Administration and will help the agency review hours of service. A notice of proposed rulemaking concerning the regulations is expected to be issued in September.