Private Fleets: Finding The Right Blend

Private fleets have long differentiated their transportation value by providing exceptional levels of customer service. And while private fleet operations are not without their challenges, today’s new breed of private fleet managers are managing to justify their existence by leveraging their operations to enhance their companies’ overall competitive position.

Estimated at $320 billion, private fleets are the largest sector of the $680 billion trucking market and expected to account for about half of all Class 8 truck sales this year. In addition, private fleets operate three out of every four of the Class 4 through Class 8 trucks on the road today.

“And it continues to get stronger,” says Gary Petty, president and CEO of the National Private Truck Council (NPTC). “Most of our companies are currently adding capacity and adding drivers because they believe that for-hire carrier services are being compromised by capacity constraints and higher costs.”

According to Petty, successful private fleet managers say that there are three basic reasons they operate a fleet rather than utilizing for-hire services: They can ensure consistent quality customer service; they can gain direct control of transportation capacity; and they can control unpredictable cost curves in the for-hire sector.

However, as many private fleet managers will attest, operating a highly-efficient private fleet takes work. Increasingly, private fleet managers are operating a “blended” operation, alternating between their own trucks in some geographic regions and utilizing for-hire options in other lanes. It’s a continually changing matrix that depends on rates, capacity, and service demands, say the best private fleet managers.

Let’s take a deeper look at how the best private fleets are operating in an ever challenging environment of mounting federal regulations, tighter for-hire capacity, and rising driver costs that affect every operation managing a fleet of trucks.

Managing market realities

The business model of an effective private fleet is best understood in the context of a larger matrix of other transportation solutions. In addition to a private fleet, many manufacturers and retailers use for-hire trucks, dedicated trucking operations, intermodal rail, as well as third-party logistics providers (3PL).

Most private fleets use so-called “blended” operations, meaning that their fleets aren’t responsible for all of their inbound and outbound freight movements. Rather, they “blend” the private fleet with other transportation providers to create an optimized transportation operation.
In addition, many private fleets operate their trucks for their own business needs, but also have for-hire operating authority for back-hauls to help offset the higher cost of private fleet operations. In fact, nearly two-thirds of all private fleets have such for-hire authority.

The trick is to utilize that for-hire authority and private fleet capacity in the most efficient way—and fleet managers say that it’s not a constant equation. Private fleet capacity at one company might optimally be 40 percent of one manufacturer’s operation and 70 percent of another’s, depending on available for-hire capacity, geographic lanes, rates, and back-haul opportunities.

One manufacturer might utilize its private fleet mostly in an area where for-hire capacity is tight and then use for-hire options in another area where many low-cost, non-union for-hire carriers have excess capacity. A savvy private fleet operator can sometimes tweak capacity by using its private fleet to add capacity to the marketplace with an idea of eventually replacing for-hire trucks on certain lanes.

Of course, such flexibility usually involves having a savvy private fleet manager at the helm. According to the NPTC, that requires a commitment from upper management, which must be willing to absorb the higher cost of private fleet operations in exchange for the service, guaranteed capacity, safe operations, and other inherent advantages that can be created with a private fleet operation.

“Private fleets really have an opportunity to expand their influence on their parent companies,” says Tom Moore, senior vice president at NPTC. “What separates us is our willingness to pay drivers top dollars.”

Driver survey says…
In fact, private fleet drivers are often referred to as the gold standard for the trucking industry—perhaps because they earn the most gold. According to the most recent NPTC benchmarking survey done in 2014, average pay for a private fleet driver is $62,000, compared to around $43,000 in the for-hire sector. The best and most senior private fleet drivers earn nearly $80,000, a figure that, surprisingly, has remained at the same level for the past seven years.

According to the benchmark survey, years of service with the same company averages 14 years, while average age of a private fleet driver is 50.1 years—the oldest ever recorded by the survey, but still younger than the average 59 years old for a Teamsters-covered driver at a unionized for-hire less-than-truckload (LTL) carrier.

Private fleet drivers work an average 59 hours a week, up from the previous year’s 56 average, but more in line with the all-time peak of 60.5 hours a week recorded three years ago. Of those hours, more than two-thirds (39.4) are spent driving while the rest is spent on non-driver tasks such as loading (7.9 hours) and unloading (12.1 hours a week) the truck.

Union operations account for 30 percent of private fleet operations in the U.S. Interestingly, however, non-union private fleet drivers earn 7 percent higher gross wages ($64,277 vs. $59,599) than their union-covered counterparts, according to the NPTC survey. That could be because non-union drivers were far more likely to receive incentive pay (78 percent) than union-covered drivers (27 percent).

Whether union or non-union, driver turnover remains stunningly low in the private fleet sector, compared to the nearly 100 percent turnover at large, for-hire, non-union TL drivers. Private fleets reported turnover of 12.8 percent in 2014, which is up slightly from 11.3 percent the previous year and 10.9 and 10.3 percent the two earlier years.

