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DRAYAGE

OWNER-
OPERATORS

Understanding
Container Drayage
Owner-Operators in
Metro Vancouver

SUMMARY REPORT
Acknowledgements
The Asia Pacific Gateway Skills Table (APGST) would like to thank the many
individuals and organizations who generously gave their time and advice
throughout this project:

Owner Operators Industry


Interviewed for this study, and » BC Trucking Association
participated in January 2013
» Port Metro Vancouver
workshop.

Trucking Companies This study was led and the


» BST Management Ltd. / following report prepared by:
Pro-West Transport
David Colledge, President
» Harbour Link Container Services Colledge Transportation
» Canaan Group Consulting (CTC) Inc.
» Indian River Transport Ltd. Delta, British Columbia

» CNTL With support from:


» KTL Transport
Terence D. Smyth, Director
» Damco Distribution Services Seaport Consultants Canada Inc.
» Prudential Transport Ltd. Vancouver, British Columbia

This project is funded by the Government of Canada’s Sector Council Program.

The opinions and interpretations in this publication are those of the author and
do not necessarily reflect those of the Government of Canada.

Some photos in this report by courtesy of Port Metro Vancouver


and the British Columbia Trucking Association.
UNDERSTANDING
CONTAINER DRAYAGE
OWNER-OPERATORS
IN METRO VANCOUVER

SUMMARY REPORT

Prepared by Asia Pacific Gateway Skills Table


© July 2013
TABLE OF CONTENTS

Chapter 1 Introduction 6
1.1 Purpose of Project 6
Project Outputs 6
1.2 Methodology 7

Chapter 2 Metro Vancouver Drayage Operating Environment 8


2.1 Gateway Supply Chain Context 8
2.2 The Role of Drayage in the Container Supply Chain 9
The Drayage Process 9
Key Requirements to Access PMV Container Terminals 10
2.3 The Metro Vancouver Container Drayage Industry 12
Industry Structure 12
Key Characteristics of the Industry 13

Chapter 3 Understanding the Owner-Operator Business 14


3.1 Who Are Drayage Owner-Operators? 14
3.2 Key Business Activities 14
3.3 Basic Requirements to Enter and Operate the Business 15
3.4 Other Required Resources 17
3.5 Selection of Work 17
Selection of a Drayage Company to Work For 18
3.6 Key Business Drivers 19
Productivity 19
Truck Utilization 19
3.7 How Industry Stakeholders Impact the Business 21
TABLE OF CONTENTS

Chapter 4 Financial Aspects of the Owner-Operator Business 22


4.1 Revenue and Compensation 22
4.2 Truck Cost / Financial Model 23
Principles of Financial Models 23
Treatment of Revenue in the Financial Model 24
Understanding Truck Costs 25
Truck Cost / Financial Model 25
Methodology and Key Assumptions 26
Sensitivity of the Model to Changes in Productivity 29

Chapter 5 Best Practice Findings and Recommendations 29


5.1 Owner-Operator Value Proposition 29
5.2 Company Criteria: Selecting Good Owner-Operators 30
5.3 Owner-Operator Criteria: Selecting a Good Company to Work For 30
5.4 Key Challenges 31
5.5 Recommendations for Improving Drayage Sector Performance 32
Recommendations for Owner-Operators 32
Recommendations for Other Stakeholders 33
Toolkit Recommendations 34

Appendices Appendix 1 Interview Question Guide 36


Appendix 2 Ready Rate Scale 38
Do the Ready Rates Affect Market Rates? 40
Appendix 3 Pro Forma Financial Model Inputs 41
Appendix 4 Sample Cost / Financial Model Results 44
6 CHAPTER 1

INTRODUCTION

1.1 PURPOSE OF THE PROJECT In 2007, Port Metro Vancouver (PMV) instituted a
— moratorium on owner-operators to prevent an over-
As part of the Asia Pacific Gateway Skills Table’s supply of operators that could destabilize the market.
mandate to ensure that Canada’s Pacific Gateway has While this report notes there are low cost barriers for
enough people with the right skills and training to meet owner-operators to enter into the drayage market,
its labour needs, the organization sponsored a project to as long as the moratorium remains in place, it acts
help the 950 owner-operators in the container drayage as a regulatory barrier. This report outlines some of the
industry in Metro Vancouver understand and manage issues and challenges associated with the entry of new
their businesses more effectively. The project was owner-operators into the market and in anticipation that
carried out in partnership with the BC Trucking these challenges will be acknowledged and addressed
Association (BCTA). by policymakers, shippers and other stakeholders before
the moratorium is lifted.
The project objectives were to:
» Develop a better understanding of the local container Project Outputs
drayage business as well as a drayage cost model;
Owner-Operator Toolkit
» Conduct research and interviews with successful
Provides a business resource for drayage operators:
trucking companies and owner-operators to identify
and compile best business practices that could be shared J Overview of the drayage business
with other owner-operators to improve the sector’s
J Getting and operating my vehicle
performance.
J Managing my business and money
The project had two main outputs. One is a toolkit
(separately published) that will provide the basis for Project Report
an online resource for potential and existing owner- Provides a profile of the owner-operator business for
operators to help them better understand and manage trucking companies, governments, industry associations:
their businesses. The second is this report, which J Understanding the drayage owner-operator business
profiles the Metro Vancouver container drayage operating
J Financial aspects of the owner-operator business
environment, including its role in the supply chain, the
nature of an owner-operator businesses, its financial J Best practice findings and recommendations
and cost structures, and industry best business practices.
This information may be used to inform policy decisions,
support education and awareness campaigns, and support
human resource initiatives in the sector.
CHAPTER 1 7

1.2 METHODOLOGY Consultations for the project included one-on-one


— interviews with trucking companies of varying sizes
The project’s findings are based on research and and types of operation as well as interviews with
analysis as well as on the consultant’s own experience 13 individual owner-operators, including senior
in the gateway. representatives of the Vancouver Container Truck
Association–CAW Local 2006. Many of these operators
The project methodology included: possess more than 20 years’ experience in the local
container drayage market. A workshop was also held
» A literature review to compile relevant information
in January 2013 with 11 owner-operators to obtain
and data on the drayage sector (provided in a separate
their feedback on the draft toolkit.
Project Briefing);
» Research pertaining to existing off-the-shelf cost Companies Consulted:
models and the development of a cost model specific » BST Management Ltd./Pro-West Transport
to Vancouver-area container drayage operations.
» Harbour Link Container Services
The cost model was based on inputs from existing
» Canaan Group
models supplemented with current cost data derived
from industry interviews carried out between October » Indian River Transport Ltd.
2012 and February 2013. » CNTL
» Extensive interviews conducted with PMV, trucking » KTL Transport
companies and individual owner-operators to identify » Damco Distribution Services
operating practices, equipment and skills requirements,
» Prudential Transport Ltd.
resource gaps, and industry best practices. The interview
question guide is provided in Appendix 1.
8 CHAPTER 2

METRO VANCOUVER
DRAYAGE OPERATING ENVIRONMENT
2.1 GATEWAY SUPPLY CHAIN CONTEXT

In 2012, Port Metro Vancouver handled 2.7 million 20-foot equivalent units (TEU) of import and export containers shipped
to and from a wide range of domestic and international locations. Approximately 32% of all loaded import containers
arriving at the port are transported by truck to locations in the Lower Mainland and beyond. Some 63% of all loaded
export containers arrive at the container (marine) terminals by truck. The remainder of container traffic is moved to/from
the container terminals by rail. It is estimated that there are about two million truck-trip legs required to handle this volume
of container traffic moving through the gateway.1

The various supply chain participants—importers, exporters, shipping lines, container terminals, drayage companies, off-dock
terminals and other participants, such as freight forwarders—must operate in a highly coordinated manner to meet customer
requirements for efficient door-to-door transportation (see Exhibit 1). The actions of any single supply chain participant may
have significant system-wide effects that impact the efficiency, performance and reputation of the entire gateway.

Exhibit 1: Container Supply Chain

METRO VANCOUVER IMPORT/EXPORT CONTAINER SUPPLY CHAIN


Connects North American and overseas customers in 160 different countries

GOAL: CUSTOMER SERVICE EXCELLENCE THROUGH OPERATIONAL EFFICIENCY

IMPORTERS & SHIPPING CONTAINER DRAYAGE OFF-DOCK


EXPORTERS* LINES TERMINALS COMPANIES FACILITIES
Participants Thousands of companies About 20 different lines TSI Terminals, DP World, 158 local drayage 50+ facilities in the
call at the Port Fraser Surrey Docks companies of varying sizes Lower Mainland

Principal Assets Cargo owners 8,500 TEU ships typical TSI: Vanterm, Deltaport A fleet of 1,050 company Distribution / transload /
(entity that pays the DP World: Centerm trucks and thousands reload centres, container
transport cost) FSD: Fraser Surrey Docks of chassis storage yards
Business Drivers Each supply chain partner seeks to maximize their own return on investment (ROI). The key business drivers are:

Reliable, cost-effective Market share; Highest possible revenue Revenue trips per shift, Highest possible revenue
end-to-end supply chain environmental stewardship generating throughput revenue per move generating throughput
performance

*Cargo owners, also known as BCO’s, or beneficial cargo owners.

1) This volume of traffic requires about 800,000 truck gate moves. Based on US research, a gate move typically requires an average of 2.5 truck-trip legs due to the need
for some tractor-only moves associated with container repositioning, resulting in approximately two million truck-trip legs in the region (i.e., 800,000 x 2.5).
CHAPTER 2 9

2.2 THE ROLE OF DRAYAGE IN THE CONTAINER SUPPLY CHAIN



The container drayage sector is an important part of the complex international supply chain serving Port Metro Vancouver,
Canada’s largest trade gateway with Asia, and more generally, the world outside North America. Drayage refers to the
pickup and delivery of containers to a seaport terminal and associated off-dock locations (e.g., warehouses, transload
centres, rail yards, container storage yards) by truck, often within an urban area—in this case, Metro Vancouver.

The Drayage Process


Exhibit 2 offers a simplified view of the import and export drayage process. The import process is driven by the shipping
manifest, provided by the shipping line to the marine terminal.2 The cargo owner contracts with the drayage company,
which in turn acquires an appointment to access the container terminal and dispatches a truck driven by either a company
driver or an owner-operator.

The export process is driven by the cargo owner (shipper), who acquires a booking number with the shipping line that
serves as a reservation for an outbound container on a specific voyage. The booking triggers several activities, including
the ordering of an empty container by a transload facility, the establishment of a delivery date to the terminal, and an
appointment by the drayage carrier with the container terminal operator to drop off the container.

Exhibit 2: The Drayage Process


SHIPPING
LINE

Manifest
DRAYAGE

Drop off
FIRM

Recieves Create Pickup Dispatch Pick Up Bring Load


Manifest Order Driver Load to Importer Empty to
Import

Terminal
TERMINAL

Recieves Delivers Recieves


Manifest Load Empty

Source:
CONSIGNEE

Unload Truck Drayage


Container Productivity Guide,
National
Cooperative Freight
Research Program,
SHIPPER

Export Load U.S. Transportation


Booking Container Research Board,
March 2011.
DRAYAGE
Export

Drop off
FIRM

Recieves Create Empty Dispatch Pick Up Bring Empty


Load to Note:
Booking Order Driver Empty to Exporter
Terminal
These flow
diagrams exclude
TERMINAL

Receives Delivers Recieves references to the


Booking Empty Load
reservation system.

2) The manifest is the list of import containers on the inbound ship. It identifies which parties to notify when the container is unloaded and ready to be picked up.
10 CHAPTER 2

Key Requirements to Access PMV issues two different types of licenses under the TLS:
PMV Container Terminals » Full Service Operator (FSO) Licenses These are intended
Three main requirements must be satisfied for drayage
for drayage companies that have direct relationships
companies to access the marine terminals within PMV’s
with cargo interests (shippers, consignees, shipping
jurisdiction: they must have a valid truck license issued
companies and agents), provide a complete dispatching
by PMV; they need a Port Pass as a security measure to
service, and are equipped to provide services in an
access federal port property; and they need a reservation
efficient and ongoing manner.
to pick up/deliver containers, obtained through the
There are two types of FSO licenses:
reservation systems administered by each marine terminal.
Ì Local: A local license allows a truck to pick up and
Each of these requirements is discussed below.
deliver both local and long-haul containers;
Ì Long-Haul: A highway license restricts a truck to
Truck Licensing System
picking up and delivering long-haul movements.
In order for a truck to access a container terminal, it must
be registered under the Truck Licensing System (TLS) » Independent Owner-Operator Permits These are meant
administered by PMV. The TLS was introduced in 2005 to for drayage entities that may be incorporated companies
manage the number of vehicles and drivers. It was later and do not have a significant pool of equipment or access
amended to impose safety and environmental standards to the reservation systems. Owner-operators can only
regarding the condition and age of vehicles serving the access port property through a subcontract with an FSO.
port. The TLS also gives PMV a mechanism to impose
sanctions on operators whose behavior does not meet There has been a moratorium on owner-operator permits
the port’s standards or service requirements.3 since early 2007.4 The purpose of the moratorium was to
prevent an oversupply of owner-operators from destabilizing
the market. At the same time, it allowed drayage companies
that wanted to expand their fleets to invest in company-
owned equipment and employee drivers, since this business
model was deemed to be more stable than the owner-
operator model. One of the unintended consequences of
the moratorium has been the proliferation of small drayage
companies that could be formed with as few as three trucks,
further fragmenting the market and resulting in extreme
competition that puts pressure on profitability in the sector.

