Understanding Container Drayage Owner-Operators in Metro Vancouver

DRAYAGE OWNER- OPERATORS

SUMMARY REPORT

Owner Operators Interviewed for this study, and

participated in January 2013

workshop.

Trucking Companies

» BST Management Ltd. / Pro-West Transport

» Harbour Link Container Services

» Canaan Group

» Indian River Transport Ltd.

» CNTL

» KTL Transport

» Damco Distribution Services

» Prudential Transport Ltd.

Industry

» BC Trucking Association

» Port Metro Vancouver

This study was led and the following report prepared by:

David Colledge, President

Colledge Transportation

Consulting (CTC) Inc.

Delta, British Columbia

With support from:

Terence D. Smyth, Director

Seaport Consultants Canada Inc.

Vancouver, British Columbia

AcknowledgementsThe 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:

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

Prepared by Asia Pacific Gateway Skills Table

© July 2013

SUMMARY REPORT

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

In 2007, Port Metro Vancouver (PMV) instituted a

moratorium on owner-operators to prevent an over -

supply 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. This report outlines some of the

issues and challenges associated with the entry of new

owner-operators into the market and in anticipation that

these challenges will be acknowledged and addressed

by policymakers, shippers and other stakeholders before

the moratorium is lifted.

Project Outputs

Owner-Operator Toolkit

Provides a business resource for drayage operators:

Overview of the drayage business

Getting and operating my vehicle

Managing my business and money

Project Report

Provides a profile of the owner-operator business for

trucking companies, governments, industry associations:

Understanding the drayage owner-operator business

Financial aspects of the owner-operator business

Best practice findings and recommendations

1.1 PURPOSE OF THE PROJECT —As part of the Asia Pacific Gateway Skills Table’s

mandate to ensure that Canada’s Pacific Gateway has

enough people with the right skills and training to meet

its labour needs, the organization sponsored a project to

help the 950 owner-operators in the container drayage

industry in Metro Vancouver understand and manage

their businesses more effectively. The project was

carried out in partnership with the BC Trucking

Association (BCTA).

The project objectives were to:

» Develop a better understanding of the local container

drayage business as well as a drayage cost model;

» Conduct research and interviews with successful

trucking companies and owner-operators to identify

and compile best business practices that could be shared

with other owner-operators to improve the sector’s

performance.

The project had two main outputs. One is a toolkit

(separately published) that will provide the basis for

an online resource for potential and existing owner-

operators to help them better understand and manage

their businesses. The second is this report, which

profiles the Metro Vancouver container drayage operating

environment, including its role in the supply chain, the

nature of an owner-operator businesses, its financial

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.

INTRODUCTION

CHAPTER 1

7CHAPTER 1

1.2 METHODOLOGY —The project’s findings are based on research and

analysis as well as on the consultant’s own experience

in the gateway.

The project methodology included:

» A literature review to compile relevant information

and data on the drayage sector (provided in a separate

Project Briefing);

» Research pertaining to existing off-the-shelf cost

models and the development of a cost model specific

to Vancouver-area container drayage operations.

The cost model was based on inputs from existing

models supplemented with current cost data derived

from industry interviews carried out between October

2012 and February 2013.

» Extensive interviews conducted with PMV, trucking

companies and individual owner-operators to identify

operating practices, equipment and skills requirements,

resource gaps, and industry best practices. The interview

question guide is provided in Appendix 1.

Consultations for the project included one-on-one

interviews with trucking companies of varying sizes

and types of operation as well as interviews with

13 individual owner-operators, including senior

representatives of the Vancouver Container Truck

Association–CAW Local 2006. Many of these operators

possess more than 20 years’ experience in the local

container drayage market. A workshop was also held

in January 2013 with 11 owner-operators to obtain

their feedback on the draft toolkit.

Companies Consulted:

» BST Management Ltd./Pro-West Transport

» Harbour Link Container Services

» Canaan Group

» Indian River Transport Ltd.

» CNTL

» KTL Transport

» Damco Distribution Services

» Prudential Transport Ltd.

8 CHAPTER 2

METRO VANCOUVER DRAYAGE OPERATING ENVIRONMENT

METRO VANCOUVER IMPORT/EXPORT CONTAINER SUPPLY CHAINConnects North American and overseas customers in 160 different countries

GOAL: CUSTOMER SERVICE EXCELLENCE THROUGH OPERATIONAL EFFICIENCY

IMPORTERS & EXPORTERS*

SHIPPING LINES

CONTAINER TERMINALS

DRAYAGE COMPANIES

OFF-DOCK FACILITIES

Participants Thousands of companies About 20 different lines

call at the Port

TSI Terminals, DP World,

Fraser Surrey Docks

158 local drayage

companies of varying sizes

50+ facilities in the

Lower Mainland

Principal Assets Cargo owners

(entity that pays the

transport cost)

8,500 TEU ships typical TSI: Vanterm, Deltaport

DP World: Centerm

FSD: Fraser Surrey Docks

A fleet of 1,050 company

trucks and thousands

of chassis

Distribution / transload /

reload centres, container

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

end-to-end supply chain

performance

Market share;

environmental stewardship

Highest possible revenue

generating throughput

Revenue trips per shift,

revenue per move

Highest possible revenue

generating throughput

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

*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).

9CHAPTER 2

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 ProcessExhibit 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.

Source:

Truck Drayage

Productivity Guide,

National

Cooperative Freight

Research Program,

U.S. Transportation

Research Board,

March 2011.

Note:

These flow

diagrams exclude

references to the

reservation system.

SH

IPP

ING

LIN

ED

RA

YAG

EFI

RM

TER

MIN

AL

CO

NS

IGN

EE

Manifest

Recieves

Manifest

Create Pickup

Order

Dispatch

Driver

Pick Up

Load

Bring Load

to Importer

Drop off

Empty to

Terminal

Recieves

Empty

Unload

Container

Delivers

Load

Recieves

Manifest

DR

AYA

GE

FIR

MTE

RM

INA

L

Recieves

Booking

Create Empty

Order

Dispatch

Driver

Pick Up

Empty

Bring Empty

to Exporter

Drop off

Load to

Terminal

Recieves

Load

Delivers

Empty

Receives

Booking

SH

IPP

ER

Load

Container

Export

Booking

Imp

ort

Exp

ort

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.

Exhibit 2: The Drayage Process

10

Key Requirements to Access PMV Container Terminals Three main requirements must be satisfied for drayage

companies to access the marine terminals within PMV’s

jurisdiction: they must have a valid truck license issued

by PMV; they need a Port Pass as a security measure to

access federal port property; and they need a reservation

to pick up/deliver containers, obtained through the

reservation systems administered by each marine terminal.

Each of these requirements is discussed below.

Truck Licensing System

In order for a truck to access a container terminal, it must

be registered under the Truck Licensing System (TLS)

administered by PMV. The TLS was introduced in 2005 to

manage the number of vehicles and drivers. It was later

amended to impose safety and environmental standards

regarding the condition and age of vehicles serving the

port. The TLS also gives PMV a mechanism to impose

sanctions on operators whose behavior does not meet

the port’s standards or service requirements.3

PMV issues two different types of licenses under the TLS:

» Full Service Operator (FSO) Licenses These are intended

for drayage companies that have direct relationships

with cargo interests (shippers, consignees, shipping

companies and agents), provide a complete dispatching

service, and are equipped to provide services in an

efficient and ongoing manner.

There are two types of FSO licenses:

Local: A local license allows a truck to pick up and

deliver both local and long-haul containers;

Long-Haul: A highway license restricts a truck to

picking up and delivering long-haul movements.

» Independent Owner-Operator Permits These are meant

for drayage entities that may be incorporated companies

and do not have a significant pool of equipment or access

to the reservation systems. Owner-operators can only

access port property through a subcontract with an FSO.

There has been a moratorium on owner-operator permits

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

3) It should also be noted that trucking company safety oversight responsibilities,

such as vehicle maintenance and driver hours of service, are governed by the

National Safety Code, which falls under provincial government responsibility.

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

licensees. In 2011, the moratorium on the issuance of new licenses and the

restriction on fleet expansion were lifted for FSOs only to allow them some

flexibility to respond to changing market conditions.

CHAPTER 2

11

drivers will operate within the Port under a Joint Temporary

Permit ("JTP") signed by and issued jointly to the hiring TLS

approved local FSO License holder and a non-TLS approved

owner-operator.

Port Passes

All workers such as truck drivers requiring regular

and frequent access to PMV property must have port-

authorized photo identification called a Port Pass5. Failure

to have a valid Port Pass may result in being refused access

to the port. The Port Pass is a means for PMV, through its

marine facility operators, to comply with Transport Canada

security regulations that require identification of all

individuals on port property.

