Focus Management Group

New Transportation Regulations

Will New Motor Carrier CSA Regulations Impact Profitability?

By Mike Grau and Juanita Schwartzkopf

Introduction

Motor carriers nationwide have begun feeling the full impact of changes to safety regulations implemented by the Federal Motor Carrier Safety Administration (FMCSA) at the end of 2010. While these changes are meant to impact safety on the roadways, they will most certainly have an impact on the profitability of transportation companies. Lenders to companies in this sector should keep abreast of the changing environment in this arena and the associated potential impact on profitability to such companies.

The Changes

The new FMCSA program, known as CSA (Compliance, Safety, Accountability) introduced the Safety Measurement System (SMS) as the new method to quantify the safety performance of carriers and drivers. Introduction of the CSA program was driven by a number of factors, including what studies have shown for years: that a relatively small percentage of the driver population contributes to a disproportionately large percentage of accidents.

While CSA generally does not change the current universe of regulations, it does change how the FMCSA prioritizes car¬riers for enforcement and how it goes about that enforce¬ment. The bottom line is that this does place an expanded compliance burden on motor carriers and individual truck drivers, so there will be real costs associated with compli¬ance that carriers will need to manage more closely going forward.
In addition to the Safety Measurement System, the CSA Op¬erational Model has a new intervention process and a safety ratings process. It’s worth pointing out that since CSA is a relatively new program, the FMCSA continues to look at ways to improve certain aspects of the program that may unfairly penalize carriers and drivers.

The previous safety measurement program, known as Safe-Stat, was primarily focused on motor carriers, which allowed individual drivers to effectively elude safety programs by jumping from one carrier to another and leaving their poor driving records behind. CSA specifically addresses this issue by monitoring driver performance across employers over a two year period.

The new safety model collects data from a carrier’s roadside inspections, state-reported accidents and the Federal Motor Carrier Census to measure performance in seven Behavior Analysis and Safety Improvement Categories (BASICs):

  • Unsafe Driving
  • Fatigued Driving (including non-compliance with hours-of-service requirements)
  • Driver Fitness (invalid commercial driver’s license medically unqualified)
  • Controlled Substances/Alcohol
  • Improper Vehicle Maintenance
  • Cargo-Related (loads improperly secured or unsafe han¬dling of hazardous materials)
  • Crash Indicator (histories of high crash involvement)
  • If one or more of a carrier’s BASIC scores exceed a minimum threshold (which vary by type of carrier), the carrier then becomes a candidate for an intervention by the FMCSA.

The new SMS program uses an algorithm which measures each BASIC by factoring both the timing (more recent violations weighted more heavily) and severity of violations and normal¬izing them by overall level of activity compared to other car¬riers. SMS then converts each participant’s BASIC scores into percentiles from similar carrier groups.

The Costs

While carriers have already adopted this new system, the incremental costs to carriers associated with their imple¬mentation of safety measures and maintaining compli¬ance are still emerging. Driver-related costs are likely to increase over time.
One of the key areas of fallout expected from CSA is a permanent reduction in the available driver workforce resulting from substandard driver safety records. Industry experts have speculated that this driver contraction could be as much as 5% – 10%, although at this early stage in the process there is no way gauge the full impact of any driver shakeout. Regardless, any meaningful reduction in the available driver pool will have real economic conse¬quences to both carriers and their customers.

It is important to point out that while CSA directly moni¬tors the performance of individual drivers, it does not assign specific ratings to each driver. However, motor carriers may request a driver’s history for purposes of pre-employment screening, and this is where the shakeup in the labor market is expected to occur. Drivers with stellar safety records will be able to command higher rates, and industry reports already list some companies willing to pay these types of drivers as much as $10,000 in signing bonuses as well as increased pay per mile.

In addition, carriers experiencing driver turnover as a result of CSA will have to deal with other related labor costs such as retention, recruitment and training costs. The bottom line is that hiring drivers has become more expensive, and this could eventually force some financially unstable carriers out of the market and erode industry capacity. Non-driver costs are likely to be impacted by the increased level of compliance.