In July 2013, PMV launched a pilot project introducing a


new temporary driver category. This category of local TLS

4) In 2009, the moratorium was expanded to include all local and long-haul
license and permit holders and to preclude fleet expansions by existing
3) It should also be noted that trucking company safety oversight responsibilities, licensees. In 2011, the moratorium on the issuance of new licenses and the
such as vehicle maintenance and driver hours of service, are governed by the restriction on fleet expansion were lifted for FSOs only to allow them some
National Safety Code, which falls under provincial government responsibility. flexibility to respond to changing market conditions.
CHAPTER 2 11

drivers will operate within the Port under a Joint Temporary must make a reservation using one of four different
Permit ("JTP") signed by and issued jointly to the hiring TLS reservation systems (one for each of the four different
approved local FSO License holder and a non-TLS approved marine terminals). Reservations are intended to make
owner-operator. terminal operations more efficient by limiting the arrival
of each truck at a terminal gate to a specific time window
Port Passes to reduce “peaking” and truck traffic congestion. In addition
All workers such as truck drivers requiring regular to reducing peaking of traffic during normal daytime
and frequent access to PMV property must have port- operations, the appointment system has been used to
authorized photo identification called a Port Pass5. Failure shift traffic to night or to off-peak gates by restricting
to have a valid Port Pass may result in being refused access the number of daytime reservations available.
to the port. The Port Pass is a means for PMV, through its
marine facility operators, to comply with Transport Canada The appointment system makes the coordination of
security regulations that require identification of all drayage operations somewhat more complex by requiring
individuals on port property. more precise scheduling of truck trips to accommodate
the appointment windows at the terminal gates. There are
Reservation System also reported difficulties in obtaining reservations because
The marine container terminals in Vancouver have had the truck gates of three of the four container terminals are
mandatory appointment systems since 2005. In order to at capacity during the day shift. Firms that do not comply
access a container terminal by truck, drayage companies with their reservations risk reducing their ability to obtain
reservations in future and are subject to penalties issues by
5) BCTA is authorized by PMV to issue port passes to drivers of vehicles over
the marine container terminals, which would effectively
5,000 kilograms and the employees of its member companies. curtail their business opportunities.
12 CHAPTER 2

2.3 THE METRO VANCOUVER


CONTAINER DRAYAGE INDUSTRY

Industry Structure
Metro Vancouver’s container drayage industry is comprised
of approximately 160 local drayage companies operating a
fleet of about 1,050 trucks. These companies supplement
their fleet with an additional 952 trucks by contracting with
independent owner-operators who provide their own
vehicles, bringing the total drayage fleet to almost 2,000
vehicles.6 Drayage companies range in size from the
smallest operators with as few as three trucks to the In contrast, diversified full-service drayage companies earn
largest firms with more than 100. It is estimated that the income from multiple sources and may operate separate
top 15–20 companies control some 20% of the total fleet divisions, transporting other types of freight (e.g., flat-deck
and handle up to about 40% of all gate movements at the truck division to haul forest products or steel). These mixed
marine terminals. full-service operators may transload forest products that
have been transported by rail to Metro Vancouver into
There are several different types of drayage companies export marine containers. Some of the larger companies
(see Exhibit 3). Pure drayage operators depend entirely on also operate off-dock container yards that can accommodate
revenues earned from moving containers and use company the handling and storage of loaded and empty containers.
drivers (employees) and equipment and/or owner-operators In some cases, a range of other services is also provided.
(independent contractors). Some companies also have Examples include staging of bonded or pre-cleared
long-haul divisions to transport containers to and from containerized cargo for delivery to customers; sufferance
locations outside Metro Vancouver. bonded facilities; and warehousing.

Exhibit 3: Different Types of Drayage Companies in the Market

PURE DRAYAGE OPERATORS MIXED FULL SERVICE OPERATORS INTEGRATED COMPANIES


Depend entirely on revenue from transporting Are diversified into related logistics functions. Vertically integrated players affiliated with other
import/export containers. supply chain partners.

Examples: Prudential, Indian River, Quantum Examples: KTL, which owns Euro Asia terminal; Examples: Damco (owned by A.P. Moller-Maersk);
Transportation Harbour Link, with an off-dock yard; LEI Cartage CNTL (owned by CN); Canaan Group (integrated
(warehousing); Aheer (large regional truckload carrier logistics, warehousing, customs brokerage,
in the Pacific Northwest, warehousing and storage, air freight and courier service)
brokerage)

6) Source: PMV, as of October 2012. These figures exclude companies registered under the TLS as long-haul carriers, which would bring the total number of companies to
more than 200. Long-haul carriers do not play a large role in local drayage operations.
CHAPTER 2 13

The third type of company is affiliated or vertically


integrated with other participants in the supply chain
such as railway or ocean carriers. A good example is
Damco, which is owned by A.P. Moller–Maersk Group,
which includes Maersk Line, one of the world’s largest
shipping lines. While Damco once handled both import
and export containers, today it specializes in import
containers for relatively large retailers such as Staples,
The Gap, Wal-Mart and Canadian Tire.

Key Characteristics of the Industry


The drayage industry in Metro Vancouver is fragmented,
extremely competitive and characterized by a high degree
of misunderstanding and mistrust. This manifests itself in
numerous day-to-day operational issues that often lead to
frustrations and inefficiencies. Exhibit 4 highlights the key
characteristics of the industry.

Exhibit 4: Drayage Industry Characteristics in Metro Vancouver

CHARACTERISTIC DESCRIPTION IMPLICATIONS


Highly fragmented There are 158 privately owned local trucking companies in the The business is highly competitive, which can result in
market and 952 owner-operators. price-cutting, low profitability and concerns regarding safety
and operating standards.

Low entry barriers7 The cost to enter the drayage business as an owner-operator is Peaking of traffic at container terminals may create an incentive
relatively low and can result in a high rate of entry of operators for expansion of owner-operator fleets employed by trucking
into the business. However, there is some evidence that entry companies. This can result in a supply-demand imbalance,
barriers are growing with the increasing cost of obtaining a contributing to instability in the sector.
reliable truck and the implementation of more stringent
standards under the National Safety Code (NSC).
Limited capacity for investment At the owner-operator level, there are limited opportunities Owner–operators have a limited financial capacity or incentive
for scale efficiencies and service improvements. to make investments in technology. This makes the selection,
funding and adoption of technology more difficult to roll out
across the industry even though technology is likely to be a key
factor in improving efficiency and performance.

7) In 2007, Port Metro Vancouver (PMV) instituted a moratorium on owner-operators to prevent an oversupply of operators that could destabilize the market.
While this report notes there are low cost barriers for owner-operators to enter into the drayage market, as long as the moratorium remains in place, it acts as
a regulatory barrier.
14 CHAPTER 3

UNDERSTANDING THE
OWNER-OPERATOR BUSINESS
3.1 WHO ARE DRAYAGE 3.2 KEY BUSINESS ACTIVITIES
OWNER-OPERATORS? —
— The owner-operator business is fairly straightforward.
There are generally two types of truck drivers in the The direct customer of an owner-operator is the trucking
container drayage industry: company drivers and owner- company; the principal activities are indicated in Exhibit 5.
operators. Company drivers are employees of drayage The main truck-trip legs for an owner-operator are outlined
companies and may be union or non-union workers. below. Not all of these moves are necessary for each job. It
Industry observers estimate that approximately 70% or more depends on the nature of the job and the owner-operator’s
of all company drivers are non-unionized.8 Owner-operators activities before and after the job. The owner-operator
act as independent contractors selling their services to generally does not offer other services.
drayage companies as drivers and tractor owners.
Truck trip leg possibilities:
The main difference between company drivers and owner- » To the point of empty chassis pick-up. This is a bobtail
operators is that company drivers are usually paid by move (i.e., no chassis or container attached to the truck)
the hour, as employees do not provide tractors. Owner- from the day’s starting point or the end of the last trip
operators, on the other hand, are normally paid by the to a point at which the owner-operator picks up an empty
trip based on a share of revenue received by the drayage chassis but no container. Such a move would not apply
company from its customers and on existing regulated or if the truck already has the right chassis attached to it at
contractually agreed rates. They are small business people the start of the trip or if the truck has no chassis attached
who take risks like any other small business owners. These because it is picking up a container already on a chassis
risks include the acquisition of the truck and the opportunity at the terminal of origin.
cost of their time working in an environment where there is
» To the terminal of origin to pick up a container.
little control over the business in terms of loads hauled and
This could be a bobtail move to pick up a chassis holding
revenues earned.9 Owner-operators may also be restricted
a container (as noted above) or a move with an empty
in their ability to expand due to limited financial resources.
chassis onto which a container will be loaded at the
terminal.
The terms and conditions for owner-operators vary. Some
» From the pick-up terminal to the delivery terminal.
may work under the regulated rates or achieve only lower
This is the main and often the only paid component of
unregulated rates between off-dock terminals.10 Others
the move. The move may be between a container terminal
may have superior compensation packages that include fuel
and an off-dock terminal (customer) or between two
subsidies, paid waiting time at terminals, or remuneration
off-dock terminals. It could also be between two
for deadhead moves (i.e., a bare-chassis move to pick up a
container terminals, but this would be unusual.
container).

8) There is no available data, however interviews with a small sample of unionized drivers indicated that Canadian Auto Workers (CAW) representation in the drayage
sector is likely less than 300, and that the number of unionized workers in the industry has been declining since 2005.
9) See also Section 3.7 for additional details regarding the impacts of various supply chain participants on an owner-operator’s business.
10) See Chapter 4 for discussion of regulated rates.
CHAPTER 3 15

» From the delivery terminal to an empty chassis 3.3 BASIC REQUIREMENTS TO


drop-off point. This applies if a truck has an empty ENTER AND OPERATE THE BUSINESS
chassis attached to it and must drop off the chassis at —
a location other than the container delivery terminal. The owner-operator drayage sector has few barriers to entry.
It does not apply if the truck drops off a container and
chassis at the delivery terminal (virtually always an In Vancouver, the only requirements are:
off-dock terminal in this situation), or if it has the right A: Sufficient resources to purchase and insure a
chassis attached for the next container move. post-2006, 10-wheel tractor;
B: A Class 1 commercial driver’s license;
C: Other licensing requirements;
Exhibit 5: Principal Drayage Activities D: Passing a safety exam and periodic commercial
of Owner-Operators vehicle inspections.

IMPORT MOVES Each of these requirements is described in more detail below.

Loaded import marine containers holding primarily consumer goods from Asia are
moved from container terminals to off-dock warehouses and distribution centres,
A: Equipment
where they are unloaded for local distribution or transloaded into larger domestic The only essential equipment required for an owner-
containers for movement by truck or rail to locations outside Metro Vancouver.
operator is a 10-wheel tractor of appropriate vintage
EXPORT MOVES to meet PMV’s requirements for accessing container
Loaded export containers holding mainly forest and grain products are moved
terminals. For the typical owner-operator, a reliable used
from transload centres and other shipper facilities to container terminals. truck in the Vancouver market costs about $50,000 to
EMPTY CONTAINER MOVES
$60,000. Less expensive trucks are available, but would
require some knowledge about vehicles or the right
Empty containers account for a significant level of activity in order to reposition
containers between empty container storage yards, container terminals and the contacts outside of British Columbia to acquire. PMV has
large number of off-dock terminals located throughout Metro Vancouver. specified conditions and age limits on trucks allowed to
become part of the TLS.11

The situation as of April 1, 2012 is:


» Trucks 2006 and older and not already in the TLS
are prohibited from entering the TLS;
» Trucks already in the TLS that are:
Ì 2002 and older must pass an annual exhaust
opacity test;
Ì 1998 and older can remain in the TLS only with
an approved age exemption.

11) Port Metro Vancouver, “TLS Environmental Requirements 2012


Program Overview,” January 24, 2012.
16 CHAPTER 3

Engine retrofits or replacements can be used to meet » Take and pass the commercial road test.
emission standards regarding age exemptions. The PMV The test has three parts:
requirements for future years are evolving. By 2017, trucks Ì A pre-trip inspection test, including an air brake
must be 2010 and newer to meet TLS requirements, or 2007 pre-inspection;
or newer and already in the TLS. PMV’s goal beyond 2012 Ì The road test itself;
is to have all trucks in the TLS meet the federal 2007–2010 Ì Driver’s medical exam.
emission standards.
To operate vehicles equipped with air brakes, a driver
Secondary equipment includes a two-way radio for must also obtain an air brake endorsement by completing
communications with drayage company dispatchers and an air brake course, pass a knowledge test, and pass a pre-
a mobile telephone for general communications. A number inspection test. A driver may be exempt from an air brake
of owner-operators carry smartphones, but are reluctant training course with proof of sufficient air brake experience.
to use them to communicate with dispatchers; they prefer
two-way radios because the exchanges can be heard by C: Other License Requirements
other parties, creating a communications record. Owner-operators should obtain a local business license
from the municipality where the business is registered and
B: Commercial Driver’s License Requirement must obtain a truck license from the Insurance Corporation
To qualify for a Class 1 commercial license, a driver must: of British Columbia (ICBC). In addition, two other require-
» Hold a BC driver's license (Class 5 or 6) or an ments are needed to access federal port property: a Port
out-of-province equivalent; Pass and a truck license under the TLS that costs $300 a
» Have an acceptable driving record with less than four year (see Section 2.2 for more details).
penalty point incidents in the past two years and no
motor vehicle-related criminal convictions within the D: Commercial Vehicle Inspection Requirements
past three years; and All commercial vehicles with a licensed gross vehicle
weight greater than 8,200 kilograms are subject to the
» Be at least 19 years of age.
Province of British Columbia’s Commercial Vehicle Safety
and Enforcement (CVSE) regulations. This generally
The necessary steps to acquire a Class 1 commercial
requires an inspection by a shop accepted by CVSE as a
driver's license are:
Designated Inspection Facility (DIF). A trucking company
» Study Driving of Commercial Vehicles. The driver must
that maintains its own fleet may get its shop approved as a
study the BC government publication Driving Commercial
Preventative Maintenance Facility that can inspect its own
Vehicles.
fleet. Most owner-operators use a DIF for such inspections.
» Take the commercial vehicle knowledge test. The driver
must pass a knowledge and road signs test and meet
medical standards.
» Practise to gain adequate skills. Upon passing the know-
ledge test, the driver is issued a commercial learner’s
license. The driver must practice under this license until
his skills are adequate to pass the road test.
CHAPTER 3 17