Reservation System

The marine container terminals in Vancouver have had

mandatory appointment systems since 2005. In order to

access a container terminal by truck, drayage companies

CHAPTER 2

must make a reservation using one of four different

reservation systems (one for each of the four different

marine terminals). Reservations are intended to make

terminal operations more efficient by limiting the arrival

of each truck at a terminal gate to a specific time window

to reduce “peaking” and truck traffic congestion. In addition

to reducing peaking of traffic during normal daytime

operations, the appointment system has been used to

shift traffic to night or to off-peak gates by restricting

the number of daytime reservations available.

The appointment system makes the coordination of

drayage operations somewhat more complex by requiring

more precise scheduling of truck trips to accommodate

the appointment windows at the terminal gates. There are

also reported difficulties in obtaining reservations because

the truck gates of three of the four container terminals are

at capacity during the day shift. Firms that do not comply

with their reservations risk reducing their ability to obtain

reservations in future and are subject to penalties issues by

the marine container terminals, which would effectively

curtail their business opportunities. 5) BCTA is authorized by PMV to issue port passes to drivers of vehicles over

5,000 kilograms and the employees of its member companies.

12

In contrast, diversified full-service drayage companies earn

income from multiple sources and may operate separate

divisions, transporting other types of freight (e.g., flat-deck

truck division to haul forest products or steel). These mixed

full-service operators may transload forest products that

have been transported by rail to Metro Vancouver into

export marine containers. Some of the larger companies

also operate off-dock container yards that can accommodate

the handling and storage of loaded and empty containers.

In some cases, a range of other services is also provided.

Examples include staging of bonded or pre-cleared

containerized cargo for delivery to customers; sufferance

bonded facilities; and warehousing.

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

largest firms with more than 100. It is estimated that the

top 15–20 companies control some 20% of the total fleet

and handle up to about 40% of all gate movements at the

marine terminals.

There are several different types of drayage companies

(see Exhibit 3). Pure drayage operators depend entirely on

revenues earned from moving containers and use company

drivers (employees) and equipment and/or owner-operators

(independent contractors). Some companies also have

long-haul divisions to transport containers to and from

locations outside Metro Vancouver.

PURE DRAYAGE OPERATORS MIXED FULL SERVICE OPERATORS INTEGRATED COMPANIES

Depend entirely on revenue from transporting

import/export containers.

Are diversified into related logistics functions. Vertically integrated players affiliated with other

supply chain partners.

Examples: Prudential, Indian River, Quantum

Transportation

Examples: KTL, which owns Euro Asia terminal;

Harbour Link, with an off-dock yard; LEI Cartage

(warehousing); Aheer (large regional truckload carrier

in the Pacific Northwest, warehousing and storage,

brokerage)

Examples: Damco (owned by A.P. Moller-Maersk);

CNTL (owned by CN); Canaan Group (integrated

logistics, warehousing, customs brokerage,

air freight and courier service)

Exhibit 3: Different Types of Drayage Companies in the Market

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

CHARACTERISTIC DESCRIPTION IMPLICATIONS

Highly fragmented There are 158 privately owned local trucking companies in the

market and 952 owner-operators.

The business is highly competitive, which can result in

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

relatively low and can result in a high rate of entry of operators

into the business. However, there is some evidence that entry

barriers are growing with the increasing cost of obtaining a

reliable truck and the implementation of more stringent

standards under the National Safety Code (NSC).

Peaking of traffic at container terminals may create an incentive

for expansion of owner-operator fleets employed by trucking

companies. This can result in a supply-demand imbalance,

contributing to instability in the sector.

Limited capacity for investment At the owner-operator level, there are limited opportunities

for scale efficiencies and service improvements.

Owner–operators have a limited financial capacity or incentive

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.

Exhibit 4: Drayage Industry Characteristics in Metro Vancouver

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 IndustryThe 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.

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.

CHAPTER 2

14 CHAPTER 3

UNDERSTANDING THEOWNER-OPERATOR BUSINESS

3.2 KEY BUSINESS ACTIVITIES —The owner-operator business is fairly straightforward.

The direct customer of an owner-operator is the trucking

company; the principal activities are indicated in Exhibit 5.

The main truck-trip legs for an owner-operator are outlined

below. Not all of these moves are necessary for each job. It

depends on the nature of the job and the owner-operator’s

activities before and after the job. The owner-operator

generally does not offer other services.

Truck trip leg possibilities:

» To the point of empty chassis pick-up. This is a bobtail

move (i.e., no chassis or container attached to the truck)

from the day’s starting point or the end of the last trip

to a point at which the owner-operator picks up an empty

chassis but no container. Such a move would not apply

if the truck already has the right chassis attached to it at

the start of the trip or if the truck has no chassis attached

because it is picking up a container already on a chassis

at the terminal of origin.

» To the terminal of origin to pick up a container.

This could be a bobtail move to pick up a chassis holding

a container (as noted above) or a move with an empty

chassis onto which a container will be loaded at the

terminal.

» From the pick-up terminal to the delivery terminal.

This is the main and often the only paid component of

the move. The move may be between a container terminal

and an off-dock terminal (customer) or between two

off-dock terminals. It could also be between two

container terminals, but this would be unusual.

3.1 WHO ARE DRAYAGE OWNER-OPERATORS? —There are generally two types of truck drivers in the

container drayage industry: company drivers and owner-

operators. Company drivers are employees of drayage

companies and may be union or non-union workers.

Industry observers estimate that approximately 70% or more

of all company drivers are non-unionized.8 Owner-operators

act as independent contractors selling their services to

drayage companies as drivers and tractor owners.

The main difference between company drivers and owner-

operators is that company drivers are usually paid by

the hour, as employees do not provide tractors. Owner-

operators, on the other hand, are normally paid by the

trip based on a share of revenue received by the drayage

company from its customers and on existing regulated or

contractually agreed rates. They are small business people

who take risks like any other small business owners. These

risks include the acquisition of the truck and the opportunity

cost of their time working in an environment where there is

little control over the business in terms of loads hauled and

revenues earned.9 Owner-operators may also be restricted

in their ability to expand due to limited financial resources.

The terms and conditions for owner-operators vary. Some

may work under the regulated rates or achieve only lower

unregulated rates between off-dock terminals.10 Others

may have superior compensation packages that include fuel

subsidies, paid waiting time at terminals, or remuneration

for deadhead moves (i.e., a bare-chassis move to pick up a

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.

15CHAPTER 3

» From the delivery terminal to an empty chassis

drop-off point. This applies if a truck has an empty

chassis attached to it and must drop off the chassis at

a location other than the container delivery terminal.

It does not apply if the truck drops off a container and

chassis at the delivery terminal (virtually always an

off-dock terminal in this situation), or if it has the right

chassis attached for the next container move.

3.3 BASIC REQUIREMENTS TO ENTER AND OPERATE THE BUSINESS—The owner-operator drayage sector has few barriers to entry.

In Vancouver, the only requirements are:

A: Sufficient resources to purchase and insure a

post-2006, 10-wheel tractor;

B: A Class 1 commercial driver’s license;

C: Other licensing requirements;

D: Passing a safety exam and periodic commercial

vehicle inspections.

Each of these requirements is described in more detail below.

A: Equipment

The only essential equipment required for an owner-

operator is a 10-wheel tractor of appropriate vintage

to meet PMV’s requirements for accessing container

terminals. For the typical owner-operator, a reliable used

truck in the Vancouver market costs about $50,000 to

$60,000. Less expensive trucks are available, but would

require some knowledge about vehicles or the right

contacts outside of British Columbia to acquire. PMV has

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:

2002 and older must pass an annual exhaust

opacity test;

1998 and older can remain in the TLS only with

an approved age exemption.

IMPORT MOVES

Loaded import marine containers holding primarily consumer goods from Asia are

moved from container terminals to off-dock warehouses and distribution centres,

where they are unloaded for local distribution or transloaded into larger domestic

containers for movement by truck or rail to locations outside Metro Vancouver.

EXPORT MOVES

Loaded export containers holding mainly forest and grain products are moved

from transload centres and other shipper facilities to container terminals.

EMPTY CONTAINER MOVES

Empty containers account for a significant level of activity in order to reposition

containers between empty container storage yards, container terminals and the

large number of off-dock terminals located throughout Metro Vancouver.

Exhibit 5: Principal Drayage Activities

of Owner-Operators

11) Port Metro Vancouver, “TLS Environmental Requirements 2012

Program Overview,” January 24, 2012.

16 CHAPTER 3

» Take and pass the commercial road test.

