The good news is 2005 will be another very good year for making money in trucking. The bad news is despite plenty of opportunity for growth, fleet mangers will have to work smart to keep ahead of rising costs.
Industry experts caution that fleets eager to enjoy top-line growth must still pay strict attention to bottom-line results — lest operational costs that are still ticking upward severely dampen the potential for profits.
Make no mistake, the positive business environment trucking currently enjoys is expected to continue through '05. Growth this calendar year is expected to moderate a bit compared to '04 but will by any definition remain robust.
“GDP (gross domestic product) growth will slow from over 4% [in '04] to between 3 and 3.5% in '05,” says Bob Costello, chief economist for the American Trucking Assns. (ATA). “Manufacturing should stay strong. It will be stronger in '05 than '04 although there will be a reduction in the rate of growth due to less consumer spending.”
Costello sees a drop in the overall growth rate as “not a bad thing. I would rather see the economy slow on its own rather than have the Federal Reserve think it must raise interest rates quickly to cool it down.”
He says look for growth to be “slower but still impressive” in '05. “The parts of the economy that are growing — especially manufacturing — will mean a lot of freight for trucking,” Costello adds.
Ken Simonson, chief economist of the Associated General Contractors of America (AGC), the nation's largest construction trade association, expects to see an annual GDP growth rate of 3 to 4% for '05.
Simonson characterizes such a growth rate as “healthy but not spectacular.” On the other hand, he contends “trucking should make out a little better than business in general. Even if supply [truck capacity] starts to creep up, carriers will still see growth in the top line. But they will need to keep their costs in line for [protecting] the bottom line.”
Analyst Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), expects '05 will deliver “good freight growth although it will be moderate compared to '04.”
He says by any measure “there will be growth enough [in the economy] to keep freight volume high. In fact, there's still too much freight for the capacity out there, meaning there are significant opportunities for carriers right now.”
However, Brady does recommend reviewing how the '04 holiday retail sales turned out to avoid moving business plans ahead too quickly.
“If holiday sales end up below the stated expectations of retailers,” he explains, “there will be excess inventory in the supply chain. That would result in inventory corrections — and that would dampen linehaul freight. It could take through the second quarter to straighten [the correction] out, especially if energy costs remain high, which would dampen consumer demand.”
Wet blanket aside, Brady points out the opposite can happen — holiday sales could wind up at or above retailers' “plan.” That would mean freight growth would begin with the New Year rather than later.
“To plan accordingly,” Brady advises, “carriers should contact their top customers around the end of January to see if their holiday sales were at, above or below projections. If they were above, they will see more freight volume right away. If below, inventory will be back in the retail distribution centers, which is what carriers don't want to hear.”
Consumer spending, reflected in those sought-after retail sales, is the major driver of the U.S. economy but not the only one. Another big piece of the economic pie feeding trucking is construction.
AGC's Simonson reports there will be shifts in activity levels among the various construction markets this year. “Home building has been dominating construction [in recent years],” he says, “but in the last few months, both public and non-public construction has begun to pick up.
“In '05,” Simonson continues, “there will be a broader improvement in private non-residential construction, such as for healthcare facilities, lodging for business travel and tourism, as well as retail. Office and factory construction will not pick up till later in the year . Heavy construction, such as for power plants, is now in a downturn.
BRICKS AND MORTAR
“Public construction, covering everything from schools to courthouses,” says Simonson, “will be going pretty well by the end of '05 as state revenues rise. School spending especially will increase, fueled by tax revenues that have risen thanks to higher property values.
“Highway construction has been moving along but that [federal funding] well is starting to run dry,” he points out. “And we don't have a long-term highway reauthorization bill yet in hand so this sector is in trouble.”
Simonson reports that after a nice run of it, residential, which accounts for 60% of current construction activity, will “take a breather in '05, due to the creeping up of interest rates and higher material costs.”
According to Gary Petty, president & CEO of the National Private Truck Council (NPTC), “2005 will be another banner year, especially for private fleets.”
He says the freight will be flowing to the point that “many firms will expand their private fleets and others will revisit whether they should operate a private fleet.”
In the recent recovery, says Petty, “many shippers have not gotten the capacity they want from for-hire carriers at any price. They may return to the private fleet business model because they have product they have to get to market.
“Private fleets are a very vital part of our economy,” remarks Petty. “And more and more, they are being seen as a key part of a company's shareholder value. That role will only grow in '05.”
Clearly, no matter what they haul or for whom, for-hire carriers should enjoy rate relief again this year. “In '05, excluding surcharges, look for rates for LTL shipments to rise 4 to 5% and for truckload expect increases in the 5 to 7% range or even 8%,” says CMVC's Brady.
That's because tonnage will be healthy. According to ATA's Costello, truck tonnage will be up this year by 4.5 to 5%, compared to the 6% rise enjoyed in '04.