3.4 OTHER REQUIRED RESOURCES 3.5 SELECTION OF WORK


— —
The other main resource required by owner-operators Drayage companies provide several different services
is equipment that is compatible with the dispatching that directly influence the businesses of the owner-
technology used by the trucking companies for whom operators who work for them as independent contrac-
they work. Typically drayage companies will provide this tors. These companies have direct relationships with
equipment. The dispatching systems used by trucking customers—cargo owners, such as big box retailers, other
companies have differing degrees of sophistication. types of importers and exporters, shipping lines, freight
forwarders and third party logistics providers—whereas
For example: owner-operators generally do not have such relationships.
» An operator of a major import distribution centre that
operates an in-house drayage company to serve its It is this customer relationship upon which the trucking
clients uses a proprietary freight tracking system. It was companies have built their businesses. Many companies
developed for a major importer, is web-based, and can have made significant investments in land, buildings,
be used on a mobile phone. Containers passing through dispatching and cargo tracking systems, chassis, computer
a terminal gate trigger settlement of the transactions. systems and office staff. Owner-operators, by contrast,
have relatively low levels of investment. They provide a
» A trucking company with about 60 non-union owner-
truck and contract their services to trucking companies
operator tractors dispatches by mobile phone, but
at contracted rates.
believes in-cab communications units would be better.
The company also has GPS units installed in its trucks.
As noted previously, the nature of drayage companies
» A trucking company with about 70 CAW owner-operators
varies depending on several factors such as their customer
under contract uses a digital Java-based dispatching
base (e.g., import, export), business model (company-
system and does not have GPS.
owned trucks with employee drivers, owner-operators, or
» A large employer of CAW owner-operators with 24/7 a mix of the two), and their relationships with other supply
trucking operations dispatches via Blackberrys using a chain participants. Some companies handle all types of
proprietary program developed by its parent company. traffic, including imports, exports and transload cargo,
while others focus on one segment or customer type.
Other resources required to support a drayage owner-
operator’s business can include office equipment (furniture,
telephones, fax machines, computers, printers, etc.) and
small business software. Some of the most popular software
programs are Quicken (personal finance software with some
business accounting features); Simply Accounting; and
QuickBooks (small business software with more robust
features).
18 CHAPTER 3

Selection of a Drayage Company Senior owner-operators generally do not work night gates.
to Work For Some junior owner-operators will work night gates as a
Owner-operators generally choose drayage companies second shift to earn revenue as long as they remain within
based on word-of-mouth information. The choice of which the 14-hour on-duty time in a day permitted under National
company (or companies) to work for is critical because it Safety Code trucking hours of service regulations.
affects shift schedules, the types of loads that are assigned
to the operator, and ultimately the owner-operator’s Examples of working hours based on selected industry
revenue stream. Some of the key factors in selecting a interviews are:
company to work for include: level of compensation, » One company operating primarily as a freight forwarder,
payment terms, the opportunity for double-ended moves, with its own trucks and agreements with owner-
driver turnover rate, and how long the company has been operators and trucking companies, is open from 7:00 a.m.
in business. to 4:00 p.m.
» A drayage company with a small storage yard for
Drayage companies use a similar word-of-mouth approach
containers is open from 6:30 a.m. to 9:00 p.m. weekdays
to hire new owner-operators. Nevertheless, some
and on Saturdays and Sundays as required.
companies that advertise for owner-operators have
» A company with about 70 CAW owner-operators under
received large volumes of responses. Based on industry
contract maintains that shifts should be 6:00 a.m. to
interviews, a “good” owner-operator possesses several
6:00 p.m. or 5:00 a.m. to 5:00 p.m. to give drivers a
qualities, including a focus on safety; mechanical aptitude;
reasonable quality of life.
the ability to see the “big picture”; and the ability to
understand and manage stress.
For unionized owner-operators, seniority dictates work
assignments. The first move in the morning—considered
Selection of Loads and Work Schedules
to be the best move of the day—is generally given to
Owner-operators typically do not have much say in the
operators with greater seniority. As an example, we
selection of loads they move because the dispatcher of the
interviewed an experienced CAW driver who has been
company for which they work generally specifies the work
driving with his current trucking company for only one
based on customer demand and on the marine container
year. Even though he has been in the industry for several
terminal reservations the company has been able to obtain
decades, he is low in seniority relative to the work
for a particular day. A typical work schedule for an owner-
assignments received. The seniority issue makes switching
operator begins at 5:00 a.m. to pick up the first job of the
among trucking companies an unattractive proposition for
day. The working day usually ends between 4:00 and
unionized owner-operators with long tenures.
5:00 p.m., when the marine terminal gates close. Including
travel time to and from the first and last jobs, operators
typically put in 12- to 13-hour days. In addition, some three
hours or so are required each week to handle administrative
aspects of the business.
CHAPTER 3 19

3.6 KEY BUSINESS DRIVERS be more productive, increase revenues and lower operating
— costs by reducing unproductive travel. Reduced travel also
Given that owner-operators have only a limited degree of helps decrease road traffic congestion and lessens the
control over their workloads and revenue streams once environmental impact of trucking.
they have selected a company to work for, their profit-
ability critically depends on productivity and the utilization There are no reliable data regarding double-ended move-
of their truck. Their truck is the principal asset in the ments. Discussions with various operators revealed a wide
business. These factors, discussed below, explain why range of performance. Some carriers achieve more than
owner-operators look at the number of turns per day as a 50% of their total moves as double-ended moves, while
key metric in performance evaluation. A rule of thumb in others may achieve only 10–15% or less. Anecdotal
the industry is that a minimum of three round-trip revenue evidence based on consultations carried out for this report
moves a day are needed for a driver to make money. suggest the industry average has deteriorated from about
30% double-ended moves in 2005 to around 20% today.
Productivity
From the owner-operator’s perspective, productivity Truck Utilization
corresponds directly to the number of revenue-generating The truck (tractor) is the largest capital expense in an
moves completed in a working day. Productivity is a key owner-operator’s business. Buying one is a fixed cost that
factor impacting an owner-operator’s income, because is incurred whether or not the truck is operating. Therefore,
compensation is typically calculated per trip and not on an increasing the use of truck equipment enables fixed costs
hourly basis. Therefore, the number of revenue moves per to be allocated across more revenue-generating trips,
day that a driver can complete will directly dictate how decreasing fixed costs per trip. These savings, in turn,
much income the driver earns. This differs from company result in increased revenue and profitability.
employee drivers, who are typically paid on an hourly basis
and whose compensation is therefore independent of the Given the limitations on operating hours permitted by
number of moves completed per day. safety regulations, increased truck usage can only be
accomplished by adding a driver to existing truck
A key factor impacting container drayage productivity equipment. But owner-operators typically have little
(and thus owner-operator income) is the ability to achieve incentive to bring in a second (relief) driver because they
double-ended moves. A double-ended move occurs, for want to maximize their own activity on the day shift and
example, when a truck is able to deliver an export container there are limited opportunities to work evening shifts.
to a terminal and pick up another import container on the Few drivers want to work for the limited number of
same visit. Double-ended moves allow owner-operators to moves available on a second shift.
20 CHAPTER 3

Most night-gate moves are one-way. Only the container


terminals and a limited number of warehouses and off-dock
terminals are open after 5:00 p.m. (e.g., CN intermodal in
Langley, Canadian Tire Corporation, The Bay). The only way
container terminal night gates will work is if receivers, such
as warehouses and a number of off-dock terminals, are
open until midnight (or 24/7). But many off-dock facilities
are too small to be open at night, leaving nowhere for a
drayage operator to hold the container overnight. As well,
there is no compensation for overnight storage or for the
additional unpaid trip to transport it the next day. Some
containers hold valuable cargoes and must be secured;
they cannot be left on the street.

Considering all of these factors, there is limited incentive


for an owner-operator to bring on a second driver, and the
relief driver model is not generally feasible. Furthermore,
owner-operators are cautious about risking the use of
their truck by another driver. Another option to expand
the business is to add more trucks. However, financial
constraints are often an issue in acquiring the vehicles;
and some trucking companies do not allow their owner-
operators to have more than one truck as a matter of policy.
CHAPTER 3 21

3.7 HOW INDUSTRY STAKEHOLDERS IMPACT THE BUSINESS



Different supply chain participants, including the railways, can have a potentially significant impact on an owner-operator’s
business. The roles and relationships of these participants and the degree to which they impact the owner-operator work
environment are summarized in Exhibit 6.

Exhibit 6: Supply Chain Participants and Impacts on Owner-Operators

STAKEHOLDER ROLE IMPACT ON OWNER-OPERATORS


Shipping Lines Shipping lines transport loaded and empty containers to/from the port » Influence the use and distribution requirements of
for cargo owners and freight forwarders, and contract with marine empty containers
terminals, drayage companies and railways to handle landside logistical » Late ship arrivals create volume bubbles that increase congestion
activities. and the timely flow of containers through terminals
Degree of impact – HIGH

Marine Terminals The primary role of marine container terminals is to provide throughput » Surges in import/export container volumes increase wait times at
of containers. The focus is on reducing the time that containers wait in the terminal and lead to increased truck-turn times
the terminal. The terminals only have operational relationships with » Longshore labour productivity has a major impact on terminal
drayage companies. operations
» A terminal operator can ban an owner-operator or trucking company
from accessing the terminal and there is no appeal mechanism
Degree of impact – HIGH

Railways Railways contract with shippers and shipping lines to transport » Trains can block road intersections and increase truck wait times
containers by rail to/from marine container terminals. Inbound » Rail activity impacts labour availability in the marine terminals and
containers arriving in Vancouver by rail from central/eastern Canada therefore truck productivity at terminal gates
are a major user of trucks for transport to final destinations in local » Railways dictate the location for storage of empty containers at
markets. marine terminals that can take up to 40% of terminal capacity
Degree of impact – MODERATE

Importers / Exporters Cargo owners ultimately pay the transport costs. They contract with » Can influence the selection of drayage companies
(Cargo Owners) shipping lines, drayage companies and railways to move cargo from » Impacts timing of available loaded and empty containers
domestic/foreign origins to foreign/domestic destinations. The focus is for truck transport
on end-to-end supply chain reliability and cost.
Degree of impact – LOW to MODERATE

Trucking Companies Trucking companies have direct relationships with cargo owners, and » Trucking companies directly influence the selection of work
contract drayage work to owner-operators based on both customer (type and number of trips), shift schedules and ultimately the
demand and the marine container terminal reservations that the owner-operators’ revenue stream
company has obtained for a particular day. » Impacts the compensation level and payment terms
Degree of impact – HIGH

Port Metro Vancouver PMV leases terminals to marine terminal operators under long-term » PMV effectively dictates the terms of access to the container
(50-year) leases and administers the Truck License System (TLS). terminals that are located on federal port property
» TLS costs owner-operators $300 a year
» PMV is requiring the use of newer vehicles that are relatively more
expensive than used trucks. Unless owner-operates achieve much
better productivity, the business case for acquiring newer trucks is
hard to justify
Degree of impact – MODERATE
22 CHAPTER 4

FINANCIAL ASPECTS OF THE


OWNER-OPERATOR BUSINESS
The previous chapter described the owner-operator 4.1 REVENUE AND COMPENSATION
business and what it does. This section of the report —
will focus on the financial and cost characteristics of To understand the current financial situation of Metro
the business. Vancouver owner-operators, some background is appro-
priate. In the summer of 2005, concerns by owner-operators
This chapter presents the only comprehensive drayage regarding high fuel costs and excessive wait times at
costing model available in Metro Vancouver today. container terminals that significantly reduced truck produc-
It also provides several analytical tools that may be tivity and income led to a five-week shutdown of the port
used by owner-operators to prepare a business plan, when owner-operators withdrew their services. The dispute
which, in turn, may be used to evaluate and benchmark was resolved through the Vince Ready Memorandum of
their business or obtain financing. The purpose of these Agreement (MOA) between trucking companies and owner-
tools is to help owner-operators better understand and operators, which established a schedule of minimum rates
manage their businesses in order to improve their (“Ready rates”) that non-unionized owner-operators would
financial performance. be paid to move containers.13 A number of steps were taken
to develop the current Port Authority Operations Regulations14
These cost and financial tools may also be used to analyze for the purpose of facilitating stability in port operations.
a variety of operational and policy questions, such as12:
» Should potential new owner-operators get into The Regulations created a legal obligation for the Vancouver
the business? Fraser Port Authority (i.e., PMV) to establish a system of
written agreements in the form of licenses (administered
» Should existing owner-operators exit the business?
under the TLS) that established minimum conditions
» What are the financial impacts of improving productivity
regarding truck trips to/from port terminals. The key aspect
in the drayage sector?
regarding compensation is that owner-operators must
» What are the cost/financial impacts of operating new be paid the equivalent of a rate published in a collective
versus used trucks? agreement of a competing drayage operation (for unionized
» Do the existing regulated rates adequately compensate drivers) and not be paid less than the rates set out in
owner-operators, who comprise approximately half the the MOA (for non-union drivers). Although the rates
drayage labour force in Metro Vancouver? are enforced by a system of audits carried out by the
BC Ministry of Transportation and Infrastructure as an
The chapter begins with a discussion of revenue and appointee of PMV, this system is widely viewed in the
compensation, followed by a description of the owner- industry as ineffective and virtually impossible to enforce.
operator truck cost/financial model and the main
assumptions used to develop the model. Appendices 3
13) Vince Ready was appointed by the provincial and federal governments as a
and 4 provide additional detailed assumptions and some mediator to the dispute. The Memorandum of Agreement (MOA), dated July 29,
sample results from the application of the model. 2005 between Trucking Companies (Owners/Brokers) and the Vancouver
Container Truckers’ Association, covered drayage moves to/from the Vanterm,
Centerm, Deltaport and Fraser Surrey Docks marine container terminals and the
intermodal yards of CP and CN.
12) The costing model and financial tools described herein form part of the 14) Refers to Port Authorities Operations Regulations (SOR/2000-55).
owner-operator toolkit mentioned in Chapter 1 and are available in a separate Regulations are current to 2013-03-04 and were last amended on 2007-07-31.
Excel spreadsheet format. See http://laws-lois.justice.gc.ca/eng/regulations/SOR-2000-55/.
CHAPTER 4 23

Although the regulated rates include a fuel surcharge One carrier stated that up to 80% of import containers go
component that provides a small offset for rising fuel costs to an off-dock location once their import cargo is unloaded
(the surcharge is only about 6% applied to the total Ready in the Metro Vancouver area. On the export side, the figure
rate), the Ready rates have not changed since August 1,
may be lower, perhaps in the 30–40% range. The level of
200615 despite changing market and cost conditions. The
compensation for an off-dock movement varies widely
rates are prescribed on a per-trip basis for different origins
depending on company policy (see also Appendix 2 for
and destinations in Metro Vancouver to provide a
theoretical rate floor (see Appendix 2). commentary on the Ready rates).