The low turnover among private fleets is chalked up to higher pay and better working conditions, private fleet managers say. For instance, 73 percent of fleets with the lowest turnover report that they get their drivers home every night, while only 55 percent of drivers for fleets with the highest turnover say that they were home every night.

Another reason driver retention levels are so high among private fleets are their selective hiring practices. Private fleet operators say that their minimum age for hiring a driver averages 22.4 years with 2.4 years of experience.

Private fleet drivers are also paid differently. Compared with for-hire drivers who nearly universally are paid by the mile, only 42 percent of private fleet drivers are paid by the mileage they drive. Rather, 29 percent are paid by the hour and another 25 percent are paid by activity-based formulas.

Improving private fleet operations
Keys to the long-term viability of a solid private fleet operation start with operational support from upper management. That, in turn, flows through a private fleet manager who’s increasingly using sophisticated technology to increase safety and drive down costs.

That savvy use of technology can be used to manage driver behavior to push even greater safety performances. This is absolutely essential for private fleet operations whose corporate “deep pockets” can be an easy target for attorneys seeking large settlements in cases involving truck accidents and fatalities.

According to Federal Motor Carrier Safety Administration (FMCSA) data, private fleets are safer than the typical for-hire carriers. FMCSA data collected through its five-year-old Compliance, Safety, Accountability (CSA) program show that private fleets are nearly three times as safe as for-hire trucks.

Private fleet managers say that some of that can be chalked up to the greater experience levels of private fleet drivers. Those drivers often drive the same routes every week and become familiar with road conditions. Technology may also be a factor, with about 30 percent of private fleets reporting use of speed governors on their trucks to limit top speeds.

Another metric to assure private fleet success is the “right-sizing” of blended operations between private fleet capacity and for-hire use. “For the most part, the best private fleets have found the proper ratio,” says Petty. “If they see a falloff in service from their for-hire operations, then that likely means that they will increase their private fleet resources in those lanes.”

Viracon’s conversion
However, private fleets don’t always stay private forever. Analysts at investment research firm Stifel estimate that approximately 15 percent to 20 percent of private fleets “turn over” to for-hire carriage every year—with about the same percentage of for-hire operations going private.

Viracon, the nation’s leading single-source architectural glass fabricator, is one of the former. After running a private fleet of 26 trucks since 1985, Viracon made a strategic decision to focus on its core competency and get out of the transportation business two years ago. Troy Hansen, director of material for Viracon, says that it was a combination of issues that lead to the decision, including the growing need for capital to keep its private fleet operating.

“When we made this choice, we were heavily into a downturn in the commercial market,” says Hansen. “We were looking to expand in our manufacturing core competency; however, competing for dollars got really difficult. Liability was another thing, as were the ever changing
compliance issues.”

With aggressive schedules and high volumes of inventory to be shipped, Viracon needed a large carrier to service the network and satisfy shipping requirements. According to Hansen, Schneider took its project implementation plan and personalized it for Viracon’s 12-week transition. Key components included taking ownership of Viracon’s current equipment; qualifying existing drivers and mechanics to meet its business demands; recruiting new drivers and mechanics to replace those who chose not to transition or did not qualify; and assuming responsibility for Viracon’s truck maintenance facility.

According to Hansen, Schneider was able to deliver a solution that transitioned Viracon from its private fleet structure to a dedicated service provider without sacrificing its reputation for safety, outstanding performance, and high customer service standards. This private fleet conversion was completely done in the 12-week period.

Because Viracon had always maintained its own equipment, the company was committed to the lease on its Owatonna, Minn., maintenance facility where five long-term mechanics were domiciled. In undertaking the facility, Schneider hired those mechanics, accepted the monthly fiscal responsibilities of leasing the facility, and continued to service the fleet’s equipment at that facility.

“We just signed a two-year extension, adding 10 more trucks and 15 trailers to the fleet,” says Hansen. “I knew we could expand the service, and the expansion will help us best serve our customers with additional capacity.”

Bob Elkins, senior vice president and general manager of Schneider’s dedicated services, adds that constant communication was critical. Weekly status calls maintained the project’s timeline, action items, and other transition details. Now Schneider provides a dedicated on-site manager and other support personnel.

“The process we’ve set up includes a 100-point inspection checklist that starts well upstream,” says Elkins. “We ensured the knowledge transfer before any execution takes place. As in any transition, there are things that require flexibility and adaptability; but it went extremely well.”

According to Hansen and Elkins, the new solution provided 98 percent on-time deliveries during the transition. The move also helped Viracon to maintain cost-per-mile during the transition before shifting the focus to cost improvement. And at the same time, the company actively worked to find customers with flatbed freight to maintain the company’s backhaul fill rate and backhaul revenue.

“Each and every one of the Viracon associates went through our qualification process and went through our own training,” says Elkins. “Looking at incumbents and taking on as many associates as possible to provide that tribal knowledge to help with that transition was the key to success.”