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Focus: Transportation Management

Feature Article from Our Transportation Management Subject Area - See All
 

From SCDigest's On-Target E-Magazine

- Dec. 10, 2013 -

 

Logistics News: New Federal Motor Carrier Safety Administration Rules Dramatically Paring Back Number of Freight Brokerage Firms, but Impact on Shippers Likely to be Modest at Best


Registered Brokers Numbers May be Cut in Half, to 10,000 or So, but Currently Active Ones Likely to Stay in Business or Become Agents for Larger Firms


SCDigest Editorial Staff

 

Over the past nine days, the US Federal Motor Carrier Safety Administration (FMCSA) has revoked the licenses of some 6500 freight brokers over their inability or unwillingness to meet new insurance requirements.

On October 1, 2013, the FMCSA reported that then there were 21,656 licensed brokers; this week, that population numbers little more than 15,000. Some say several more thousand small brokers could still exit the market in coming weeks and months.

SCDigest Says:

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Oddly, in healthy freight markets, broker margins decline, as carriers have their assets busy with direct customers and are less inclined to take brokered loads.
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But few seem to think this dramatic change in the numbers, mostly the result of very small and even inactive brokers shutting down, will have much if any impact on shippers or carriers, other than some modest relationship changes. Even then, many of these relationships may be continued as some smaller brokers move on to agent relationships with larger firms.

In 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) bill was signed into law, legislation largely dealing with funding for surface transportation programs. But it also included a provision that raised the level of insurance (bond) that a broker has to carry from $10,000 to $75,000. The $10,000 level had been in place for some 30 years.

That bond is used to protect truck carriers from brokers who go bankrupt or use unethical business practices and don't pay the truckers they contract with. Sometimes, brokers collect from the shipper, go belly up, and then stiff carriers who in a sense loaned them money by agreeing to haul some freight on the promise of being paid later.

In that context, given that a given freight broker could rack up tens or even hundreds of thousands of dollars' worth of freight bills even over a month's time, and the previous $10,000 maximum requirement seems quite antiquated. Many argue that even the new $75,000 level is not nearly sufficient.

A $75,000 surety bond, as they it is called, shouldn't cost a broker more than $5-6,000 per year. Still, that is up quite a bit from what brokers would have paid for just $10,000 worth of insurance. (Alternatively, a broker can put $75,000 in escrow or have their bank send letter confirming a broker has that kind of money on hand.)

Thom Williams, a former trucking industry executive who now runs advisory firm AmherstAlphaAdvisors, thinks many of the brokerages which had their licenses revoked for failure to show they had meet the new requirements by Dec. 1 (following an unsuccessful court battle by the Association of Independent Property Brokers & Agents delayed enforcement for two months) were not really active market participants. Rather, they simply maintained their licenses for possible future activity because the cost to do so was so low. The high bond requirement changed that equation.

For those that were still active but for which the new requirement is a real burden, Williams believes that many will accept roles as "agents" for larger brokers such as Landstar or USA Truck, which will take care of the bonding, accounts receivables management and other administrative areas in return for 7-8% of the cut.

Williams noted to SCDigest an odd characteristic of the freight brokerage market, which is that when the freight market is weak, broker margins (difference between the sell price to the shipper and what carriers are paid) actually rise, as there are more carriers willing to move freight at rock bottom prices.

In healthy freight markets, broker margins decline, as carriers have their assets busy with direct customers and are less inclined to take brokered loads.


(Transportation Management Article Continued Below)

 
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Right now, the US is somewhere in between, with modest trucking volume growth, depending on the source, but with asset discipline by most carriers keeping capacity fairly tight. In general, after a big jump in 2008-09, broker margins have been trending down slightly over the past three years, consistent with the theory.

Does Any of This Matter to Shippers?

Do the gyrations in the freight brokerage market really mean much to shippers?

Modestly at best, most experts say.

Large shippers tend to work with large brokers, such as CH Robinson or a growing number of large asset-based carriers trying to horn in on the brokerage business, so their relationships will be largely unaffected. As an example, truckload carrier Knight Transportation said its non-asset business segments, which include brokerage, saw revenues growth of 29% in Q3.

Stephen Craig, an executive with consulting and transportation services firm enVista, told SCDigest that "The FMSCA revoking the license of any broker who can't or willfully won't comply is a good thing for brokers generally, who can be assured that the law will be consistently enforced. It is good for shippers too because there will be no confusion over bond amounts. Beyond that, I personally think this will not have a measureable impact on capacity or service levels as experienced by shippers."

Thom Williams agrees, saying that shippers will be largely unaffected, with the exception of some smaller shippers who have long time relationships with smaller brokers to move certain freight. But even then, the broker would have to be so small as to be unable to acquire a surety bond, and even then they may simply move to become an agent for a larger firm, so that shipper relationships can be maintained.

Sue Lindhorst, vice president of logistics for Kelley Logistics, a division of Dayton Freight that offers brokerage services, thinks the new requirements will be a big positive for the brokerage industry overall.

 

"Brokers throughout the years have often been saddled with the stigma of being dishonest, presenting the shady image of somebody operating out of a truck stop or motel room," Lindhorst told SCDigest. "The $10,000 dollar bond that has been enforced for 30 years has allowed easier access to the industry. The higher bond may help weed out the negative players and improve the overall reputation we have fought to overcome over the years."

 

She added that with this change, shipper and carriers should feel more confident in utilizing brokers, with the more guarantee of payment to the motor carrier along with the reassurance of higher standards and ethical practices.

Williams also questions why the FMCSA needed to get involved in this issue at all, given it has nothing to do with safety, and carriers are free to take risks or not in dealing with smaller brokers which could fold.

He sees a much bigger issue being the current FMCSA rule that carriers must only maintained $750,000 in liability insurance, which he believes is grossly inadequate and should be raised to $5 million or so.


Do you see any meaningful impact to shippers or carriers from the new brokerage rules and license revocations? Let us know your thoughts at the Feedback button (for email) or section (for web form) below.

 


   
 

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