Initially, the MOA and Regulations were interpreted as


4.2 TRUCK COST / FINANCIAL MODEL
applying to the delivery or pick-up of containers, including

This section outlines the technical foundation and
hauling containers between the marine container terminals,
methodology used to develop the owner-operator truck
customers and final locations that included off-dock sites.
cost/financial model. It begins with a review of the
However, in 2010, PMV concluded that the Regulations only
principles of financial models in a trucking application,
covered the trip leg between the customer and the port,
followed by a description of the main truck cost elements,
not the leg to/from an off-dock location. Transport Canada
the cost/financial model tools that were developed, data
supported this interpretation and determined that federal
sources and key assumptions. Sample results from the
regulation applied only to those moves that originate or
model are provided in Appendix 4.
terminate at the port’s marine container terminals.

Principles of Financial Models


The impact is that owner-operators may not always
Financial models are generally used to evaluate business
be fully compensated for “third leg” moves (i.e., moves
decisions regarding operations and investments. They
between off-dock locations, such as terminals, storage
incorporate revenues and expenses, estimate profits and
yards and rail yards) that are not on port property. This
compare profits with the investments required. Expenses
is significant because large proportions of the drayage
in financial models for trucking can involve various kinds
activity in the region relate to moves between off-dock
of estimates, including:
locations, while moves to or from container terminals
often involve at least one empty chassis move. » Estimates from first principles. Examples include fuel
The third-leg remuneration issue has been exacerbated cost estimated as consumption per unit, such as litres
by the continued development and dispersion of off-dock per kilometre multiplied by the prevailing market price
facilities throughout Metro Vancouver. for diesel; labour costs at current rates multiplied by
workload per year; and tires at a cost per set (typically
10 tires for a tractor) and their replacement cycles.
» Estimates from surveys of trucking costs. Detailed
15) On July 29, 2005, the Ready MOA established the schedule of minimum surveys of truck operators generate a good database
rates (Schedule 1) that came into force under an Order-in-Council requiring
Vancouver Fraser Port Authority (i.e. PMV) to implement a mandatory Truck
of operating costs as inputs to a financial model.
License System (TLS) and to enforce the Ready rates for non-unionized Because surveys are conducted at a particular point in
owner-operators. However, the current rates are those contained in Schedule 2,
and came into effect August 1, 2006 per the regulation that replaced the
time, it is generally necessary to escalate costs from
original 2005 Order-in-Council. The Schedule 2 rates are slightly higher than the time of the survey to reflect current price levels.
those contained in Schedule 1. See Appendix 2.
24 CHAPTER 4

» Evaluations of accounting data and other records. Understanding Truck Costs


If an owner-operator maintains good records of costs and Since the revenues that owner-operators receive are
business activity, it is possible to generate cost estimates largely beyond their control, at least in terms of the per
customized for particular operations for each year of trip rates they receive, success as a business owner
activity. It is possible to export data from accounting critically depends on understanding and managing costs.
software into analytical software, such as Microsoft An operator who can reduce costs by five cents per kilo-
Excel, to estimate unit costs for modeling purposes. metre will save $3,000 a year over 60,000 kilometres driven
in one year. These savings go entirely to bottom-line profits.
The financial model that was developed for this study is
essentially a combination of all three of these approaches Expenses generally have fixed and variable components
and is described in the methodology section below. (see Exhibit 7). Fixed costs may be viewed as the costs
of time—they do not change from month to month,
Treatment of Revenue and include ownership of tractors (depreciation, capital
in the Financial Model recovery, etc.), insurance and license fees. Fixed costs
Revenue is a simple calculation in principle: payment for are allocated to period costs, such as a trip in proportion
the sale of a good or service multiplied by sales volume. to distance in relation to the annual utilization of a tractor
However, it is less simple in the case of owner-operator in kilometres.
container drayage. This is due to the variety of different
payment schemes (i.e., union collective agreements, Variable costs are those costs that vary with trucking
Ready rates for moves to and from marine container activity, such as distance traveled or time spent, and
terminals, and market rates for some other moves) as well include fuel, operator wage allowance, and maintenance.
as the variety of truck movements that an owner-operator Some costs may have both fixed and variable components.
can make to serve different origins and destinations.16 For example, tire costs may be treated as either variable
The latter includes paid movements, such as transporting costs (e.g., tire replacement cost divided by tire life
full or empty containers between terminals, and move- measured in kilometres) or short-term fixed costs by
ments that may be paid in some cases but not all, such treating tires as a capital replacement cost (e.g., tire
as picking up or dropping off empty chassis. replacement cost every two years); the choice of approach
may depend on the distance driven in a year.
The treatment of revenue in the financial model for the
purposes of this study is straightforward. The model use Costing models usually divide investments into fixed assets
has two approaches. The first approach requires the user to (primarily tractors in the case of this study) and working
input total revenue in any given time period (i.e., per move, capital (funds required to run the business). The main
per day, per month). The second approach derives revenue
elements of working capital are cash, accounts receivable
from the Ready rate scale that compensates owner-
(income for work performed and invoiced, but not yet paid)
operators by the trip, depending on the origin and
and the liability of accounts payable (expenses incurred
destination for the container move.
but not yet paid). Accounts receivable are a particular
issue for small businesses like drayage owner-operators:
16) For example, the Ready rate (without fuel cost escalation) to move a container
from New Westminster to Deltaport is $135 per trip; the rate from New
if customers are typically slow to pay, the owner-operator
Westminster to Vanterm or Centerm, located at Burrard Inlet, is $115 per trip. must have sufficient capital to allow for this.
CHAPTER 4 25

Exhibit 7: Fixed and Variable Drayage Cost Elements » Trip Cost Analyzer. Develops the full costs (including
wages and allocated fixed costs) and a profit contribution
VARIABLE COSTS FIXED COSTS of a particular trip from start to end. It provides the
» Driver* » Tractor (truck) depreciation**
structure of overall costs and an estimate of the costs
» Fuel » Licenses (provincial government, TLS)
» Maintenance and Repairs » Overhead and financing costs*** of the trip against which owner-operators can compare
» Tires
their trip revenue. The trip cost analyzer can be used to
» Miscellaneous
determine whether or not to accept a particular container
* Includes wage cost for driving, ** Since owner-operators do not generally movement job or to evaluate the adequacy of remune-
the cost of waiting time for own chassis, the focus is on tractor
loading /unloading, and overhead costs. ration paid to an owner-operator by a drayage company.
costs (annual vacation, Workers’ ***Vehicle insurance (drayage company
» Pro Forma Financial Tool. Evaluates the business from
Compensation, etc.). typically pays cargo insurance),
administration, working capital. start to either a future “steady state” or its termination.
It includes estimates of revenue and expenses over a
number of years (including income taxes and inflation),
Truck Cost / Financial Model
owner-operator capital requirements, loan draws, loan
A consistent theme that emerged from the industry
repayments and interest, sale of assets at the end of
consultations is the need for owner-operators to identify
the business, and some measures of financial return
and better understand the costs of operating their
(e.g., return on capital, return on equity, discounted
businesses. The most successful owner-operators in the
cash flow). The principal use of the pro forma tool by
industry are keenly aware of and closely manage their
an owner-operator is to address questions such as:
costs. This is critically important because every dollar
Ì How much capital do I require?
in cost savings goes directly to the bottom line.
Ì What annual returns can I expect?
Ì Do I really want to get into this business?
The truck cost/financial model consists of three analytical
Ì What financial information is needed in a business
tools as the most practical way to identify, manage and
plan that I could take to a financial institution to
benchmark an owner-operator business. These tools are
obtain a loan to finance my business?
based on best business practices to help owner-operators
improve their financial performance:
» Profit Estimator. Assesses an owner-operator’s profit-
ability for any defined period of drayage activity (per day,
week, month, etc.) based on three simple inputs: revenue,
distance driven and hours worked. The profit estimator
can be used to evaluate the profitability of any type of
drayage activity in Metro Vancouver. It can be useful to
evaluate multiple trips that may involve double-ended
moves such as those engaged in by successful operators.
The result is simple—the total return to the owner-
operator per activity (trip, day, etc.), per kilometre and
per hour. Of these, perhaps the most useful is the return
per hour, since it can be compared with wage income.
26 CHAPTER 4

Methodology and Key Assumptions The Trip Cost Estimator and Profit Estimator allow the user
The initial database used for the container drayage truck to modify the following inputs in order to analyze any type
cost/financial model is derived from Ray Barton and of container drayage operation in Metro Vancouver:
Associates (Barton), who have prepared periodic surveys » Average annual tractor utilization (in kilometres),
of trucking costs in Canada for Transport Canada for which is part of fixed-cost allocation
a number of years.17 Barton uses several data sources,
» Average speed
principal among them surveys of trucking companies,
» Tractor financial parameters, including new or used
and prepares costs for Canadian regions and for different
vehicle, capital cost, vehicle life and residual value
kinds of tractor and trailer combinations.
» Trucking distances to cover all likely moves (i.e., to point
The Barton model provides a credible framework for the of empty chassis pick-up, pick-up and delivery at terminals
drayage financial model. However, in order to better reflect and to the point of empty chassis drop-off)
the cost characteristics of the Metro Vancouver container » Waiting time at terminals or off-dock locations
drayage industry, the Barton model was refined in a » Profit as a percent of total cost
three-step process.
» Ready rate origins and destinations

First, the costs were indexed to bring them to 2012 levels, The Pro Forma Financial Tool allows the user to adjust the
since the Barton model used 2010 values. The second step following inputs:
refined the Barton model based on select data obtained » Capital expenditures for equipment other than the tractor
from Metro Vancouver trucking companies and owner-
» Working capital and loans
operators.18 Several adjustments were made to reflect
local drayage operating and cost conditions. The main » Trip characteristics based on annual averages
adjustments made to the Barton model are: increased driver » Annual revenues, costs and escalation factors to allow
costs to reflect longer wait times at container terminals; for five-year business projections
lower tractor ownership costs due to the use of older, less
costly trucks; higher maintenance, repair and tire costs; All three models allow users to choose between model
and lower overhead and administration costs. The third default values or enter their own estimates for the
step was to refine the model to allow user inputs for several following operating costs:
major cost items. These are hourly driver wage rate, fuel
» Fuel (the default value is per kilometre, but the user
cost per kilometre, maintenance cost per kilometre,
can enter specific estimates of fuel consumption,
administration cost per year, tractor capital cost, and
annual tractor utilization. such as litres/kilometre, as well as fuel price per litre)
Exhibit 8 highlights the primary data sources and key » Maintenance cost per kilometre
assumptions used in the truck cost/financial model. » Administration cost per year

17) Ray Barton and Associates, Logistics Solution Builders Inc. and The Research
and Traffic Group, “Final Report Operating Costs of Trucking and Surface
Intermodal Transportation in Canada,” Transport Canada RFP File # T8080
– 100234, March 15, 2011.
18) Note that the scope of this study did not permit an extensive data
collection survey.
CHAPTER 4 27

Exhibit 8: Cost/Financial Model Key Assumptions

COST ITEM DATA SOURCE ASSUMPTION / COMMENT


VARIABLE Variable costs typically comprise about 80% of total truck operating costs, or $2.50/km, including an allowance for wages.

Driver Wage User input The default value used in the model is $25.00/hour plus a 15% wage burden for CPP and workers’ compensation.
The driver wage covers the cost of driving plus wait times at pick-up and delivery points.