The test has three parts:

A pre-trip inspection test, including an air brake

pre-inspection;

The road test itself;

Driver’s medical exam.

To operate vehicles equipped with air brakes, a driver

must also obtain an air brake endorsement by completing

an air brake course, pass a knowledge test, and pass a pre-

inspection test. A driver may be exempt from an air brake

training course with proof of sufficient air brake experience.

C: Other License Requirements

Owner-operators should obtain a local business license

from the municipality where the business is registered and

must obtain a truck license from the Insurance Corporation

of British Columbia (ICBC). In addition, two other require-

ments are needed to access federal port property: a Port

Pass and a truck license under the TLS that costs $300 a

year (see Section 2.2 for more details).

D: Commercial Vehicle Inspection Requirements

All commercial vehicles with a licensed gross vehicle

weight greater than 8,200 kilograms are subject to the

Province of British Columbia’s Commercial Vehicle Safety

and Enforcement (CVSE) regulations. This generally

requires an inspection by a shop accepted by CVSE as a

Designated Inspection Facility (DIF). A trucking company

that maintains its own fleet may get its shop approved as a

Preventative Maintenance Facility that can inspect its own

fleet. Most owner-operators use a DIF for such inspections.

Engine retrofits or replacements can be used to meet

emission standards regarding age exemptions. The PMV

requirements for future years are evolving. By 2017, trucks

must be 2010 and newer to meet TLS requirements, or 2007

or newer and already in the TLS. PMV’s goal beyond 2012

is to have all trucks in the TLS meet the federal 2007–2010

emission standards.

Secondary equipment includes a two-way radio for

communications with drayage company dispatchers and

a mobile telephone for general communications. A number

of owner-operators carry smartphones, but are reluctant

to use them to communicate with dispatchers; they prefer

two-way radios because the exchanges can be heard by

other parties, creating a communications record.

B: Commercial Driver’s License Requirement

To qualify for a Class 1 commercial license, a driver must:

» Hold a BC driver's license (Class 5 or 6) or an

out-of-province equivalent;

» Have an acceptable driving record with less than four

penalty point incidents in the past two years and no

motor vehicle-related criminal convictions within the

past three years; and

» Be at least 19 years of age.

The necessary steps to acquire a Class 1 commercial

driver's license are:

» Study Driving of Commercial Vehicles. The driver must

study the BC government publication Driving Commercial

Vehicles.

» 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.

17CHAPTER 3

3.4 OTHER REQUIRED RESOURCES —The other main resource required by owner-operators

is equipment that is compatible with the dispatching

technology used by the trucking companies for whom

they work. Typically drayage companies will provide this

equipment. The dispatching systems used by trucking

companies have differing degrees of sophistication.

For example:

» An operator of a major import distribution centre that

operates an in-house drayage company to serve its

clients uses a proprietary freight tracking system. It was

developed for a major importer, is web-based, and can

be used on a mobile phone. Containers passing through

a terminal gate trigger settlement of the transactions.

» A trucking company with about 60 non-union owner-

operator tractors dispatches by mobile phone, but

believes in-cab communications units would be better.

The company also has GPS units installed in its trucks.

» A trucking company with about 70 CAW owner-operators

under contract uses a digital Java-based dispatching

system and does not have GPS.

» A large employer of CAW owner-operators with 24/7

trucking operations dispatches via Blackberrys using a

proprietary program developed by its parent company.

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).

3.5 SELECTION OF WORK —Drayage companies provide several different services

that directly influence the businesses of the owner-

operators who work for them as independent contrac-

tors. These companies have direct relationships with

customers—cargo owners, such as big box retailers, other

types of importers and exporters, shipping lines, freight

forwarders and third party logistics providers—whereas

owner-operators generally do not have such relationships.

It is this customer relationship upon which the trucking

companies have built their businesses. Many companies

have made significant investments in land, buildings,

dispatching and cargo tracking systems, chassis, computer

systems and office staff. Owner-operators, by contrast,

have relatively low levels of investment. They provide a

truck and contract their services to trucking companies

at contracted rates.

As noted previously, the nature of drayage companies

varies depending on several factors such as their customer

base (e.g., import, export), business model (company-

owned trucks with employee drivers, owner-operators, or

a mix of the two), and their relationships with other supply

chain participants. Some companies handle all types of

traffic, including imports, exports and transload cargo,

while others focus on one segment or customer type.

18

Selection of a Drayage Company to Work ForOwner-operators generally choose drayage companies

based on word-of-mouth information. The choice of which

company (or companies) to work for is critical because it

affects shift schedules, the types of loads that are assigned

to the operator, and ultimately the owner-operator’s

revenue stream. Some of the key factors in selecting a

company to work for include: level of compensation,

payment terms, the opportunity for double-ended moves,

driver turnover rate, and how long the company has been

in business.

Drayage companies use a similar word-of-mouth approach

to hire new owner-operators. Nevertheless, some

companies that advertise for owner-operators have

received large volumes of responses. Based on industry

interviews, a “good” owner-operator possesses several

qualities, including a focus on safety; mechanical aptitude;

the ability to see the “big picture”; and the ability to

understand and manage stress.

Selection of Loads and Work SchedulesOwner-operators typically do not have much say in the

selection of loads they move because the dispatcher of the

company for which they work generally specifies the work

based on customer demand and on the marine container

terminal reservations the company has been able to obtain

for a particular day. A typical work schedule for an owner-

operator begins at 5:00 a.m. to pick up the first job of the

day. The working day usually ends between 4:00 and

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.

Senior owner-operators generally do not work night gates.

Some junior owner-operators will work night gates as a

second shift to earn revenue as long as they remain within

the 14-hour on-duty time in a day permitted under National

Safety Code trucking hours of service regulations.

Examples of working hours based on selected industry

interviews are:

» One company operating primarily as a freight forwarder,

with its own trucks and agreements with owner-

operators and trucking companies, is open from 7:00 a.m.

to 4:00 p.m.

» A drayage company with a small storage yard for

containers is open from 6:30 a.m. to 9:00 p.m. weekdays

and on Saturdays and Sundays as required.

» A company with about 70 CAW owner-operators under

contract maintains that shifts should be 6:00 a.m. to

6:00 p.m. or 5:00 a.m. to 5:00 p.m. to give drivers a

reasonable quality of life.

For unionized owner-operators, seniority dictates work

assignments. The first move in the morning—considered

to be the best move of the day—is generally given to

operators with greater seniority. As an example, we

interviewed an experienced CAW driver who has been

driving with his current trucking company for only one

year. Even though he has been in the industry for several

decades, he is low in seniority relative to the work

assignments received. The seniority issue makes switching

among trucking companies an unattractive proposition for

unionized owner-operators with long tenures.

CHAPTER 3

19

3.6 KEY BUSINESS DRIVERS —Given that owner-operators have only a limited degree of

control over their workloads and revenue streams once

they have selected a company to work for, their profit-

ability critically depends on productivity and the utilization

of their truck. Their truck is the principal asset in the

business. These factors, discussed below, explain why

owner-operators look at the number of turns per day as a

key metric in performance evaluation. A rule of thumb in

the industry is that a minimum of three round-trip revenue

moves a day are needed for a driver to make money.

ProductivityFrom the owner-operator’s perspective, productivity

corresponds directly to the number of revenue-generating

moves completed in a working day. Productivity is a key

factor impacting an owner-operator’s income, because

compensation is typically calculated per trip and not on an

hourly basis. Therefore, the number of revenue moves per

day that a driver can complete will directly dictate how

much income the driver earns. This differs from company

employee drivers, who are typically paid on an hourly basis

and whose compensation is therefore independent of the

number of moves completed per day.

A key factor impacting container drayage productivity

(and thus owner-operator income) is the ability to achieve

double-ended moves. A double-ended move occurs, for

example, when a truck is able to deliver an export container

to a terminal and pick up another import container on the

same visit. Double-ended moves allow owner-operators to

be more productive, increase revenues and lower operating

costs by reducing unproductive travel. Reduced travel also

helps decrease road traffic congestion and lessens the

environmental impact of trucking.

There are no reliable data regarding double-ended move-

ments. Discussions with various operators revealed a wide

range of performance. Some carriers achieve more than

50% of their total moves as double-ended moves, while

others may achieve only 10–15% or less. Anecdotal

evidence based on consultations carried out for this report

suggest the industry average has deteriorated from about

30% double-ended moves in 2005 to around 20% today.

Truck UtilizationThe truck (tractor) is the largest capital expense in an

owner-operator’s business. Buying one is a fixed cost that

is incurred whether or not the truck is operating. Therefore,

increasing the use of truck equipment enables fixed costs

to be allocated across more revenue-generating trips,

decreasing fixed costs per trip. These savings, in turn,

result in increased revenue and profitability.

