Thrive or dive in '05?

An unusually large number of uncertainties loom for trucking next year. Among them: Will diesel prices remain near the record levels they reached in October, soar even higher, or retreat? What will happen to hours-of-service rules? Will Mexican trucks finally be running throughout the U.S.? The answers to these questions won't be known for a while. But several changes will clearly make 2005 a more

An unusually large number of uncertainties loom for trucking next year. Among them: Will diesel prices remain near the record levels they reached in October, soar even higher, or retreat? What will happen to hours-of-service rules? Will Mexican trucks finally be running throughout the U.S.?

The answers to these questions won't be known for a while. But several changes will clearly make 2005 a more challenging year than 2004-price resistance by customers, higher average fuel, equipment, and interest costs, and selective tax increases.

Most carriers had all the freight they could handle in 2004. Moreover, most have survived the unprecedented 70-cent-per-gallon increase in diesel prices because shippers have been more willing to accept fuel surcharges than at any time in the last 30 years. The combination of more freight and less price resistance by customers has enabled many fleets to profit even in a high-cost environment.

Shippers were docile because they were achieving strong productivity savings and business was growing steeply. Inflation-adjusted gross domestic product (real GDP) grew at an average of 5% per year from the spring of 2003 through the first quarter of 2004. Meanwhile, productivity in the non-farm business sector soared to a 9% annual rate of growth in the third quarter of 2003.

But in the second and third quarters of 2004, real GDP slowed to a 3.5% annual growth rate and productivity gains tumbled to 1.9% (annual rate) by the third quarter.

The economy is not growing as rapidly as before, making it harder for businesses to achieve productivity gains large enough to offset higher materials, energy, or trucking costs. Nor can they pass those costs on to consumers, because personal income is growing more slowly, and fuel and heating costs are claiming a bigger portion of it. Caught between rising costs and an inability to raise consumer prices, businesses must either accept lower profits or push back against suppliers, including trucking companies.

Carriers that borrow will face higher interest rates, on average. The Federal Reserve had already hiked short-term rates four times by November and was expected to play Santa-in-reverse by boosting them again just before Christmas or early in 2005.

Another change that will make it tougher to thrive in 2005 is a double whammy for the cost of new equipment. First, truck makers can be expected to pass along the higher costs they've been paying for steel and other metals, plastics, rubber, energy, and health care. Second, the after-tax cost will rise due to the expiration of “bonus depreciation.” This tax provision let buyers of trucks and other equipment deduct 50% of the cost in the first year and then claim regular depreciation on the remaining cost. For tractors, the first-year deduction doubled-from 1/3 to 2/3 of the cost. That break applies only to vehicles placed in service by December 31, 2004. With the tax break gone, modernizing or expanding a fleet will cost more in 2005.

Owners of trucks and combinations subject to the heavy vehicle use tax will have to pay the full year's tax at one time, rather than in four installments. That tax applies to vehicles with a taxable gross weight of 55,000 lb. or more.

The bottom line: Whether your firm will thrive, merely survive or take a dive in 2005 depends in part on how you prepare. Consider locking in fuel prices. Take a look at leasing your new equipment to make use of the lessor's tax and interest rates. Devise alternatives in case hours-of-service rules change or Mexican trucks start competing with yours.

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