At the end of the day, the wage rate is what the owner-operator hopes to make from the business and may be compared
to other employment opportunities an operator may have. If a value of zero is used in the model, then the profit for the trip
(or trips) in any given time period is equal to the driver’s income.
Fuel User input or default The Barton default value is $0.548/km. Since fuel is one of largest variable cost items, accounting for approximately 22% of
value from Barton total variable costs, the model provides the option to input a specific fuel consumption rate in miles per gallon and current
confirmed through price per litre. An owner-operator pays about $40,000 a year for fuel if he drives 70,000 km/year at a cost of $0.548/km.
consultations
Maintenance User input or default Barton cost is $0.081/km for a new truck, or $0.121/km for a used truck, at the user’s discretion. The used truck cost is
& Repairs value from Barton assumed to be 50% higher than the new truck cost. The user can choose to enter his own estimate of maintenance and
confirmed through repairs in dollars per km. Maintenance and repair costs are about 5% of total variable costs.
consultations
Tires Barton $0.028/km, or about 1% of total variable costs. This assumes the cost for a set of 10 new tires that last for 2 years is
about $5,000.
Miscellaneous Barton $0.015/km, or about 0.5% of total variable costs. This cost category includes items such as small tools and equipment,
truck cleaning, communications equipment, etc.

FIXED Fixed costs comprise about 20% of total operating costs, or $0.60/km (the cost per km is sensitive to annual truck utilization).

Tractor User input or default The default value in the model is $60,000 for a typical used tractor. The user has the option of substituting any value to reflect
Ownership value based on a specific vehicle (newer vehicles can cost $90,000 to $140,000). A key factor for ownership cost is the annual vehicle
consultation results utilization rate that is used to allocate this cost over time. Truck utilization varies widely among owner-operators. Depending
and industry best on the nature of the drayage operation (i.e., pure drayage, or shunting at a major customer, or more highway moves from rail
practices intermodal terminals), truck utilization ranges between 25,000 and 120,000 km a year. The tractor cost and assumed use have
a major impact on tractor ownership costs and represent 40% to 50% of total fixed costs.
Licenses Barton $2,400/year, representing about 6% of total fixed costs.
Insurance Barton $8,000/year, representing about 20% of total fixed costs.
Administration User input or default The default value is $10,000/year based on best practices and covers general administration and bookkeeping, accounting
value based on and legal fees. General overheads are assumed to be 45 minutes per working day. The user of the model has the option of
consultation results and using any other value stated as an annual cost.
industry best practices
28 CHAPTER 4

Sensitivity of the Model to Changes activity, and limits the number of paid container moves that
in Productivity can be handled in the day. Under this scenario, the net
The Profit Estimator provides a powerful tool to evaluate return to the driver is $20.30/hour.
the financial impacts of different drayage operating
scenarios. For example, it could be used to assess the In the second scenario, the operator achieves four revenue
impact of improving productivity by increasing the number trips per day and is able to reduce unproductive driving
of double-ended moves, reducing wait times at container activity from 30 kilometres in the base case to 10 kilometres
terminal gates, or improving travel times associated with due to double-ended moves. This reduces both the total
infrastructure improvements, such as the South Fraser distance driven and unproductive time. The result under
Perimeter Road. It could also be used to evaluate the this scenario is to improve the net return to $32.29/hour,
potential impacts of policy changes, such as promoting the a gain of 60%. Under the third scenario, five revenue trips
use of newer trucks in order to reduce the environmental are made in the day, and additional double-ended moves
footprint of port-related activities. and reduced queuing time at the terminal improve
productivity even further. The net return increases to
Exhibit 9 illustrates the impact of improving truck $38.95, a gain of 92% over the base case.
productivity on owner-operators’ returns. In the base case
scenario, the owner-operator makes three revenue trips These scenarios demonstrate the high degree of sensitivity
per day, and has to travel 20 kilometres to the terminal to of owner-operator returns to changes in productivity.
pick up the container as well as another 10 kilometres from Productivity improvements are one of the most critical
the delivery terminal to position for the next revenue load. aspects in improving operating conditions in the drayage
This results in a total of 30 kilometres of unpaid driving sector.

Exhibit 9: Sensitivity of Returns to Truck Productivity


Improvements (Revenue and cost, $/day)

ITEM BASE CASE 4 TRIPS/DAY 5 TRIPS/DAY


Revenue ($) 450.00 600.00 750.00

Variable Cost ($)* 128.14 113.90 142.38

Gross Operating Profit ($) 321.86 486.10 607.62

Fixed and Overhead Costs ($) 108.67 98.59 120.74

Net Return to Owner–Operator ($) 213.19 387.51 486.88

Net Return (per hour) $20.30 $32.29 $38.95

Difference (per hour vs. base case) — +$11.99 +$18.65

Difference (per cent vs. base case) — +60% +92%

* Excludes driver wages. Driver compensation is shown in this example as the net
return after covering all other variable costs such as fuel, tires, maintenance and
repairs.
CHAPTER 5 29

BEST PRACTICE FINDINGS AND


RECOMMENDATIONS
The previous sections of this report focused on the owner-operator business in terms of what the business does
(business model) and how it makes money (cost model) in order to provide a better understanding of the container
drayage sector in Metro Vancouver. This chapter builds on this information by examining the business practices of
successful operators collected through industry interviews with both drayage companies and owner-operators. The
objective is to identify the key factors and skills that lead to success in the industry and to provide recommendations
to owner-operators and industry stakeholders in order to improve the business and economic performance of the
drayage sector in Metro Vancouver.

The discussion begins with a focus on the customer value proposition and is followed by the key factors that drayage
companies look for when contracting an owner-operator, the factors owner-operators should consider when selecting
a drayage company, and finally what can be done to improve the overall performance of the drayage sector.

5.1 OWNER-OPERATOR VALUE » Flexibility. Companies that use owner-operators have


PROPOSITION the flexibility to adjust the size of their operation by
— expanding or contracting in a timely and cost-effective
From a drayage company perspective, owner-operators manner in response to changing market conditions.
provide benefits that enhance the value of their own » Access to TLS Independent Owner-Operator Permits.
business, as well as the services they are in turn able to Given the existing moratorium on TLS licenses for owner-
offer to the importers/exporters and shipping lines who operators, those who already have a license add value by
are their primary customers: providing a ready supply of labour to companies looking
» Cost advantages. Drayage companies could achieve to bring on additional operators.
a competitive edge by using owner-operators because
they may be able to pay them less than what they pay
company drivers. This is because the company avoids the
cost burden of fringe benefits and wage overhead costs.
Such cost savings could also be used to advantage by
sharing a portion of the savings with owner-operators as
an incentive. The fact that some large drayage companies
such as CNTL have converted to a 100% owner-operator
model is evidence of the benefits.
» Reduced financial risks. Companies can reduce their
capital requirements and financial risks by using owner-
operators, since the company is able to avoid the capital
costs of purchasing a fleet of trucks.
30 CHAPTER 5

5.2 COMPANY CRITERIA: SELECTING From an owner-operator’s perspective, the key questions
GOOD OWNER-OPERATORS to ask when selecting a company to work for are:
— » How long has the company been in business?
A common theme that emerged from the interviews is an The longer the better.
emphasis on safety. Several companies indicated that
» What is the company’s driver turnover rate? The lower
owner-operators must have a clean safety record and
the better, because high driver turnover may indicate
comply with National Safety Code (NSC) standards
poor working conditions.
regarding drivers and vehicle maintenance.
» Does the company provide a signed contract with clearly
defined terms of the business arrangement?
The main skills/attributes used by companies to identify
and select good operators include: » What do discussions with other owner-operators who
work for the company indicate about the company and
» Good reputation in the industry for reliability;
its working conditions?
» Sufficient driving experience;
» How does the company compensate its owner-operators
» Positive attitude, willingness to learn and an under-
in general and what are its detailed compensation terms?
standing of the gateway container supply chain
» Will it be possible to get double-ended revenue-
“big picture”;19
generating moves?
» Dependable and flexible—able to handle frequently
» Does the company pay for waiting time at marine
changing work requirements;
terminals and subsidize fuel costs?
» Responsible and to have developed a business plan,
» How long does it take to get paid after hauling a load?
business systems and a regular preventative truck
maintenance program; » Does the company have established arrangements with
a repair shop that can help owner-operators with truck
» Understands and manages stress (self-awareness);
repairs under the company umbrella?
» Mechanical aptitude.
This last point can be extremely valuable because it helps
5.3 OWNER-OPERATOR CRITERIA: reduce delays in getting unexpected repairs completed,
SELECTING A GOOD COMPANY thereby minimizing downtime in the event of mechanical
TO WORK FOR problems with the vehicle that is the owner-operator’s
— chief source of income.
As noted previously, there are some 160 local drayage
companies of varying sizes in Metro Vancouver. Owner-
operators contract out their equipment and services to one
or more of these companies. The choice of which company
(or companies) to work for is critical because it affects
workload, shift schedules, quality of life and income.

19) Interestingly, several interviewees had the misperception that


PMV somehow controlled the container terminals.
CHAPTER 5 31

5.4 KEY CHALLENGES Several of the challenges are symptoms of underlying


— systemic factors, for example: the inherent seasonality
There are major opportunities for growth on the horizon. of the container trade, which causes periodic volume
Import and export container traffic volume moving through fluctuations; legacy reservation systems of the terminal
the port is expected to approximately double by 2030 to operators; longshore labour paradigms; and container
about 6 million TEUs. To realize the growth opportunities terminal capacity constraints. The combination of these
ahead, the operation and performance of the drayage and other factors results in a significant degree of “noise”
sector serving the port must be improved. and finger-pointing in the system, and are exacerbated by
daily operational frustrations that occasionally flare up as
The fundamental challenges confronting the drayage well as a general lack of trust. These issues cause a great
sector may be grouped into three broad areas: deal of anxiety in the drayage community.
» Lack of a sustainable economic model. Intense price
The systemic challenges are beyond owner-operators’
competition, the fact that the Ready rates do not keep
control or influence. Other issues are a matter of policy,
pace with current market conditions, and the false
such as the extent to which the provincial and federal
security of the rate “floor” under the regulated rate
governments should be involved in rate regulation in the
regime mean there is no sustainable economic model
drayage sector and whether or not market forces would
in the drayage sector—a factor that contributes to
promote greater stability.
instability and reduced profits for owner-operators.
» Lack of integrated planning and operations. Without
closer coordination among supply chain participants to
align interests, drayage productivity will continue to be
an issue, resulting in long and unpredictable truck turn
times at container terminals and sub-optimization of
double-ended revenue moves.
» Limited knowledge and understanding. There is a
general lack of knowledge in the drayage sector with
respect to understanding and managing truck operating
costs and how businesses can improve their financial
management. In addition, the roles and responsibilities
of different supply chain participants are not generally
well understood by owner-operators. This lack of clarity
poses a significant communications challenge when it
comes to addressing key issues and the implementation
of system-wide solutions.
32 CHAPTER 5

5.5 RECOMMENDATIONS FOR IMPROVING DRAYAGE SECTOR PERFORMANCE



The research and analysis into best business practices carried out for this project led to recommendations for
owner-operators and other drayage sector stakeholders, and are shown below.

Recommendations for Owner-Operators

ITEM BEST PRACTICES

Cost Control » Understand and manage all costs, fixed and variable
Reducing costs by just 5 cents/km will save » Focus on minimizing the most significant cost items, such as fuel and tractor purchase
$3,500 a year for an owner-operator who » Implement a preventative truck maintenance program to keep costs under control and minimize revenue lost to
drives 70,000 km per year—these savings equipment breakdowns.
go directly to the bottom line.

1% Tires 20% Fixed Costs

4% Maintenance & Other 24% Driver Operating Time

18% Fuel 33% Driver Wait Time

Source: CTC-Seaport Drayage Trip Cost Analyzer.

Truck Assets » Consider acquiring a new truck that offers the following potential benefits:
An owner-operator’s truck is the most Ì May be more reliable than an older, used vehicle
important asset—having a safe, reliable, Ì Less costly due to fewer mechanical issues
cost-effective vehicle(s) is critical for success. Ì Repairs covered under warranty
Ì Complies with PMV age/emission standards, which are becoming more stringent to improve port standards

Performance Monitoring » Develop a business plan and budget to track finances


Successful owner-operators adjust for » Keep good records to determine how the plan/budget is working and whether or not adjustments are required
changing conditions to maximize profitability » Utilize accounting software for bookkeeping and reporting
—the key here is to track performance » Account for depreciation by setting aside money for eventual vehicle replacement
against a business plan and budget in order » Keep a reserve ($10,000–$15,000) to accommodate unforeseen expenses, such as major vehicle repairs
to determine what adjustments to make.
CHAPTER 5 33

Recommendations for Other Stakeholders maintenance, driver training and other aspects of safety
Some of the key challenges identified above are already management. Insufficient compensation to drayage
being addressed through other initiatives, for example operators increases the risk of sector instability, reduces
those led by the Container Drayage Leadership Team owner-operators’ financial means to invest in newer truck
and Port Metro Vancouver, particularly with regard to equipment, and can be an impediment to attracting a
the development of a more integrated planning and sufficient number of quality drayage operators to service
operations environment and the collection of data on projected gateway container traffic volumes.
drayage operations and activities in the region. Technology » Develop a drayage cost index that can be used to
also has a significant potential role to play in the solutions. identify and track operating costs in the industry on
an ongoing basis. The index would provide a useful
The following five recommendations are advanced for other bench-mark for owner-operators and drayage companies
stakeholders to improve the performance of the drayage to advocate for rate increases and help transition away
sector in Metro Vancouver. The objective of these recommen- from the existing regulated rate regime to a market-based
dations is to create a more stable and sustainable drayage system.
sector and to improve knowledge and understanding within » In order to address the challenge of limited knowledge
the industry: and understanding of the financial management aspects
» Develop a communications protocol, in cooperation with of the drayage business, consideration should be given
the BCTA and PMV, as a means to increase the general to developing an education and awareness program for
knowledge and understanding of owner-operators owner-operators. The goal is to provide basic information
working in the drayage sector and communicate the and the fundamental principles of business management
steps that industry and governments are taking to and financing to help existing and potential new owner-
address structural challenges in the industry. operators better understand best business practices.
» Develop a shipper education campaign to increase » Consider creating a drayage sector ombudsman to act
awareness and understanding of the impact of shippers’ as a credible, empowered and more unified voice for
decision-making on the drayage sector in general and the industry in order to address operational issues and
on owner-operators in particular with respect to vehicle communicate progress on these issues.
34 CHAPTER 5

Toolkit Recommendations
The toolkit is the other main output for this project. It is
a separate resource for owner-operators that highlights
successful business practices and the skills required to
improve business performance. It is recommended that an
online version of the toolkit be developed as the best way
to disseminate the information and promote its use.

