Werner's Leathers: capacity cuts are in the 'early innings' — about 15% of trucks still out of alignment, only 3% to 4% gone

Enforcement-driven capacity reductions are still in the early stages and will keep pushing freight rates higher into peak season, Werner Enterprises executives said on the carrier's third-quarter earnings call Tuesday, according to Commercial Carrier Journal on Oct. 28. Chairman and CEO Derek Leathers said the industry remains 'in the early innings of capacity reductions as a result of enforcement efforts,' estimating that about 15% of industry capacity is out of alignment with current regulations. 'We've seen 3%, 4% of capacity come out,' Leathers estimated. On Leathers' count, the exit that has already firmed rates is only about a quarter of the reduction the current rules imply. Leathers was recently elected chairman of the American Trucking Associations.

Leathers described an enforcement net that is still widening. Enforcement has widened to cover CDL school audits and CDL issuance, he said, noting that B-1 visa cabotage enforcement is 'only really just getting started.' Rising costs and scrutiny are also making it harder for new capacity to replace what leaves: he listed escalating insurance premiums, aggressive carrier vetting, heightened litigation risk, high fuel prices and stringent regulatory requirements as the combined barriers. Because new entrants face a tougher path, he said, disciplined operators face less threat from non-compliant carriers. 'This structural floor creates a stronger, more sustainable market backdrop, paving the way for further rate increases, reduced volatility and healthier operating margins,' Leathers said.

The hiring side of that squeeze showed up in two striking figures. Driver applicant screening is getting harder industry-wide, Leathers said, pointing to third-party data showing rejection rates on driver applications up 170% since January. Enrollment at Werner's Roadmaster schools and others across the country is down 20% to 30%, he said. Read together, those numbers describe a pipeline narrowing at both ends at once: fewer people entering training, and a much larger share of those who do apply being screened out before they reach a truck. For a compliant experienced driver, that is pricing power. For a carrier trying to seat trucks for peak season, it is the reason Werner says it deliberately front-loaded spending on advertising, recruiters, sign-on and transition incentives, and driving-school instructors — and why drivers in its dedicated segment also saw pay increases funded by customers.

The quarter's results show both the opportunity and the cost of chasing it. The Omaha, Nebraska-based carrier's total revenues rose 23% year over year to $950.5 million, from $771 million, and through nine months revenues are up 20% to $2.69 billion. Operating income was $17 million, compared with an operating loss of $13 million in the prior-year quarter — a swing Werner said was partly due to the non-recurrence of $21.4 million in litigation costs tied to a class action settlement recorded a year ago. Net income attributable to Werner was $6.6 million, versus a $20.6 million loss a year ago. Of the roughly $0.18 per share sequential drag on results, Chief Financial Officer Chris Wikoff said about a third, or $0.06, was driver investment; the remaining $0.12 was largely fuel, along with some insurance reserve development on select FirstFleet claims. Leathers said the lag matters: a new driver can take eight to 10 weeks to become productive, and the investments will continue in the fourth quarter.

The fleet numbers show the strategy working on its own terms. The Truckload Transportation Services fleet ended the quarter at 8,740 trucks, up 17.4% year over year, and dedicated added about 130 net trucks sequentially. In the segment detail, trucking revenues net of fuel surcharge rose 28% to $579.6 million, operating income was $23.2 million versus a $13.8 million loss a year ago, average trucks in service rose 15.5% to 8,668, and revenue per truck per week rose 11%. Werner Logistics moved the other way: revenue fell 7% to $215.8 million with an operating loss of $0.4 million, as truckload logistics shipments fell 40%, partly offset by a 44% increase in revenue per shipment. Fuel pressed from the other side — Werner's fuel expense more than doubled to $130.3 million while trucking fuel surcharge revenue rose 111% to $125.2 million, and Leathers said the problem was less the price level than its steady climb through the quarter, which kept the roughly one-week surcharge lag hitting results; the spread between wholesale and retail diesel also fell to historically low levels during the quarter.

The practical takeaway for drivers is to read the hiring market the way Leathers just described it, because his numbers are a negotiating map. A carrier that is spending ahead of revenue to seat trucks, waiting eight to 10 weeks for each new driver to become productive, facing application rejection rates up 170% and school enrollment down by a fifth to a third, is a carrier for whom a clean, experienced, immediately productive driver is worth measurably more than a year ago — and Werner is not the only large fleet saying so this week. If you are weighing a move, the leverage is in exactly the things the screening surge rewards: a clean record that survives tighter vetting, current credentials, and the ability to be productive in week one rather than week ten. And if you are staying put, the same figures are the argument, in your carrier's own industry's words, for why experienced-driver pay is where the money is going.