Given the limitations on operating hours permitted by

safety regulations, increased truck usage can only be

accomplished by adding a driver to existing truck

equipment. But owner-operators typically have little

incentive to bring in a second (relief) driver because they

want to maximize their own activity on the day shift and

there are limited opportunities to work evening shifts.

Few drivers want to work for the limited number of

moves available on a second shift.

CHAPTER 3

20

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.

STAKEHOLDER ROLE IMPACT ON OWNER-OPERATORS

Shipping Lines Shipping lines transport loaded and empty containers to/from the port

for cargo owners and freight forwarders, and contract with marine

terminals, drayage companies and railways to handle landside logistical

activities.

» Influence the use and distribution requirements of

empty containers

» Late ship arrivals create volume bubbles that increase congestion

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

of containers. The focus is on reducing the time that containers wait in

the terminal. The terminals only have operational relationships with

drayage companies.

» Surges in import/export container volumes increase wait times at

the terminal and lead to increased truck-turn times

» Longshore labour productivity has a major impact on terminal

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

containers by rail to/from marine container terminals. Inbound

containers arriving in Vancouver by rail from central/eastern Canada

are a major user of trucks for transport to final destinations in local

markets.

» Trains can block road intersections and increase truck wait times

» Rail activity impacts labour availability in the marine terminals and

therefore truck productivity at terminal gates

» Railways dictate the location for storage of empty containers at

marine terminals that can take up to 40% of terminal capacity

Degree of impact – MODERATE

Importers / Exporters

(Cargo Owners)

Cargo owners ultimately pay the transport costs. They contract with

shipping lines, drayage companies and railways to move cargo from

domestic/foreign origins to foreign/domestic destinations. The focus is

on end-to-end supply chain reliability and cost.

» Can influence the selection of drayage companies

» Impacts timing of available loaded and empty containers

for truck transport

Degree of impact – LOW to MODERATE

Trucking Companies Trucking companies have direct relationships with cargo owners, and

contract drayage work to owner-operators based on both customer

demand and the marine container terminal reservations that the

company has obtained for a particular day.

» Trucking companies directly influence the selection of work

(type and number of trips), shift schedules and ultimately the

owner-operators’ revenue stream

» Impacts the compensation level and payment terms

Degree of impact – HIGH

Port Metro Vancouver PMV leases terminals to marine terminal operators under long-term

(50-year) leases and administers the Truck License System (TLS).

» PMV effectively dictates the terms of access to the container

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

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

CHAPTER 3

22

FINANCIAL ASPECTS OF THE OWNER-OPERATOR BUSINESS

The previous chapter described the owner-operator

business and what it does. This section of the report

will focus on the financial and cost characteristics of

the business.

This chapter presents the only comprehensive drayage

costing model available in Metro Vancouver today.

It also provides several analytical tools that may be

used by owner-operators to prepare a business plan,

which, in turn, may be used to evaluate and benchmark

their business or obtain financing. The purpose of these

tools is to help owner-operators better understand and

manage their businesses in order to improve their

financial performance.

These cost and financial tools may also be used to analyze

a variety of operational and policy questions, such as12:

» Should potential new owner-operators get into

the business?

» Should existing owner-operators exit the business?

» What are the financial impacts of improving productivity

in the drayage sector?

» What are the cost/financial impacts of operating new

versus used trucks?

» Do the existing regulated rates adequately compensate

owner-operators, who comprise approximately half the

drayage labour force in Metro Vancouver?

The chapter begins with a discussion of revenue and

compen sation, followed by a description of the owner-

operator truck cost/financial model and the main

assumptions used to develop the model. Appendices 3

and 4 provide additional detailed assumptions and some

sample results from the application of the model.

4.1 REVENUE AND COMPENSATION—To understand the current financial situation of Metro

Vancouver owner-operators, some background is appro-

priate. In the summer of 2005, concerns by owner-operators

regarding high fuel costs and excessive wait times at

container terminals that significantly reduced truck produc-

tivity and income led to a five-week shutdown of the port

when owner-operators withdrew their services. The dispute

was resolved through the Vince Ready Memo randum of Agreement (MOA) between trucking companies and owner-

operators, which established a schedule of minimum rates

(“Ready rates”) that non-unionized owner-operators would

be paid to move containers.13 A number of steps were taken

to develop the current Port Authority Operations Regulations14 for the purpose of facilitating stability in port operations.

The Regulations created a legal obligation for the Vancouver

Fraser Port Authority (i.e., PMV) to establish a system of

written agreements in the form of licenses (administered

under the TLS) that established minimum conditions

regarding truck trips to/from port terminals. The key aspect

regarding compensation is that owner-operators must

be paid the equivalent of a rate published in a collective

agreement of a competing drayage operation (for unionized

drivers) and not be paid less than the rates set out in

the MOA (for non-union drivers). Although the rates

are enforced by a system of audits carried out by the

BC Ministry of Transportation and Infrastructure as an

appointee of PMV, this system is widely viewed in the

industry as ineffective and virtually impossible to enforce.

12) The costing model and financial tools described herein form part of the

owner-operator toolkit mentioned in Chapter 1 and are available in a separate

Excel spreadsheet format.

13) Vince Ready was appointed by the provincial and federal governments as a

mediator to the dispute. The Memorandum of Agreement (MOA), dated July 29,

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.

14) Refers to Port Authorities Operations Regulations (SOR/2000-55).

Regulations are current to 2013-03-04 and were last amended on 2007-07-31.

See http://laws-lois.justice.gc.ca/eng/regulations/SOR-2000-55/.

CHAPTER 4

23CHAPTER 4

Although the regulated rates include a fuel surcharge

component that provides a small offset for rising fuel costs

(the surcharge is only about 6% applied to the total Ready

rate), the Ready rates have not changed since August 1,

200615 despite changing market and cost conditions. The

rates are prescribed on a per-trip basis for different origins

and destinations in Metro Vancouver to provide a

theoretical rate floor (see Appendix 2).

Initially, the MOA and Regulations were interpreted as

applying to the delivery or pick-up of containers, including

hauling containers between the marine container terminals,

customers and final locations that included off-dock sites.

However, in 2010, PMV concluded that the Regulations only

covered the trip leg between the customer and the port,

not the leg to/from an off-dock location. Transport Canada

supported this interpretation and determined that federal

regulation applied only to those moves that originate or terminate at the port’s marine container terminals.

The impact is that owner-operators may not always

be fully compensated for “third leg” moves (i.e., moves

between off-dock locations, such as terminals, storage

yards and rail yards) that are not on port property. This

is significant because large proportions of the drayage

activity in the region relate to moves between off-dock

locations, while moves to or from container terminals

often involve at least one empty chassis move.

The third-leg remuneration issue has been exacerbated

by the continued development and dispersion of off-dock

facilities throughout Metro Vancouver.

One carrier stated that up to 80% of import containers go

to an off-dock location once their import cargo is unloaded

in the Metro Vancouver area. On the export side, the figure

may be lower, perhaps in the 30–40% range. The level of

compensation for an off-dock movement varies widely

depending on company policy (see also Appendix 2 for

commentary on the Ready rates).

4.2 TRUCK COST / FINANCIAL MODEL—This section outlines the technical foundation and

methodology used to develop the owner-operator truck

cost/financial model. It begins with a review of the

principles of financial models in a trucking application,

followed by a description of the main truck cost elements,

the cost/financial model tools that were developed, data

sources and key assumptions. Sample results from the

model are provided in Appendix 4.

Principles of Financial ModelsFinancial models are generally used to evaluate business

decisions regarding operations and investments. They

incorporate revenues and expenses, estimate profits and

compare profits with the investments required. Expenses

in financial models for trucking can involve various kinds

of estimates, including:

» Estimates from first principles. Examples include fuel

cost estimated as consumption per unit, such as litres

per kilometre multiplied by the prevailing market price

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

surveys of truck operators generate a good database

of operating costs as inputs to a financial model.

Because surveys are conducted at a particular point in

time, it is generally necessary to escalate costs from

the time of the survey to reflect current price levels.

15) On July 29, 2005, the Ready MOA established the schedule of minimum

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

License System (TLS) and to enforce the Ready rates for non-unionized

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

original 2005 Order-in-Council. The Schedule 2 rates are slightly higher than

those contained in Schedule 1. See Appendix 2.

24 CHAPTER 4

» Evaluations of accounting data and other records.