The recommended structure of the toolkit is shown below.

THE DRAYAGE BUSINESS MY BUSINESS


Owner-Operator Essentials Managing My Business & Money
» 1.1 Drayage Business Environment » 3.1 Budgeting & Bookkeeping
» 1.2 Lifestyle » 3.2 How Am I Doing?
» 1.3 Business & Financial Considerations » 3.3 How Can I Make More $$$?
» 1.4 Choosing a Company to Work For » 3.4 Understanding My Costs
» 1.5 What Companies Look For » 3.5 Financial Tools

MY TRUCK GLOSSARY A – Z
Getting & Operating My Vehicle
» 2.1 Financing Options
» 2.2 Getting Bank Financing
» 2.3 New vs. Used
» 2.4 Importance Of Maintenance
» 2.5 Safety
» 2.6 Fuel Efficiency
» 2.7 Practical Terminal Information
APPENDICES
36 APPENDIX 1

APPENDIX 1
INTERVIEW QUESTION GUIDE
1. What is the nature of your business and who are 11. Is there a driver shortage in the Lower Mainland?
your key customers (import, export, transload, etc.)? If so, what should be done to address it?

2. What services do you provide and what are 12. Do you currently have a driver training program?
your customer requirements? » What are your needs in this area?
» What resources would be helpful to improve driver
3. What is the typical work schedule? training?

4. What are the most critical factors impacting this 13. How are your drivers paid (own drivers versus
schedule (terminal issues, road congestion, reliability owner-operators)?
of drivers, etc.)?
14. Are the Ready rates current with respect to
5. What is the proportion of company drivers to market conditions?
owner-operators in your business?
» What is the revenue split with owner-operators for
» What factors determine this? Ready rate moves?
» What issues dictate the choice between » How do Ready rates vary from the non-regulated
company drivers and owner-operators? drayage market?

6. Are your drivers unionized? If so, what is the proportion 15. What tools/resources would you find the most useful
of unionized drivers in your business and to what unions to improve the performance of your business?
do they belong?
16. What are the key factors affecting your profitability,
7. How does your dispatch system work and what does it both within and outside of your control?
cost to operate?
» Are there any lessons in it for owner-operators? 17. Would you find value in having real-time information to
operate your business? What would be most valuable?
8. What equipment do you need for your business
(tractors, chassis, hardware, software, communications, 18. Regarding owner-operators:
GPS, etc.)? » How do you select owner-operators?
» What qualities define a “good” operator?
9. How was this equipment financed and what does
» Is there a high turnover of owner-operators at your
it cost to purchase/lease?
business and in general? If so, why?
10. What is the average age of your own tractor fleet? » What is the typical age of their tractors?
» How many kilometres a year does your average » What is a typical tractor utilization in kilometres
tractor operate: for drayage and for long-haul? (or hours or other)?
» How suited are their tractors to container drayage,
and what are the issues?
APPENDIX 1 INTERVIEW QUESTION GUIDE 37

» How knowledgeable are owner-operators about Ì Typical specifications


their own trucking businesses? Ì How long would an owner-operator keep such a
Ì What is their understanding of basic business principles? tractor and what would be the resale price?
Ì What is their understanding of their operational » Regarding variable tractor operating costs in general,
costs and bottom lines? what are unit costs (per kilometre) for:
Ì To what extent do they use accounting systems? Ì Maintenance? (And how does this vary for new
» What skills, tools, etc. would make owner-operators and older tractors?)
more effective in their businesses? Ì Tires?
Ì Fuel?
» What kinds of real-time information would be valuable
Ì Driver (operating)?
to owner-operators, perhaps via an app on a mobile
Ì Driver (waiting—should this be per hour?)?
phone (iPhone, Android, etc.) plus a website?
Ì How does one handle the cost of tractor waiting
Examples could include:
time in general?
Ì Real-time updates on road information, congestion
Ì Driver time with fixed costs allocated per kilometre
and travel speeds (Google Traffic?)
and variable costs close to zero?
Ì Reports on congestion at marine container terminal gates
Ì Should one differentiate between standard time
Ì Daily market conditions
allowances at terminals and non-standard time,
» To what degree do you think owner-operators
such as gate queuing?
understand simple and complex business and general
» Regarding fixed tractor costs:
concepts? How much does this vary by individual?
Ì Licensing: What is the annual cost of licensing
» What are some good ways to get new concepts and
a tractor?
information across to owner-operators about their
» Insurance (operating) cost:
business and business practices? Visuals, stories,
Ì What is the annual tractor insurance cost,
workshops, examples, manuals, storyboards? Other?
and is it strictly fixed?
19. Regarding trucking costs (main focus on owner-operators): » Administration (operating) costs:
Ì What are the key administration items for an
» How do you record, evaluate and use trucking costs
owner-operator?
in business planning?
Ì What level of annual administration costs would you
» Are there any lessons in this for owner-operators?
expect for an owner-operator? How does this vary
» What is the price of a new tractor appropriate for with annual tractor utilization?
Metro Vancouver drayage?
» Tractor ownership costs:
Ì What are its specifications?
Ì What is best way to handle them for owner-operators?
Ì How long would you keep such a tractor and
Ì Depreciation plus interest?
what would be the resale price?
Ì Loan payments plus a return on own capital (equity)?
» What are some typical characteristics of Ì Capital recovery (overall return to cover debt
owner-operator tractors? and equity)?
Ì Age at acquisition and price Ì Other?
Ì Appropriateness for Metro Vancouver drayage Ì Are there any other significant fixed costs? PMV TLS?
38 APPENDIX 2

APPENDIX 2
READY RATE SCALE
Schedule 1: Rates in Effect from Date of Return to Work

FROM / TO VANTERM CENTERM DELTAPORT FSD CP CN

Vancouver Docks $90 $120 $110 $120 $120

North Vancouver $95 $125 $120 $130 $130

West Vancouver $100 $130 $125 $135 $135

Burnaby North $95 $120 $100 $110 $110

Burnaby South (South of Highway 1) $100 $120 $95 $110 $115

Richmond North $95 $110 $95 $120 $120

Richmond South (South of Westminster) $100 $100 $95 $125 $120

Annacis Island $110 $110 $90 $115 $115

New Westminster $105 $120 $95 $110 $115

Coquitlam $105 $120 $100 $100 $105

Port Moody / Port Coquitlam $110 $130 $105 $95 $110

Pitt Meadows $120 $135 $110 $90 $115

Haney / Maple Ridge $125 $145 $120 $95 $120

Surrey North (North of 72, West of 152, FSD) $110 $110 $90 $110 $100

Delta North (Tillbury) $120 $90 $90 $120 $115

Surrey South (includes White Rock) $120 $110 $110 $135 $110

Cloverdale $120 $120 $105 $115 $90

Port Kells (North of Highway, West of 208) $120 $130 $100 $115 $90

Langley City $130 $120 $110 $120 $95

Langley South (South of 40) $150 $110 $110 $130 $100

Pacific Highway $150 $110 $110 $130 $100

Fort Langley / Aldergrove $140 $150 $120 $140 $110

Abbotsford / Clearbrook $160 $160 $145 $150 $120

Mission $160 $170 $150 $130 $130

Chilliwack / Sardis $185 $185 $170 $170 $160


APPENDIX 2 READY RATE SCALE 39

Schedule 2: Rates in Effect from August 1, 2006

FROM / TO VANTERM CENTERM DELTAPORT FSD CP CN

Vancouver Docks $100 $135 $120 $135 $135

North Vancouver $105 $140 $135 $145 $145

West Vancouver $110 $145 $140 $150 $150

Burnaby North $105 $135 $110 $120 $120

Burnaby South (South of Highway 1) $110 $135 $105 $120 $130

Richmond North $105 $120 $105 $135 $135

Richmond South (South of Westminster) $110 $110 $105 $140 $135

Annacis Island $120 $120 $100 $130 $130

New Westminster $115 $135 $105 $120 $130

Coquitlam $115 $135 $110 $110 $115

Port Moody / Port Coquitlam $120 $145 $115 $105 $120

Pitt Meadows $135 $150 $120 $100 $130

Haney / Maple Ridge $140 $160 $135 $105 $135

Surrey North (North of 72, West of 152, FSD) $120 $120 $100 $120 $110

Delta North (Tillbury) $135 $100 $100 $135 $130

Surrey South (includes White Rock) $135 $120 $120 $150 $120

Cloverdale $135 $135 $115 $130 $100

Port Kells (North of Highway, West of 208) $135 $145 $110 $130 $100

Langley City $145 $135 $120 $135 $105

Langley South (South of 40) $165 $120 $120 $145 $110

Pacific Highway $165 $120 $120 $145 $110

Fort Langley / Aldergrove $155 $165 $135 $155 $120

Abbotsford / Clearbrook $175 $175 $160 $165 $135

Mission $175 $185 $165 $145 $145

Chilliwack / Sardis $200 $200 $185 $185 $175


40 APPENDIX 2 READY RATE SCALE

DO THE READY RATES AFFECT MARKET RATES?



This question is difficult to determine; general anecdotal evidence includes:

» A trucking company with about 60 non-union owner-operator tractors pays for container movements according to the
Ready MOA. The company also pays drivers an additional amount to compensate for their time handling empty chassis
moves. The compensation for this additional work is based on mileage at a predetermined scale.

For example:
Ì For a five-kilometres repositioning move, the driver would receive $75.
Ì For a 20-kilometre repositioning move, the driver would receive $85.

» An operator of a major import distribution centre that operates an in-house drayage company to serve its clients pays
its owner-operators based on the MOA plus a percentage of the Ready rates if an empty chassis move is involved.

» One company stated that it pays its owner-operators for container moves based on the MOA and must do so because
of audits. This company has adjusted the rates it pays for inflation but only at some 2% a year. If there is a mix-up at
a marine terminal that results in an unavailable container, this company will pay owner-operators, typically at 50% of
the Ready rate. The company pays 100% of the Ready rate for certain kinds of delays or lack of container availability.

» Unionized owner-operators mentioned that some non-unionized owner-operators undercut the Ready rates. They also
mentioned that “cash back” refunds occur. These involve owner-operators invoicing trucking companies at the Ready
rates to support audits, after which—following payment of invoices—the non-unionized owner-operator rebates in
cash a portion of the amount paid, resulting in a rate that is effectively below the Ready rate.
APPENDIX 3 41

APPENDIX 3
PRO FORMA FINANCIAL MODEL INPUTS
The pro forma model input worksheet has several The components of the model and key assumptions
sections, as follows: are outlined below.

Average Utilization and Speed Working Capital Assumptions


This is an input value with the default 40 kilometres Working capital is the difference between current assets
per hour. and current liabilities. The principal current assets are cash
or cash equivalents and accounts receivable. Accounts
Selection of Input Costs receivable are amounts owed for services performed and
The user can: invoiced but not yet paid.
» Input his own value for driver compensation
and payroll burden. Discussions with owner-operators indicate that they are
paid several weeks after they make a container drayage
» Choose between model defaults for fuel cost or enter his
move; a value of 45 days was used for accounts receivable.
own values for miles per gallon and fuel price per litre.
The principal current liability is accounts payable. These are
» Choose between model defaults for repair and
for items that have been purchased but not yet paid for. An
maintenance costs or enter his own value per kilometre.
example is a tank of fuel bought on a credit card and paid
» Choose between model defaults for administration for as part of the credit card payment. Invoices for goods
costs or enter his own value per year. and services often have payment terms of 30 days; a value
of 30 days was used to calculate accounts payable in the
pro forma model. Driver “wages” were not included in
Selection of Financial Parameters
accounts payable; it was assumed that owner-operators
The user can enter:
draw “wages” throughout each month.
» Tractor financial parameters
» Other capital expenditures, such as a computer A loan with an interest rate of 6% and a term of five years
and tools was assumed. This would be typical of a small business
» Start-up year loan secured by an asset such as a house. Some owner-
operators reported difficulty in securing line-of-credit loans
» Income tax rate
because they could not demonstrate adequate proof of
» Working capital parameters
income.
» Capital contributions to the business
» Loan interest rate and term Selection of Trip Characteristics & Revenue
The next section deals with trip characteristics, revenue
and related calculations. The trucking distances per
trip were generalized from discussions with trucking
companies and owner-operators. They can be modified
to reflect the outlook of each individual owner-operator
and the contract terms he has with a trucking company.
The travel time per trip is calculated at the average speed
above. The calculated annual truck utilization in kilometres
42 APPENDIX 3 PRO FORMA FINANCIAL MODEL INPUTS

is calculated based on the average trip distance, the Escalation Rates


number of working days in a year, and the number of The final subsection deals with the escalation of revenue
trips per day (see below). and costs to allow for price increases over time. The base
year for escalation is 2013 (i.e., the first year of escalation
Three categories of truck waiting time are listed: waiting is 2014). Three cost categories are listed: general (consumer
at a pick-up terminal (0.5 hours assumed for a typical price index inflation), which is used when there is no
off-dock terminal); waiting at a marine container terminal particular escalation rate to use; and tires and fuel, both
to discharge a container (1.0 hour as typical at PMV of which have increased at rates in excess of inflation
terminals); and an allowance for other queuing, which and are likely to continue to do so in future.
might be at a container terminal gate or a road congestion
point. The total waiting time is the sum of these; the total In the case of revenue, the model is set up to input one set
time per trip is the sum of travel and waiting time. of values for all years in Column C and escalates them over
the evaluation period. It is also possible to override the
The basis for revenue is the number of working days per input values for each year, such as the revenue per trip.
year, the number of paid trips per day and the average Only one approach should be used.
payment per trip. This version of the model assumes 250
working days a year (day-shift weekdays only, less 10 days’ For example:
holiday time) and three trips a day at $150 per trip. These » If an owner-operator has a long-term contact with a
figures were generalized from discussions with owner- trucking company that specifies the rate per trip by year,
operators, who reported that given the congestion at the rates should be entered manually in the line “Revenue
container gates today, they typically make three trips a per Trip” and revenue escalation should be set to zero.
day and their daily revenue is $450.
» If the rate per trip is known for the current year and the
market seems that it will allow revenue escalation over
The calculated annual times are next. The total working
the next five years, the rate should be left constant in the
time of 2,625 hours that results is reasonable; working
line “Revenue per Trip” and revenue escalation set at a
time generally should be around 2,000 hours a year for
rate that reflects the prospects. The escalation rate could
the owner of a small business such as owner-operator
be less or greater than general inflation.
trucking.
In this example, the rate per trip is left constant for each
year and the revenue escalation rate of 2.0% a year is
applied over the five-year projection period.
APPENDIX 3 PRO FORMA FINANCIAL MODEL INPUTS 43