CPA Richard Bell, president of consulting firm Bell & Co., expects his clients, mainly non-publicly traded truckload carriers of 10 to 500 trucks, to have a “very good year” for business with “good” rate increases to boot.
But he is counseling them to play it smart. “Of course, the large carriers set the rates,” says Bell, “but smaller operations can use lane-analysis software to determine if each and every run is profitable before taking it.
“You have to work smart” he continues. “You can only haul so many loads per truck so you want to be smart about what you haul.”
Indeed, despite all the freight itching to be moved, the watchword for '05 is smart. Smart about costs, that is.
And when costs are discussed, “drivers” is the word on everyone's lips with “fuel” not far behind.
“Demand for trucking services will be up,” says ATA's Costello. “Capacity in truckload will remain tight, with the potential to get tighter, and LTL capacity will also tighten.” Even so, fleets do not have the luxury of not giving the cost side its due.
“The two main challenges facing fleets this year,” he continues, “will be finding quality drivers and dealing with all costs in general.
“Fuel remains a major cost; I don't see any significant relief anytime soon,” says Costello. “If it was 20 years ago and the price of fuel was this high, I would be expecting a recession. Fortunately, two things today lessen fuel's impact. First, in real terms, adjusted for inflation, fuel is not as high a cost item as it could be. Second, most products are more energy-efficient than they were five or ten years ago so less is being spent on energy overall.”
CMVC's Brady says the rise in diesel prices was largely caused not by rising worldwide demand but by a “large hit” to the oil supply. “Production in Venezuela, Nigeria and Iraq was disrupted. As those producers come back on line, diesel prices should trend down again” over time.
ATA's Costello reports he's hearing that “premiums are leveling off” for insurance but a lot of fleets have taken on more risk through higher deductibles or self-insurance. “There are lots of opportunities to lower insurance costs,” he advises, “but they require managing the business more closely.”
CMVC's Brady says insurance rates for vehicle coverage will “moderate” this year but healthcare rates will continue to suffer double-digit increases.
NO SILVER BULLET
As for the seemingly intractable driver problem, ATA's Costello sees “no major solutions” on the horizon. “Finding and keeping drivers remains a complex issue and a major reason truckload capacity will remain tight. There's no silver bullet, but expect driver wages to continue to go up. Trucking must face the fact driving is not an easy job and drivers are looking for more compensation to do it.”
He points out that owner-operators will also be harder to find as their cost of doing business is high as well, forcing many off the field and preventing others from ever entering it. Costello adds that much of the used equipment being turned in by fleets that owner-operators end up running currently come with high miles and thus ring up high maintenance costs.
Consultant Bell says the “driver shortage is the number-one issue for my 27 clients — even to just maintain the size of their fleets.
OUTSIDE THE BOX
“I agree with the need for higher driver pay,” he continues. “Wage scales are essentially set by the big players. I advise my clients that while they are making ample profits now they should increase pay by way of bonuses. This would allow them to see how the bigger fleets do with a higher pay scale before instituting it themselves. So if freight rates did fall, they would not be caught up with a high base rate. Call it bonus pay but keep your base where it is — because what goes up goes down.”
Bell also points to another route to finding more drivers. “Go outside the box, as I do to find CPAs. We market ourselves as a high-caliber boutique firm to attract top talent. By the same token, even small fleets can accept the mission to be the best carrier of their size — and that can greatly help attract and retain drivers.”
The threat of changes to federal driver hours-of-service (HOS) regs are a New Year's hangover trucking must still ride out.
NPTC's Petty says private fleets “do not want to lose the ground gained on productivity and relationships with shippers and hope clarifications” will be forthcoming from the Federal Motor Carrier Safety Administration (FMCSA).
“I think FMCSA will try to have something [a revised rule] out sometime this year,” says Petty, “and the agency may mandate some kind of onboard [driver log] technology.
“That could mean a substantial investment in equipment that would be hard for smaller operations to accept,” he points out. “And that could [further] shrink available truck capacity.”
Whether as familiar as drivers, fuel and insurance, or as new as meeting various homeland security demands, operating costs will have to be kept firmly in hand again this year.
On the up side, though, CMVC's Brady stresses this will also be a year in which fleets can take the upper hand with customers.
“The leverage has swung from the shipper to the carrier,” Brady states. “That means carriers can review their customer base and raise the rates for a marginal shipper or take on other shippers instead. They must do whatever it takes to be more profitable.
“Fleets can work with shippers to improve their situation or be more selective, accepting customers based on which will accept higher rates or which will enable improved operating efficiencies — such as providing short vs. long turnarounds at their docks — or in other ways improve the working conditions for their drivers,” he suggests.
So, while staying on top of operating costs will remain as critical an exercise as ever for fleet managers, 2005 is shaping up to be another “up” year in trucking.
“Business cycles come and go,” CMVC's Brady sums up. “And this is one truck fleets should be sure to catch while they can.”