If an owner-operator maintains good records of costs and

business activity, it is possible to generate cost estimates

customized for particular operations for each year of

activity. It is possible to export data from accounting

software into analytical software, such as Microsoft

Excel, to estimate unit costs for modeling purposes.

The financial model that was developed for this study is

essentially a combination of all three of these approaches

and is described in the methodology section below.

Treatment of Revenue in the Financial ModelRevenue is a simple calculation in principle: payment for

the sale of a good or service multiplied by sales volume.

However, it is less simple in the case of owner-operator

container drayage. This is due to the variety of different

payment schemes (i.e., union collective agreements,

Ready rates for moves to and from marine container

terminals, and market rates for some other moves) as well

as the variety of truck movements that an owner-operator

can make to serve different origins and destinations.16

The latter includes paid movements, such as transporting

full or empty containers between terminals, and move-

ments that may be paid in some cases but not all, such

as picking up or dropping off empty chassis.

The treatment of revenue in the financial model for the

purposes of this study is straightforward. The model use

has two approaches. The first approach requires the user to

input total revenue in any given time period (i.e., per move,

per day, per month). The second approach derives revenue

from the Ready rate scale that compensates owner-

operators by the trip, depending on the origin and

destination for the container move.

Understanding Truck CostsSince the revenues that owner-operators receive are

largely beyond their control, at least in terms of the per

trip rates they receive, success as a business owner

critically depends on understanding and managing costs.

An operator who can reduce costs by five cents per kilo-

metre will save $3,000 a year over 60,000 kilometres driven

in one year. These savings go entirely to bottom-line profits.

Expenses generally have fixed and variable components

(see Exhibit 7). Fixed costs may be viewed as the costs

of time—they do not change from month to month,

and include ownership of tractors (depreciation, capital

recovery, etc.), insurance and license fees. Fixed costs

are allocated to period costs, such as a trip in proportion

to distance in relation to the annual utilization of a tractor

in kilometres.

Variable costs are those costs that vary with trucking

activity, such as distance traveled or time spent, and

include fuel, operator wage allowance, and maintenance.

Some costs may have both fixed and variable components.

For example, tire costs may be treated as either variable

costs (e.g., tire replacement cost divided by tire life

measured in kilo metres) or short-term fixed costs by

treating tires as a capital replacement cost (e.g., tire

replacement cost every two years); the choice of approach

may depend on the distance driven in a year.

Costing models usually divide investments into fixed assets

(primarily tractors in the case of this study) and working

capital (funds required to run the business). The main

elements of working capital are cash, accounts receivable

(income for work performed and invoiced, but not yet paid)

and the liability of accounts payable (expenses incurred

but not yet paid). Accounts receivable are a particular

issue for small businesses like drayage owner-operators:

if customers are typically slow to pay, the owner-operator

must have sufficient capital to allow for this.

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

Westminster to Vanterm or Centerm, located at Burrard Inlet, is $115 per trip.

25CHAPTER 4

VARIABLE COSTS FIXED COSTS

» Driver*

» Fuel

» Maintenance and Repairs

» Tires

» Miscellaneous

» Tractor (truck) depreciation**

» Licenses (provincial government, TLS)

» Overhead and financing costs***

* Includes wage cost for driving,

the cost of waiting time for

loading /unloading, and overhead

costs (annual vacation, Workers’

Compensation, etc.).

** Since owner-operators do not generally

own chassis, the focus is on tractor

costs.

***Vehicle insurance (drayage company

typically pays cargo insurance),

administration, working capital.

Truck Cost / Financial ModelA consistent theme that emerged from the industry

consultations is the need for owner-operators to identify

and better understand the costs of operating their

businesses. The most successful owner-operators in the

industry are keenly aware of and closely manage their

costs. This is critically important because every dollar

in cost savings goes directly to the bottom line.

The truck cost/financial model consists of three analytical

tools as the most practical way to identify, manage and

benchmark an owner-operator business. These tools are

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.

» Trip Cost Analyzer. Develops the full costs (including

wages and allocated fixed costs) and a profit contribution

of a particular trip from start to end. It provides the

structure of overall costs and an estimate of the costs

of the trip against which owner-operators can compare

their trip revenue. The trip cost analyzer can be used to

determine whether or not to accept a particular container

movement job or to evaluate the adequacy of remune-

ration paid to an owner-operator by a drayage company.

» Pro Forma Financial Tool. Evaluates the business from

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),

owner-operator capital requirements, loan draws, loan

repayments and interest, sale of assets at the end of

the business, and some measures of financial return

(e.g., return on capital, return on equity, discounted

cash flow). The principal use of the pro forma tool by

an owner-operator is to address questions such as:

How much capital do I require?

What annual returns can I expect?

Do I really want to get into this business?

What financial information is needed in a business

plan that I could take to a financial institution to

obtain a loan to finance my business?

Exhibit 7: Fixed and Variable Drayage Cost Elements

26 CHAPTER 4

Methodology and Key AssumptionsThe initial database used for the container drayage truck

cost/financial model is derived from Ray Barton and

Associates (Barton), who have prepared periodic surveys

of trucking costs in Canada for Transport Canada for

a number of years.17 Barton uses several data sources,

principal among them surveys of trucking companies,

and prepares costs for Canadian regions and for different

kinds of tractor and trailer combinations.

The Barton model provides a credible framework for the

drayage financial model. However, in order to better reflect

the cost characteristics of the Metro Vancouver container

drayage industry, the Barton model was refined in a

three-step process.

First, the costs were indexed to bring them to 2012 levels,

since the Barton model used 2010 values. The second step

refined the Barton model based on select data obtained

from Metro Vancouver trucking companies and owner-

operators.18 Several adjustments were made to reflect

local drayage operating and cost conditions. The main

adjust ments made to the Barton model are: increased driver

costs to reflect longer wait times at container terminals;

lower tractor ownership costs due to the use of older, less

costly trucks; higher maintenance, repair and tire costs;

and lower overhead and administration costs. The third

step was to refine the model to allow user inputs for several

major cost items. These are hourly driver wage rate, fuel

cost per kilometre, maintenance cost per kilometre,

administration cost per year, tractor capital cost, and

annual tractor utilization.

Exhibit 8 highlights the primary data sources and key

assumptions used in the truck cost/financial model.

The Trip Cost Estimator and Profit Estimator allow the user

to modify the following inputs in order to analyze any type

of container drayage operation in Metro Vancouver:

» Average annual tractor utilization (in kilometres),

which is part of fixed-cost allocation

» Average speed

» Tractor financial parameters, including new or used

vehicle, capital cost, vehicle life and residual value

» Trucking distances to cover all likely moves (i.e., to point

of empty chassis pick-up, pick-up and delivery at terminals

and to the point of empty chassis drop-off)

» Waiting time at terminals or off-dock locations

» Profit as a percent of total cost

» Ready rate origins and destinations

The Pro Forma Financial Tool allows the user to adjust the

following inputs:

» Capital expenditures for equipment other than the tractor

» Working capital and loans

» Trip characteristics based on annual averages

» Annual revenues, costs and escalation factors to allow

for five-year business projections

All three models allow users to choose between model

default values or enter their own estimates for the

following operating costs:

» Fuel (the default value is per kilometre, but the user

can enter specific estimates of fuel consumption,

such as litres/kilometre, as well as fuel price per litre)

» Maintenance cost per kilometre

» 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.

27CHAPTER 4

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

value from Barton

confirmed through

consultations

The Barton default value is $0.548/km. Since fuel is one of largest variable cost items, accounting for approximately 22% of

total variable costs, the model provides the option to input a specific fuel consumption rate in miles per gallon and current

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.

Maintenance

& Repairs

User input or default

value from Barton

confirmed through

consultations

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

assumed to be 50% higher than the new truck cost. The user can choose to enter his own estimate of maintenance and

repairs in dollars per km. Maintenance and repair costs are about 5% of total variable costs.

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

Ownership

User input or default

value based on

consultation results

and industry best

practices

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

a specific vehicle (newer vehicles can cost $90,000 to $140,000). A key factor for ownership cost is the annual vehicle

utilization rate that is used to allocate this cost over time. Truck utilization varies widely among owner-operators. Depending

on the nature of the drayage operation (i.e., pure drayage, or shunting at a major customer, or more highway moves from rail

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

value based on

consultation results and

industry best practices

The default value is $10,000/year based on best practices and covers general administration and bookkeeping, accounting

and legal fees. General overheads are assumed to be 45 minutes per working day. The user of the model has the option of

using any other value stated as an annual cost.