Profit and Loss Statement Assumptions » Income taxes are calculated at the 13.5% rate applicable
The structure of the operating costs is similar to that of to small incorporated businesses in 2012 and probably
the trip cost model but there are some differences. in subsequent years. On the assumption that this is an
The costs are built up as follows: incorporated business, taxes apply only if profit before
taxes is positive; otherwise taxes are zero. Losses can
» All variable cost items except driver waiting time are
be carried forward to write off against future profits, but
calculated on a per-kilometre basis. The annual cost is
this provision is not built into the pro forma model. If the
the rate per kilometre multiplied by the annual tractor
owner-operator business is not going to be profitable, it
kilometres.
may be better to operate it as an unincorporated business
» The cost of driver operating time is calculated as annual
to allow write-off of losses against other personal
operating time multiplied by the hourly rate input by the
income. The main taxation benefit of an incorporated
user plus a 15% burden. The cost of driver waiting time is
small business is the ability to retain profits in the
calculated as annual waiting time multiplied by the same
company at a modest tax rate and to engage in income
hourly rate.
splitting (over time for the owner-operator and perhaps
» Driver operating and waiting times are treated in the pro among members of his family).
forma model as expenses, which would be the case if
the owner-operator withdrew these salary-like amounts The bottom line is profit after tax. This flows to the cash
each month. The owner-operator could also make flow statement.
periodic draws through the year and sort out the
allocation of these draws to driver time and other items Strictly speaking, the straight-line depreciation used in
at the end of the year. Inserting these items as costs in the pro forma model for tax calculations should be replaced
the pro forma model provides a better overall picture of by declining-balance depreciation under the Capital Cost
the tractor business. Allowance (CCA) rates and rules specified by Canada
» Depreciation is calculated on a straight-line basis as Revenue Agency (CRA). While the CCA amounts specified
(tractor cost minus residual value, if any) divided by by CRA result in more rapid asset write-offs, the impacts
life and other capital expenditures divided by life. on this simple and short-term pro forma evaluation will
Note that depreciation remains constant in spite of be minor.
inflation because it is based on the historical cost of
assets and their lives.
» Interest is calculated as the average loan balance
in a year multiplied by the interest rate.
» Licenses, insurance and administration are treated
as fixed annual costs.
44 APPENDIX 4

APPENDIX 4 SAMPLE COST / FINANCIAL


MODEL RESULTS
This appendix demonstrates an application of the cost/financial model for a typical drayage operation in Metro
Vancouver. The following tables show sample results for a typical drayage operation. This includes results for the
Profit Estimator, the Trip Cost Analyzer and Pro Forma Financial Tool, including five-year pro forma results, a profit and
loss statement, working capital statement, cash flow statement, balance sheet and overall owner-operator financial
evaluation for two scenarios.

Profit Estimator Trip Cost Analyzer


Table 1 summarizes the Profit Estimator results for a The results are based on a hypothetical move from
working day with the following characteristics: revenue Vanterm or Centerm in Burrard Inlet to North Delta
of $450, 10.5 hours worked, and total driving distance of (see Table 2).
180 kilometres. All other inputs were left at the model
default values. The key assumptions are:
» Revenue per trip from Ready rate scale is $143.10,
Table 1: Example of Profit Estimator Results including the fuel surcharge
» Annual truck utilization is 60,000 kilometre
ITEM PER PERIOD PER KM PER HOUR » Average truck speed is 40 km/hour
Revenue $450.00 $2.50 $42.86 » Acquisition price of used tractor is $60,000
Variable Costs $128.14 $0.71 $12.20 » Tractor life is 5 years with zero residual value
Operating Profit $321.86 $1.79 $30.65 » Total trucking distance travelled is 57 kilometre
Fixed and Overhead Costs $108.67 $0.60 $10.35 (includes travel to point of empty chassis pick-up,
Net Return to Owner–Operator $213.19 $1.18 $20.30 distance to the terminal to pick up container, distance
from the terminal to deliver the container, and distance
from the delivery terminal to chassis drop-off)
» Total trucking time for the trip is 1.43 hours
» Total waiting time at terminals is 2.0 hours
» Total trip time is 3.43 hours
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 45

Table 2: Example of Trip Cost Analyzer Results*

USER INPUTS
Average Annual Truck Utilization (km) 60,000 Revenue Assumptions (user input) *Based on Ready Rates
Average Truck Speed (km/h) 40 Pick Up Terminal: Vanterm/Centerm
Tractor Financial Parameters Delivery Terminal: Delta North, Tilbury
New or Used Used
Acquisition Price of Tractor $60,000
Life (years) 5
Resale Value (% of Acquisition Price) 0
Trucking Distances (km)
To Point of Empty Chassis Pickup
To Terminal to Pick Up Container 20
From Pick-Up Terminal to Delivery Terminal 27
From Delivery Terminal to Chassis Drop-Off 10
Total Trucking Distance 57
Calculated Travel Time (Hours) 1.43
Truck Waiting Times (Hours)
At Pickup Terminal 0.50
At Delivery Terminal 1.00
Other Queuing 0.50
Total Waiting Time 2.00
Total Time (Hours) 3.43
Revenue (A) 143.10 2.51 41.78
Truck Costs Per Trip Per Km Per Hour
Variable Costs
Fuel 31.22 0.55 9.12
Repairs & Maintenance 6.92 0.12 2.02
Miscellaneous 0.85 0.01 0.25
Tires 1.58 0.03 0.46
Total Variable Costs (B) $40.58 $0.71 $11.85
Fixed Tractor Costs
Capital Recovery Charges (Ownership) $15.04 $0.26 $4.39
Licenses 2.27 0.04 0.66
Total Tractor Fixed Costs $17.31 $0.30 $5.05
Overhead Costs
Insurance $7.60 $0.13 $2.22
Administration $9.50 0.17 2.77
Total Overhead Costs $17.10 $0.30 $4.99
Total Fixed and Overhead Costs (C) $34.41 $0.60 $10.05
Total Trip Costs (Variable + Fixed) $92.30 $1.61 $21.89
Net Return to Owner-Operator (A-B-C) $68.11 $1.19 $19.89

* Note that these results are for a single trip with low productivity. Depending on the number of double-ended revenue generating moves the owner-operator is able to achieve,
the returns for a longer period (such as a day/week/month) would be greater than shown above.
46 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Pro Forma Cost Model Model Inputs


This model builds on the trip cost model, adding a pro The full input page to the pro forma model is described
forma financial evaluation of an owner-operator drayage in Appendix 3. The following comments deal with the
trucking business. All models were developed in one Excel specifics of this illustrative case. The inputs for fuel
file so they could share input costs; revisions to costs can and other costs are all at the default model values.
be made within one file. A pro forma financial model Table 3 summarizes the inputs discussed below.
projects the financial statements of a business over a
period of time. The model has three principal financial The average speed (40 kilometres/hour) remains. It is
statements: used to calculate driving time from annual distance driven.
» The Profit and Loss (P&L) or Income Statement The tractor financial parameters remain, but they are
compares revenue and expenses to arrive at profit used to calculate tractor depreciation rather than capital
before and after tax. recovery and to provide inputs to the cash flow statement
and balance sheet. There is also an allowance for other
» The Cash Flow Statement shows operating cash
capital expenditures, such as office equipment (telephones,
generated by the business and takes into consideation
computers, software, etc.) and tools. In the pro forma
the acquisition of assets (such as a tractor), how the
model, annual utilization is calculated from the assumptions
business is financed, and the net addition/reduction to
regarding annual trip activity.
cash at the end of the year.
» The Balance Sheet provides a financial snapshot of
The start-up year is stated as 2013, which affects the
the status of the business at the end of each year.
column headings in the model. A corporate tax rate of
13.5% is specified. This is the small business tax rate in
The pro forma model addresses the most common questions
British Columbia in 2012 (and likely in future years) for
of potential owner-operators looking to enter the business,
taxable business incomes under $500,000. Revenue is
such as:
assumed to be $150/trip, which generally reflects the
» How much equity capital do I need? Ready rate for the average trip characteristics in the model.
» How much money can I borrow, and can I repay it? Annual revenue is based on three trips a day, 250 days a
» How much do I get out of the business? year, consistent with industry practices. In the pro forma
model, owner-operators are assumed to earn $450 per day
» What will the position of the business be in five years?
and average gross revenue of $112,500 a year. Additional
» Do I really want to do this?
assumptions used in the model are discussed in Appendix 3.
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 47

Table 3: Pro Forma Financial Model Inputs

GENERAL INPUTS
Average Truck Speed (km/h) 40
Tractor Financial Parameters Driver Compensation and Payroll Cost
New or Used Used Driver Wage ($/hr) $25.00
Acquisition Price of Tractor $60,000 Non-Voluntary Wage Burden (%) 15%
Life (years) 5 Driver Payroll Cost ($/hr) $28.75
Resale Value (% of Acquisition Price) 0
Other Capital Expenditures
Office Equipment and Tools $5,000
Life (years) 5
Start-Up Year 2013
Corporate Income Tax 13.5%
Working Capital Parameters (Days)
Accounts Receivable 45
Accounts Payable 30
Loan
Interest Rate 6%
Term (Years) 5
TRIP CHARACTERISTICS AND REVENUES
Trucking Distances per Trip (km) 2013 2014 2015 2016 2017
To Point of Empty Chassis Pickup
To Terminal to Pick Up Container 20 20 20 20 20
From Pick-Up Terminal to Delivery Terminal 30 30 30 30 30
From Delivery Terminal to Chassis Drop-Off 10 10 10 10 10
Total Trucking Distance 60 60 60 60 60
Calculated Annual Utilization (km) 45,000 45,000 45,000 45,000 45,000
Calculated Travel Time (Hours) 1.50 1.50 1.50 1.50 1.50
Truck Waiting Times (Hours)
At Pickup Terminal 0.50 0.50 0.50 0.50 0.50
At Delivery Terminal 1.00 1.00 1.00 1.00 1.00
Other Queuing 0.50 0.50 0.50 0.50 0.50
Total Waiting Time 2.00 2.00 2.00 2.00 2.00
Total Time per Trip (Hours) 3.50 3.50 3.50 3.50 3.50
Revenue Basis
Working Days per year 250 250 250 250 250
Daily Number of Trips 3 3 3 3 3
Revenue per Trip $150 $150 $150 $150 $150
Calculated Annual Times (Hours)
Travel Time 1,125 1,125 1,125 1,125 1,125
Waiting Time 1,500 1,500 1,500 1,500 1,500
Total Time 2,625 2,625 2,625 2,625 2,625
Escalation Rates (% / Annum)
Revenue 2.0%
Operating Cost Indices
General (CPI) 2.0%
Fuel 3.0%
Tires 3.0%
48 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Profit and Loss


The P&L Statement begins with revenue. Although there is provision for other revenue, only drayage is shown. As with all
items, the value for 2013 is not escalated; the first escalated year is 2014. Table 4 presents the P&L statement. The bottom
line is profit after tax that flows to the cash flow statement.

Table 4: Pro Forma Profit and Loss Statement

ITEM 2013 2014 2015 2016 2017


Revenue
Drayage $112,500 $114,750 $117,045 $119,386 $121,774

Other

Total $112,500 $114,750 $117,045 $119,386 $121,774

COSTS
Variable Costs
Driver Operating Time $32,344 $32,991 $33,650 $34,323 $35,010

Driver Waiting Time 43,125 43,988 44,867 45,765 46,680

Fuel 24,648 25,387 26,149 26,933 27,741

Repairs and maintenance 5,466 5,575 5,687 5,800 5,916

Miscellaneous 670 684 698 712 726

Tires 1,251 1,289 1,327 1,367 1,408

Total Variable Costs $107,504 $109,913 $112,378 $114,900 $117,482

Fixed Tractor Costs


Depreciation $13,000 $13,000 $13,000 $13,000 $13,000

Interest 2,430 1,890 1,350 810 270

Licenses 2,394 2,442 2,491 2,541 2,592

TOTAL TRACTOR FIXED COSTS $17,824 $17,332 $16,841 $16,351 $15,862

Overhead Costs
Insurance $8,000 $8,160 $8,323 $8,490 $8,659

Administration 10,000 10,200 10,404 10,612 10,824

TOTAL OVERHEAD COSTS $18,000 $18,360 $18,727 $19,102 $19,484

TOTAL COSTS $143,328 $145,605 $147,946 $150,353 $152,827


PROFIT BEFORE TAX -$30,828 -$30,855 -$30,901 -$30,967 -$31,053
- TAXES $0 $0 $0 $0 $0
PROFIT AFTER TAX -$30,828 -$30,855 -$30,901 -$30,967 -$31,053
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 49

Working Capital
The Working Capital section shows the calculation of accounts receivable and accounts payable to estimate net working
capital other than cash. In general, net working capital increases slowly in line with inflation. If the volume of activity
(such as working hours per year or trips per day) increases, working capital also rises.