  • Poor ratings may lead to an FMCSA intervention. These compliance interventions may be time consuming and occur in three stages: 1) early contact, 2) investigation and 3) follow-on.
  • Insurance costs are another area to watch closely. While safer drivers will ultimately have a positive impact on insurance rates, carriers may be held to higher levels of accountability for hiring unsafe drivers. Early indications are that when it comes to CSA’s impact on insurance costs, insurance companies are looking at how proactive both the driver and carrier are being in improving safety scores.
  • Vehicle maintenance is another one of the BASICs upon which carriers will be scored, and this could lead to an increase in maintenance costs for carriers.
  • Capital investment in safety-related technology is an¬other area that may increase going forward. Innovations such as electronic on-board recording devices, advanced collision warning systems, adaptive cruise control, electronic stability control and tire pressure monitoring systems are just a few of these technologies that carriers may look to in the future as a means to improve safety ratings.

There will also be opportunity costs for those carriers who do not manage their safety programs well. With the implementation of CSA, carriers’ BASIC scores are posted for public viewing on the FMCSA website. Customers, competi¬tors, brokers, insurance companies and the general public all have access to scores and violation data. Unsafe carriers will simply be less attractive options for shippers, who do not want to worry about shipment delays related to driver issues or any liability related to the hiring of unsafe carriers.Consequently, customers will now have more economic incentive than ever to avoid carriers they know to have substandard safety records.

The Winners

Carriers who are successful in managing this new world of compliance will be proactive in dealing with the changes. Programs such as Fatigue Management and the FMCSA’s vol¬untary Pre-Employment Screening Program will help carriers better manage CSA compliance. Likewise, placing more emphasis on preventative maintenance and pre-trip and post-trip vehicle inspections will help carriers meet their compliance thresholds. Carriers need to become familiar with the process for challenging inaccu¬rate information and make sure they are placed in the proper peer group. It is also important for carriers to actively engage their customers in the process. Customers who insist on se¬curing loads themselves must know the implications of failing to do so properly, and those with excessive detention times (holding drivers too long) may create problems with driver hours-of-service requirements and overall carrier scheduling.

Research has shown that carriers who commit to a strong safety program will ultimately lower their operating costs. Those carriers which make CSA a priority will also position themselves to take better advantage of increased pricing resulting from what appears to be an ongoing tightening of market capacity. Second quarter 2011 results already show a tightening capacity in the truckload (TL) sector has led to upward pressure on freight rates. Likewise, less-than-truckload (LTL) rates are also moving higher as carriers such as UPS, Con-Way and ABF Freight Systems all announced 6.9% increases to their general LTL rates in July.

Questions for Lenders

The impact of CSA will extend beyond carriers to the entire shipper universe of manufacturers, distributors, retailers and other end-users of carrier services, not to mention lenders and other stakeholders. It will become increasingly important for lenders and stakeholders of motor carriers to check online scores, validate compliance and ask these questions:

  • Do the carrier’s current BASIC scores exceed intervention thresholds, and if so has the carrier been contacted by the FMCSA?
  • What specific programs have been put in place to ensure compliance with CSA?
  • With respect to operating costs:
  • Has the carrier experienced increased driver turnover as a result of CSA, and how is that impacting labor costs?
  • Has CSA had any impact on insurance rates?
  • How have maintenance costs been impacted, and does the company have a formal preventative maintenance program?
  • Is CSA having any other measurable impact on the busi¬ness (e.g., capacity, customer pricing)?

How Focus Can Help

Protecting collateral and enterprise values requires skilled managers, and Focus professionals have extensive experi¬ence identifying and correcting problems commonly found at underperforming transportation companies.We have provided operational management, financial manage¬ment, product marketing assistance and receivership services for motor carriers and many other sectors of the transporta¬tion industry.

Our specific capabilities in transportation services include:

  • Cost Control & Fleet Utilization
  • System Review and Implementation
  • Regulatory Compliance and Rate Structures
  • Strategic Analysis and Overall Business Management
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