Exhibit 8: Cost/Financial Model Key Assumptions

28 CHAPTER 4

Sensitivity of the Model to Changes in ProductivityThe Profit Estimator provides a powerful tool to evaluate

the financial impacts of different drayage operating

scenarios. For example, it could be used to assess the

impact of improving productivity by increasing the number

of double-ended moves, reducing wait times at container

terminal gates, or improving travel times associated with

infrastructure improvements, such as the South Fraser

Perimeter Road. It could also be used to evaluate the

potential impacts of policy changes, such as promoting the

use of newer trucks in order to reduce the environmental

footprint of port-related activities.

Exhibit 9 illustrates the impact of improving truck

productivity on owner-operators’ returns. In the base case

scenario, the owner-operator makes three revenue trips

per day, and has to travel 20 kilometres to the terminal to

pick up the container as well as another 10 kilometres from

the delivery terminal to position for the next revenue load.

This results in a total of 30 kilometres of unpaid driving

activity, and limits the number of paid container moves that

can be handled in the day. Under this scenario, the net

return to the driver is $20.30/hour.

In the second scenario, the operator achieves four revenue

trips per day and is able to reduce unproductive driving

activity from 30 kilometres in the base case to 10 kilometres

due to double-ended moves. This reduces both the total

distance driven and unproductive time. The result under

this scenario is to improve the net return to $32.29/hour,

a gain of 60%. Under the third scenario, five revenue trips

are made in the day, and additional double-ended moves

and reduced queuing time at the terminal improve

productivity even further. The net return increases to

$38.95, a gain of 92% over the base case.

These scenarios demonstrate the high degree of sensitivity

of owner-operator returns to changes in productivity.

Productivity improvements are one of the most critical

aspects in improving operating conditions in the drayage

sector.

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%

Exhibit 9: Sensitivity of Returns to Truck Productivity

Improvements (Revenue and cost, $/day)

* 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.

29CHAPTER 5

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 PROPOSITION—From a drayage company perspective, owner-operators

provide benefits that enhance the value of their own

business, as well as the services they are in turn able to

offer to the importers/exporters and shipping lines who

are their primary customers:

» Cost advantages. Drayage companies could achieve

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.

» Flexibility. Companies that use owner-operators have

the flexibility to adjust the size of their operation by

expanding or contracting in a timely and cost-effective

manner in response to changing market conditions.

» Access to TLS Independent Owner-Operator Permits.

Given the existing moratorium on TLS licenses for owner-

operators, those who already have a license add value by

providing a ready supply of labour to companies looking

to bring on additional operators.

30 CHAPTER 5

5.2 COMPANY CRITERIA: SELECTING GOOD OWNER-OPERATORS—A common theme that emerged from the interviews is an

emphasis on safety. Several companies indicated that

owner-operators must have a clean safety record and

comply with National Safety Code (NSC) standards

regarding drivers and vehicle maintenance.

The main skills/attributes used by companies to identify

and select good operators include:

» Good reputation in the industry for reliability;

» Sufficient driving experience;

» Positive attitude, willingness to learn and an under-

standing of the gateway container supply chain

“big picture”;19

» Dependable and flexible—able to handle frequently

changing work requirements;

» Responsible and to have developed a business plan,

business systems and a regular preventative truck

maintenance program;

» Understands and manages stress (self-awareness);

» Mechanical aptitude.

5.3 OWNER-OPERATOR CRITERIA: SELECTING A GOOD COMPANY TO WORK FOR—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.

From an owner-operator’s perspective, the key questions

to ask when selecting a company to work for are:

» How long has the company been in business?

The longer the better.

» What is the company’s driver turnover rate? The lower

the better, because high driver turnover may indicate

poor working conditions.

» Does the company provide a signed contract with clearly

defined terms of the business arrangement?

» What do discussions with other owner-operators who

work for the company indicate about the company and

its working conditions?

» How does the company compensate its owner-operators

in general and what are its detailed compensation terms?

» Will it be possible to get double-ended revenue-

generating moves?

» Does the company pay for waiting time at marine

terminals and subsidize fuel costs?

» How long does it take to get paid after hauling a load?

» Does the company have established arrangements with

a repair shop that can help owner-operators with truck

repairs under the company umbrella?

This last point can be extremely valuable because it helps

reduce delays in getting unexpected repairs completed,

thereby minimizing downtime in the event of mechanical

problems with the vehicle that is the owner-operator’s

chief source of income.

19) Interestingly, several interviewees had the misperception that

PMV somehow controlled the container terminals.

31CHAPTER 5

5.4 KEY CHALLENGES—There are major opportunities for growth on the horizon.

Import and export container traffic volume moving through

the port is expected to approximately double by 2030 to

about 6 million TEUs. To realize the growth opportunities

ahead, the operation and performance of the drayage

sector serving the port must be improved.

The fundamental challenges confronting the drayage

sector may be grouped into three broad areas:

» Lack of a sustainable economic model. Intense price

competition, the fact that the Ready rates do not keep

pace with current market conditions, and the false

security of the rate “floor” under the regulated rate

regime mean there is no sustainable economic model

in the drayage sector—a factor that contributes to

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.

Several of the challenges are symptoms of underlying

systemic factors, for example: the inherent seasonality

of the container trade, which causes periodic volume

fluctuations; legacy reservation systems of the terminal

operators; longshore labour paradigms; and container

terminal capacity constraints. The combination of these

and other factors results in a significant degree of “noise”

and finger-pointing in the system, and are exacerbated by

daily operational frustrations that occasionally flare up as

well as a general lack of trust. These issues cause a great

deal of anxiety in the drayage community.

The systemic challenges are beyond owner-operators’

control or influence. Other issues are a matter of policy,

such as the extent to which the provincial and federal

governments should be involved in rate regulation in the

drayage sector and whether or not market forces would

promote greater stability.

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.

ITEM BEST PRACTICES

Cost ControlReducing costs by just 5 cents/km will save

$3,500 a year for an owner-operator who

drives 70,000 km per year—these savings

go directly to the bottom line.

» Understand and manage all costs, fixed and variable

» Focus on minimizing the most significant cost items, such as fuel and tractor purchase

» Implement a preventative truck maintenance program to keep costs under control and minimize revenue lost to

equipment breakdowns.

Truck AssetsAn owner-operator’s truck is the most

important asset—having a safe, reliable,

cost-effective vehicle(s) is critical for success.

» Consider acquiring a new truck that offers the following potential benefits:

May be more reliable than an older, used vehicle

Less costly due to fewer mechanical issues

Repairs covered under warranty

Complies with PMV age/emission standards, which are becoming more stringent to improve port standards

Performance MonitoringSuccessful owner-operators adjust for

changing conditions to maximize profitability

—the key here is to track performance

against a business plan and budget in order

to determine what adjustments to make.

» Develop a business plan and budget to track finances

» Keep good records to determine how the plan/budget is working and whether or not adjustments are required

» Utilize accounting software for bookkeeping and reporting

» Account for depreciation by setting aside money for eventual vehicle replacement

» Keep a reserve ($10,000–$15,000) to accommodate unforeseen expenses, such as major vehicle repairs

Recommendations for Owner-Operators

1% Tires

4% Maintenance & Other

18% Fuel

20% Fixed Costs

33% Driver Wait Time

24% Driver Operating Time

Source: CTC-Seaport Drayage Trip Cost Analyzer.

33CHAPTER 5

Recommendations for Other StakeholdersSome of the key challenges identified above are already

being addressed through other initiatives, for example

those led by the Container Drayage Leadership Team

and Port Metro Vancouver, particularly with regard to

the development of a more integrated planning and

operations environment and the collection of data on

drayage operations and activities in the region. Technology

also has a significant potential role to play in the solutions.

The following five recommendations are advanced for other

stakeholders to improve the performance of the drayage

sector in Metro Vancouver. The objective of these recommen -

dations is to create a more stable and sustainable drayage

sector and to improve knowledge and understanding within

the industry:

» Develop a communications protocol, in cooperation with

the BCTA and PMV, as a means to increase the general

knowledge and understanding of owner-operators

working in the drayage sector and communicate the

steps that industry and governments are taking to

address structural challenges in the industry.

» Develop a shipper education campaign to increase

awareness and understanding of the impact of shippers’

decision-making on the drayage sector in general and

on owner-operators in particular with respect to vehicle

maintenance, driver training and other aspects of safety

management. Insufficient compensation to drayage

operators increases the risk of sector instability, reduces

owner-operators’ financial means to invest in newer truck

equipment, and can be an impediment to attracting a

sufficient number of quality drayage operators to service

projected gateway container traffic volumes.

» Develop a drayage cost index that can be used to

identify and track operating costs in the industry on

an ongoing basis. The index would provide a useful

bench-mark for owner-operators and drayage companies

to advocate for rate increases and help transition away

from the existing regulated rate regime to a market-based

system.