Accounts payable are calculated from out-of-pocket costs such as fuel, maintenance and insurance. They exclude
depreciation (because these are non-cash items) and interest (because there are scheduled payments). Owner-operator
compensation, i.e., driver time pay, is also excluded on the basis that the owner-operator draws the amount within the
month in which it is earned. Accounts receivable and accounts payable appear in the balance sheet. Net working capital
appears in the cash flow statement. Table 5 summarizes the calculation of non-cash working capital.

Table 5: Pro Forma Calculation of Working Capital

ITEM 2012 2013 2014 2015 2016 2017


Non-Cash Working Capital
Accounts Receivable – $13,870 $14,147 $14,430 $14,719 $15,013
Accounts Payable – 4,309 4,417 4,527 4,640 4,756
Net Non-Cash Working Capital – $9,561 $9,731 $9,903 $10,079 $10,257
Changes in Non-Cash Working Capital – $9,561 $170 $173 $175 $178

Cash Flow Statement


The Cash Flow Statement shows how funds flow through the business. It has three components:
» Cash flow from operations. This section of the statement measures the cash flow generated by the business in each year.
It begins with income after tax, adds back depreciation because depreciation is a non-cash expense, and deducts non-cash
working capital (current assets minus current liabilities). As the name implies, it begins only after operations start.
» Investment activity. In this case, investments in 2012 include a used tractor, office equipment and tools. Were the
business expanding, there would likely be more asset acquisitions over the evaluation period.
» Funding activity. This section lists the sources of funding for the business. These include an equity contribution by the
owner-operator and a loan draw. The loan amount was calculated as 70% of tractor capital expenditure. In order to
get such a loan, the owner-operator would probably have to pledge assets such as an interest in a house and either
demonstrate income from other sources or provide a good business plan. The amount of funding not only has to cover
the investment activity in 2012, it also has to provide an opening cash balance that allows projected cash balances to
remain positive as non-cash working capital builds up over time. The section also lists loan repayments and dividends
(the latter are shown as zero in this case because there is no profit).
50 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

The net of the three above items is net cash flow. This flows to the Cash and Cash Equivalents account of the balance sheet.
Table 6 presents the Cash Flow Statement.

Table 6: Pro Forma Cash Flow Statement

ITEM 2012 2013 2014 2015 2016 2017


Cash Flow from Operations
Income after Tax – -$30,828 -$30,855 -$30,901 -$30,967 -$31,053
Depreciation – 13,000 13,000 13,000 13,000 13,000
Change in Net Non-Cash Working Capital – 9,561 170 173 175 178
Operations Cash Flow – -$27,389 $18,025 $18,074 $18,143 $18,232
Investment Activity
Tractor $60,000 – – – – –
Office Equipment and Tools 5,000 – – – – –
Net Investment Activity $65,000 $0 $0 $0 $0 $0
Funding Activity
Equity Contributions $30,000 – – – – –
Loan Draws 45,000 – – – – –
Loan Repayments – 9,000 9,000 9,000 9,000 9,000
Dividends – – – – – –
Net Funding Activity $75,000 -$9,000 -$9,000 -$9,000 -$9,000 -$9,000
NET CASH FLOW $10,000 -$36,389 -$27,025 -$27,074 -$27,143 -$27,232
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 51

Balance Sheet
The Balance Sheet provides a snapshot of the business’s financial position at the end of each year (see Table 7). At start-up
in 2012, the company has $10,000 in cash and $65,000 in fixed assets. It also has owner-operator equity of $30,000 and a
loan of $45,000. The sections of the balance sheet are:
» Current assets. These are cash (and cash equivalents) and accounts receivable.
» Fixed assets. These begin with fixed assets at cost and subtract accumulated depreciation to arrive at net fixed assets.
» Current liabilities. Only accounts payable are shown.
» Equity. This is the value of the company to the owner-operator. It consists of initial equity plus retained earnings.

The company at the end of five years has equity of -$125,000, down from the initial $30,000. If the owner-operator were to
wind up the company at this point, he would lose money. The tractor and other fixed assets are assumed to have essentially
no residual value.

Table 7: Pro Forma Financial Model Balance Sheet

ITEM 2012 2013 2014 2015 2016 2017


Current Assets
Cash and Cash Equivalents $10,000 -$26,389 -$53,414 -$80,488 -$107,631 -$134,862
Accounts Receivable – 13,870 14,147 14,430 14,719 15,013
Total Current Assets $10,000 -$12,519 -$39,267 -$66,058 -$92,912 -$119,849
Fixed Assets at Cost
Truck $60,000 $60,000 $60,000 $60,000 $60,000 $60,000
Office Equipment 5,000 5,000 5,000 5,000 5,000 5,000
Total Fixed Assets $65,000 $65,000 $65,000 $65,000 $65,000 $65,000
Less Accumulated Depreciation – $13,000 $26,000 $39,000 $52,000 $65,000
Net Fixed Assets $65,000 $52,000 $39,000 $26,000 $13,000 $0
TOTAL ASSETS $75,000 $39,481 -$267 -$40,058 -$79,912 -$119,849
Liabilities
Current Liabilities – – – – – –
Accounts Payable – $4,309 $4,417 $4,527 $4,640 $4,756
Loans $45,000 $36,000 $27,000 $18,000 $9,000 $0
Equity – – – – – –
Contributed Equity $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Retained Earnings – -30,828 -61,684 -92,585 -123,552 -154,605
Total Equity $30,000 -$828 -$31,684 -$62,585 -$93,552 -$124,605
TOTAL LIABILITIES $75,000 $39,481 -$267 -$40,058 -$79,912 -$119,849
52 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Financial Ratios
The simple financial ratios in Table 8 illustrate: 1) the liquidity of the owner-operator business as a measure of its ability
to withstand financial shocks; and 2) debt service to illustrate its ability to meet loan obligations. The ratios are:

Liquidity
» Current Ratio (current assets/current liabilities)
» Acid Ratio (cash/current liabilities)

Debt service coverage


» Times interest covered (income before tax plus interest/interest)
» Times loan payments covered (cash flow from operations/loan payments)

Table 8: Financial Ratios

ITEM 2012 2013 2014 2015 2016 2017


Liquidity
Current Ratio – -2.91 -8.89 -14.59 -20.02 -25.20
Acid Ratio – -6.12 -12.09 -17.78 -23.20 -28.36
Debt Service Coverage
Times Interest Covered (By Income) – -11.69 -15.33 -21.89 -37.23 -114.01
Times Payments Covered (By Cash Flow) – -3.04 -2.00 -2.01 -2.02 -2.03
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 53

Owner-Operator Financial Evaluation


A major function of a pro forma financial evaluation is to allow an owner-operator to judge the attractiveness of the trucking
business. While the inputs to this case are only illustrative, they are consistent with cost modeling in general, the Ready
rates, and discussions with a sample of owner-operators for the purposes of this project. This section provides an example
of an analysis that an owner-operator could conduct.

First, the overall financials of this evaluation do not work at all. The company is illiquid and unprofitable, does not generate
positive cash flows or pay off the loans, and provides little income to the owner-operator.

Table 9 provides an example of an evaluation that a potential owner-operator could conduct to compare his situation with
and without the trucking business. It begins with the cash flows an owner-operator would experience with the trucking
business as set out in the pro forma financial evaluations above. In this case, he puts up $30,000 in equity capital, receives
about $75,000 a year in before-tax income (in constant 2013 dollars), may receive dividends (but not in this particular case,
since the business is not profitable), and at the end, loses about $125,000.

Is this an attractive proposition? No. However, a key question is the owner-operator’s opportunity cost in other employment.
In this example, a value of $25 per hour is applied to the time spent working in trucking as a measure of opportunity cost.
The result is that the trucking business generates a negative before-tax internal rate of return (IRR) on the initial equity
investment of $30,000. The results, however, vary with the assumptions; two other scenarios are discussed below.

Table 9: Owner-Operator Financial Evaluation

ITEM 2012 2013 2014 2015 2016 2017


Owner-Operator Financial Returns
Equity Contribution -$30,000 – – – – –
Salary Equivalent – Operating Time – $32,344 $32,991 $33,650 $34,323 $35,010
Salary Equivalent – Waiting Time – 43,125 43,988 44,867 45,765 46,680
Dividends – 0 0 0 0 0
Residual Value (Working Capital) – – – – – -124,605
TOTAL -$30,000 $75,469 $76,978 $78,518 $80,088 -$42,915
Owner-Operator Financial Evaluation
Cash Flow From Business -$30,000 $75,469 $76,978 $78,518 $80,088 -$42,915
Less Opportunity Cost of Wages – -$65,625 -$66,938 -$68,276 -$69,642 -$71,035
Valuation Cash Flow -$30,000 $9,844 $10,041 $10,241 $10,446 -$113,950
Internal Rate of Return (%/annum) – – – – – –
Calculation of Opportunity Cost of Wages*
Hours Worked – 2,625 2,625 2,625 2,625 2,625
Income/Hour in Other Employment $25.00 – – – – –
Opportunity Cost of Wages – $65,625 $66,938 $68,276 $69,642 $71,035

*Opportunity cost in other possible employment = $25.00 per hour multiplied by 2,620 hours a year or $65,625 in 2013.
54 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Scenario 1: Scenario 2:
Lower Driver Compensation Factor Higher Revenue Level
Driver compensation was reduced to $15 per hour from Revenue per move was increased until the business
$25 per hour (plus burdens in each). There is some evidence became profitable and just met cash flow needs. Table 10
to suggest that driver wages can be as low as $15 per hour. summarizes this case. Its parameters and results are:
When this lower rate is used, the model results indicate » Required revenue is $190 per move.
(financial statements not shown):
» The owner-operator business becomes profitable in 2015.
» The business is marginally profitable from 2015; cash
» There is sufficient cash flow to meet loan repayments.
flow is adequate to repay the loan; and the cash item of
» There is almost enough initial cash to meet working
the balance sheet remains positive.
capital needs (it is slightly negative in 2013).
» The $15 per hour is much too low a compensation level
» If the owner-operator terminates the business at the end
for an owner-operator who is following best practices.
of five years, he contributes $30,000 to the business at
There may, however, be owner-operators who will accept
the start, receives compensation of $25 per hour plus
such low compensation either because they have few
payroll burdens over five years, and receives a residual
other employment options or they do not understand
value of about $30,000.
their business.
» The owner-operator should be able to achieve business
continuity. At the end of five years, the residual value
of the business could provide a contribution to the
acquisition of another tractor to continue the business.

This case shows that the revenue per move required for
an owner-operator business that has marginally acceptable
financials and provides adequate compensation to the
owner-operator exceeds the revenues earned based on
the Ready rates.

Other Possible Scenarios


Several other scenarios are possible and realistic for
owner-operators who achieve best practices. Although
not evaluated in detail as part of this report, they generally
involve higher tractor productivity—that is, more time
spent on revenue-generating moves and less on unpaid
moves and waiting at terminal gates.
APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS 55

Table 10: Owner-Operator Financial Evaluation (Higher Revenue Level)

FINANCIAL RESULTS 2012 2013 2014 2015 2016 2017


Profit and Loss
Revenue – $142,500 $145,350 $148,257 $151,222 $154,247
Costs
Variable Costs – $107,504 $109,913 $112,378 $114,900 $117,482
Fixed Costs – 17,824 17,332 16,841 16,351 15,862
Overhead Costs – 18,000 18,360 18,727 19,102 19,484
Total Costs – $143,328 $145,605 $147,946 $150,353 $152,827
Profit before Tax – -$828 -$255 $311 $869 $1,420
- Taxes – 0 0 42 117 192
Profit after Tax – -$828 -$255 $269 $752 $1,228
Balance Sheet
Assets
Current Assets $10,000 $17,481 $21,333 $25,712 $30,577 $35,921
Net Fixed Assets 65,000 52,000 39,000 26,000 13,000 0
Total Assets $75,000 $69,481 $60,333 $51,712 $43,577 $35,921
Liabilities
Accounts Payable – $4,309 $4,417 $4,527 $4,640 $4,756
Loans 45,000 36,000 27,000 18,000 9,000 $0
Contributed Equity 30,000 30,000 30,000 30,000 30,000 30,000
Retained Earnings – -828 -1,084 -815 -63 1,165
Total Liabilities $75,000 $69,481 $60,333 $51,712 $43,577 $35,921
Owner-Operator Evaluation
Owner-Operator Returns
Equity Contribution -$30,000 – – – – –
Salary Equivalent – $75,469 $76,978 $78,518 $80,088 $81,690
Residual Value 31,165
TOTAL -30,000 $75,469 $76,978 $78,518 $80,088 $112,855
#407, 55 Water Street Understanding Container Drayage
Vancouver, British Columbia Owner-Operators in Metro Vancouver
V6B 1A1 —
— Summary Report
O: 604.684.1471 —
E: info@apgst.ca Prepared by
— Asia Pacific Gateway Skills Table

www.apgst.ca
© July 2013
www.hrwire.ca

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