» In order to address the challenge of limited knowledge

and understanding of the financial management aspects

of the drayage business, consideration should be given

to developing an education and awareness program for

owner-operators. The goal is to provide basic information

and the fundamental principles of business management

and financing to help existing and potential new owner-

operators better understand best business practices.

» Consider creating a drayage sector ombudsman to act

as a credible, empowered and more unified voice for

the industry in order to address operational issues and

communicate progress on these issues.

34 CHAPTER 5

Toolkit RecommendationsThe 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 DRAYAGE BUSINESS

Owner-Operator Essentials

» 1.1 Drayage Business Environment

» 1.2 Lifestyle

» 1.3 Business & Financial Considerations

» 1.4 Choosing a Company to Work For

» 1.5 What Companies Look For

MY TRUCK

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

MY BUSINESS

Managing My Business & Money

» 3.1 Budgeting & Bookkeeping

» 3.2 How Am I Doing?

» 3.3 How Can I Make More $$$?

» 3.4 Understanding My Costs

» 3.5 Financial Tools

GLOSSARY A – Z

The recommended structure of the toolkit is shown below.

APPENDICES

36 APPENDIX 1

APPENDIX 1 INTERVIEW QUESTION GUIDE

1. What is the nature of your business and who are

your key customers (import, export, transload, etc.)?

2. What services do you provide and what are

your customer requirements?

3. What is the typical work schedule?

4. What are the most critical factors impacting this

schedule (terminal issues, road congestion, reliability

of drivers, etc.)?

5. What is the proportion of company drivers to

owner-operators in your business?

» What factors determine this?

» What issues dictate the choice between

company drivers and owner-operators?

6. Are your drivers unionized? If so, what is the proportion

of unionized drivers in your business and to what unions

do they belong?

7. How does your dispatch system work and what does it

cost to operate?

» Are there any lessons in it for owner-operators?

8. What equipment do you need for your business

(tractors, chassis, hardware, software, communications,

GPS, etc.)?

9. How was this equipment financed and what does

it cost to purchase/lease?

10. What is the average age of your own tractor fleet?

» How many kilometres a year does your average

tractor operate: for drayage and for long-haul?

11. Is there a driver shortage in the Lower Mainland?

If so, what should be done to address it?

12. Do you currently have a driver training program?

» What are your needs in this area?

» What resources would be helpful to improve driver

training?

13. How are your drivers paid (own drivers versus

owner-operators)?

14. Are the Ready rates current with respect to

market conditions?

» What is the revenue split with owner-operators for

Ready rate moves?

» How do Ready rates vary from the non-regulated

drayage market?

15. What tools/resources would you find the most useful

to improve the performance of your business?

16. What are the key factors affecting your profitability,

both within and outside of your control?

17. Would you find value in having real-time information to

operate your business? What would be most valuable?

18. Regarding owner-operators:

» How do you select owner-operators?

» What qualities define a “good” operator?

» Is there a high turnover of owner-operators at your

business and in general? If so, why?

» What is the typical age of their tractors?

» What is a typical tractor utilization in kilometres

(or hours or other)?

» How suited are their tractors to container drayage,

and what are the issues?

37APPENDIX 1 INTERVIEW QUESTION GUIDE

» How knowledgeable are owner-operators about

their own trucking businesses?

What is their understanding of basic business principles?

What is their understanding of their operational

costs and bottom lines?

To what extent do they use accounting systems?

» What skills, tools, etc. would make owner-operators

more effective in their businesses?

» What kinds of real-time information would be valuable

to owner-operators, perhaps via an app on a mobile

phone (iPhone, Android, etc.) plus a website?

Examples could include:

Real-time updates on road information, congestion

and travel speeds (Google Traffic?)

Reports on congestion at marine container terminal gates

Daily market conditions

» To what degree do you think owner-operators

understand simple and complex business and general

concepts? How much does this vary by individual?

» What are some good ways to get new concepts and

information across to owner-operators about their

business and business practices? Visuals, stories,

workshops, examples, manuals, storyboards? Other?

19. Regarding trucking costs (main focus on owner-operators):

» How do you record, evaluate and use trucking costs

in business planning?

» Are there any lessons in this for owner-operators?

» What is the price of a new tractor appropriate for

Metro Vancouver drayage?

What are its specifications?

How long would you keep such a tractor and

what would be the resale price?

» What are some typical characteristics of

owner-operator tractors?

Age at acquisition and price

Appropriateness for Metro Vancouver drayage

Typical specifications

How long would an owner-operator keep such a

tractor and what would be the resale price?

» Regarding variable tractor operating costs in general,

what are unit costs (per kilometre) for:

Maintenance? (And how does this vary for new

and older tractors?)

Tires?

Fuel?

Driver (operating)?

Driver (waiting—should this be per hour?)?

How does one handle the cost of tractor waiting

time in general?

Driver time with fixed costs allocated per kilometre

and variable costs close to zero?

Should one differentiate between standard time

allowances at terminals and non-standard time,

such as gate queuing?

» Regarding fixed tractor costs:

Licensing: What is the annual cost of licensing

a tractor?

» Insurance (operating) cost:

What is the annual tractor insurance cost,

and is it strictly fixed?

» Administration (operating) costs:

What are the key administration items for an

owner-operator?

What level of annual administration costs would you

expect for an owner-operator? How does this vary

with annual tractor utilization?

» Tractor ownership costs:

What is best way to handle them for owner-operators?

Depreciation plus interest?

Loan payments plus a return on own capital (equity)?

Capital recovery (overall return to cover debt

and equity)?

Other?

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

39APPENDIX 2 READY RATE SCALE

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:

For a five-kilometres repositioning move, the driver would receive $75.

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.

41

APPENDIX 3 PRO FORMA FINANCIAL MODEL INPUTS

APPENDIX 3

The pro forma model input worksheet has several

sections, as follows:

Average Utilization and SpeedThis is an input value with the default 40 kilometres

per hour.

Selection of Input CostsThe user can:

» Input his own value for driver compensation

and payroll burden.

» Choose between model defaults for fuel cost or enter his

own values for miles per gallon and fuel price per litre.

» Choose between model defaults for repair and

maintenance costs or enter his own value per kilometre.

» Choose between model defaults for administration

costs or enter his own value per year.

Selection of Financial ParametersThe user can enter:

» Tractor financial parameters

» Other capital expenditures, such as a computer

and tools

» Start-up year

» Income tax rate

» Working capital parameters

» Capital contributions to the business

» Loan interest rate and term

The components of the model and key assumptions

are outlined below.

Working Capital AssumptionsWorking capital is the difference between current assets

and current liabilities. The principal current assets are cash

or cash equivalents and accounts receivable. Accounts

receivable are amounts owed for services performed and

invoiced but not yet paid.

Discussions with owner-operators indicate that they are

paid several weeks after they make a container drayage

move; a value of 45 days was used for accounts receivable.

The principal current liability is accounts payable. These are

for items that have been purchased but not yet paid for. An

example is a tank of fuel bought on a credit card and paid

for as part of the credit card payment. Invoices for goods

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

accounts payable; it was assumed that owner-operators

draw “wages” throughout each month.

A loan with an interest rate of 6% and a term of five years

was assumed. This would be typical of a small business

loan secured by an asset such as a house. Some owner-

operators reported difficulty in securing line-of-credit loans

because they could not demonstrate adequate proof of

income.

Selection of Trip Characteristics & RevenueThe 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

number of working days in a year, and the number of

trips per day (see below).

Three categories of truck waiting time are listed: waiting

at a pick-up terminal (0.5 hours assumed for a typical

off-dock terminal); waiting at a marine container terminal

to discharge a container (1.0 hour as typical at PMV

terminals); and an allowance for other queuing, which

might be at a container terminal gate or a road congestion

point. The total waiting time is the sum of these; the total

time per trip is the sum of travel and waiting time.

The basis for revenue is the number of working days per

year, the number of paid trips per day and the average

payment per trip. This version of the model assumes 250

working days a year (day-shift weekdays only, less 10 days’

holiday time) and three trips a day at $150 per trip. These

figures were generalized from discussions with owner-

operators, who reported that given the congestion at

container gates today, they typically make three trips a

day and their daily revenue is $450.

The calculated annual times are next. The total working

time of 2,625 hours that results is reasonable; working

time generally should be around 2,000 hours a year for

the owner of a small business such as owner-operator

trucking.

Escalation RatesThe final subsection deals with the escalation of revenue

and costs to allow for price increases over time. The base

year for escalation is 2013 (i.e., the first year of escalation

is 2014). Three cost categories are listed: general (consumer

price index inflation), which is used when there is no

particular escalation rate to use; and tires and fuel, both

of which have increased at rates in excess of inflation

and are likely to continue to do so in future.

In the case of revenue, the model is set up to input one set

of values for all years in Column C and escalates them over

the evaluation period. It is also possible to override the

input values for each year, such as the revenue per trip.

Only one approach should be used.

For example:

» If an owner-operator has a long-term contact with a

trucking company that specifies the rate per trip by year,

the rates should be entered manually in the line “Revenue

per Trip” and revenue escalation should be set to zero.

» If the rate per trip is known for the current year and the

market seems that it will allow revenue escalation over

the next five years, the rate should be left constant in the

line “Revenue per Trip” and revenue escalation set at a

rate that reflects the prospects. The escalation rate could

be less or greater than general inflation.

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.

43APPENDIX 3 PRO FORMA FINANCIAL MODEL INPUTS

Profit and Loss Statement AssumptionsThe structure of the operating costs is similar to that of

the trip cost model but there are some differences.

The costs are built up as follows:

» All variable cost items except driver waiting time are

calculated on a per-kilometre basis. The annual cost is

the rate per kilometre multiplied by the annual tractor

kilometres.

» The cost of driver operating time is calculated as annual

operating time multiplied by the hourly rate input by the

user plus a 15% burden. The cost of driver waiting time is

calculated as annual waiting time multiplied by the same

hourly rate.

» Driver operating and waiting times are treated in the pro

forma model as expenses, which would be the case if

the owner-operator withdrew these salary-like amounts

each month. The owner-operator could also make

periodic draws through the year and sort out the

allocation of these draws to driver time and other items

at the end of the year. Inserting these items as costs in

the pro forma model provides a better overall picture of

the tractor business.

» Depreciation is calculated on a straight-line basis as

(tractor cost minus residual value, if any) divided by

life and other capital expenditures divided by life.

Note that depreciation remains constant in spite of

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.

» Income taxes are calculated at the 13.5% rate applicable

to small incorporated businesses in 2012 and probably

in subsequent years. On the assumption that this is an

incorporated business, taxes apply only if profit before

taxes is positive; otherwise taxes are zero. Losses can

be carried forward to write off against future profits, but

this provision is not built into the pro forma model. If the

owner-operator business is not going to be profitable, it

may be better to operate it as an unincorporated business

to allow write-off of losses against other personal

income. The main taxation benefit of an incorporated

small business is the ability to retain profits in the

company at a modest tax rate and to engage in income

splitting (over time for the owner-operator and perhaps

among members of his family).

The bottom line is profit after tax. This flows to the cash

flow statement.

Strictly speaking, the straight-line depreciation used in

the pro forma model for tax calculations should be replaced

by declining-balance depreciation under the Capital Cost

Allowance (CCA) rates and rules specified by Canada

Revenue Agency (CRA). While the CCA amounts specified

by CRA result in more rapid asset write-offs, the impacts

on this simple and short-term pro forma evaluation will

be minor.

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.

ITEM PER PERIOD PER KM PER HOUR

Revenue $450.00 $2.50 $42.86

Variable Costs $128.14 $0.71 $12.20

Operating Profit $321.86 $1.79 $30.65

Fixed and Overhead Costs $108.67 $0.60 $10.35

Net Return to Owner–Operator $213.19 $1.18 $20.30

Table 1: Example of Profit Estimator Results

Profit EstimatorTable 1 summarizes the Profit Estimator results for a

working day with the following characteristics: revenue

of $450, 10.5 hours worked, and total driving distance of

180 kilometres. All other inputs were left at the model

default values.

Trip Cost AnalyzerThe results are based on a hypothetical move from

Vanterm or Centerm in Burrard Inlet to North Delta

(see Table 2).

The key assumptions are:

» Revenue per trip from Ready rate scale is $143.10,

including the fuel surcharge

» Annual truck utilization is 60,000 kilometre

» Average truck speed is 40 km/hour

» Acquisition price of used tractor is $60,000

» Tractor life is 5 years with zero residual value

» Total trucking distance travelled is 57 kilometre

(includes travel to point of empty chassis pick-up,

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

45APPENDIX 4 SAMPLE COST / FINANCIAL MODEL 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

Table 2: Example of Trip Cost Analyzer Results*

* 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 ModelThis model builds on the trip cost model, adding a pro

forma financial evaluation of an owner-operator drayage

trucking business. All models were developed in one Excel

file so they could share input costs; revisions to costs can

be made within one file. A pro forma financial model

projects the financial statements of a business over a

period of time. The model has three principal financial

statements:

» The Profit and Loss (P&L) or Income Statement

compares revenue and expenses to arrive at profit

before and after tax.

» The Cash Flow Statement shows operating cash

generated by the business and takes into consideation

the acquisition of assets (such as a tractor), how the

business is financed, and the net addition/reduction to

cash at the end of the year.

» The Balance Sheet provides a financial snapshot of

the status of the business at the end of each year.

The pro forma model addresses the most common questions

of potential owner-operators looking to enter the business,

such as:

» How much equity capital do I need?

» How much money can I borrow, and can I repay it?

» How much do I get out of the business?

» What will the position of the business be in five years?

» Do I really want to do this?

Model Inputs

The full input page to the pro forma model is described

in Appendix 3. The following comments deal with the

specifics of this illustrative case. The inputs for fuel

and other costs are all at the default model values.

Table 3 summarizes the inputs discussed below.

The average speed (40 kilometres/hour) remains. It is

used to calculate driving time from annual distance driven.

The tractor financial parameters remain, but they are

used to calculate tractor depreciation rather than capital

recovery and to provide inputs to the cash flow statement

and balance sheet. There is also an allowance for other

capital expenditures, such as office equipment (telephones,

computers, software, etc.) and tools. In the pro forma

model, annual utilization is calculated from the assumptions

regarding annual trip activity.

The start-up year is stated as 2013, which affects the

column headings in the model. A corporate tax rate of

13.5% is specified. This is the small business tax rate in

British Columbia in 2012 (and likely in future years) for

taxable business incomes under $500,000. Revenue is

assumed to be $150/trip, which generally reflects the

Ready rate for the average trip characteristics in the model.

Annual revenue is based on three trips a day, 250 days a

year, consistent with industry practices. In the pro forma

model, owner-operators are assumed to earn $450 per day

and average gross revenue of $112,500 a year. Additional

assumptions used in the model are discussed in Appendix 3.

47APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

GENERAL INPUTSAverage 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%

Table 3: Pro Forma Financial Model Inputs

48 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Profit and LossThe 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.

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

Table 4: Pro Forma Profit and Loss Statement

49APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Working CapitalThe 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.

Cash Flow StatementThe 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).

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

Table 5: Pro Forma Calculation of Working Capital

50 APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

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

Table 6: Pro Forma Cash Flow Statement

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.

51APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

Balance SheetThe 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.

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

Table 7: Pro Forma Financial Model Balance Sheet

52

Financial RatiosThe 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)

APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

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

Table 8: Financial Ratios

53

Owner-Operator Financial EvaluationA 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.

APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

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

Table 9: Owner-Operator Financial Evaluation

*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:Lower Driver Compensation FactorDriver compensation was reduced to $15 per hour from

$25 per hour (plus burdens in each). There is some evidence

to suggest that driver wages can be as low as $15 per hour.

When this lower rate is used, the model results indicate

(financial statements not shown):

» The business is marginally profitable from 2015; cash

flow is adequate to repay the loan; and the cash item of

the balance sheet remains positive.

» The $15 per hour is much too low a compensation level

for an owner-operator who is following best practices.

There may, however, be owner-operators who will accept

such low compensation either because they have few

other employment options or they do not understand

their business.

Scenario 2:Higher Revenue LevelRevenue per move was increased until the business

became profitable and just met cash flow needs. Table 10

summarizes this case. Its parameters and results are:

» Required revenue is $190 per move.

» The owner-operator business becomes profitable in 2015.

» There is sufficient cash flow to meet loan repayments.

» There is almost enough initial cash to meet working

capital needs (it is slightly negative in 2013).

» If the owner-operator terminates the business at the end

of five years, he contributes $30,000 to the business at

the start, receives compensation of $25 per hour plus

payroll burdens over five years, and receives a residual

value of about $30,000.

» 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.

55APPENDIX 4 SAMPLE COST / FINANCIAL MODEL RESULTS

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

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

Understanding Container Drayage Owner-Operators in Metro Vancouver

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Summary Report

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Prepared by Asia Pacific Gateway Skills Table

© July 2013

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