Metrics tracked by research firm FTR Associates indicates that trucking continues to build a strong hand, with freight volumes increasing as capacity remains tight. However, fuel prices remain a big wild card due to the recent run-up in oil prices, cautioned FTR president Eric Starks. He said this dynamic is negatively affecting carrier margins.
“What we’re seeing now in terms of fuel prices is painful, certainly, but it’s not drastic yet,” Starks told Fleet Owner. “Carriers on the fringe are hurting as high fuel prices stress their cash flow. But if fuel keeps moving up, then it becomes a much broader concern as those fleets with ready access to cash spend it on fuel, not on new trucks, maintenance, etc.”
Outside of the current fuel concern, trucking is in a much stronger position relative to the freight market. FTR said its Trucking Conditions Index (TCI) jumped to 9.1 in January from a December 2010 reading of 7.1, and it’s been rising steadily since October of last year.
The firm noted that any TCI reading above zero indicates a healthy trucking environment, and FTR believes that continued economic growth combined with the impact of new safety regulations will produce sufficient freight to stress capacity sustaining an upward trend for the TCI until mid 2012.
“Good freight demand and tightening capacity are allowing truckers to push freight rates higher. We expect to see significant movement as we leave the winter freight lull behind in March,” Starks added.
However, he cautioned that challenges remain – with the high cost of fuel only one factor. “Significant cost increases are on the horizon, including higher equipment and labor costs,” Starks explained. “A major wild card is fuel prices. The recent sharp run-up in fuel costs due to Mideast unrest – a factor not yet reflected in the TCI – if sustained will put a great deal of pressure on marginal carriers.”
He said the “time lag” between the increase in the cost of diesel and fleets’ ability to recover the cash spent via fuel surcharges will put stress on those carriers with shaky balance sheets, resulting in a potentially further tightening capacity as marginal carriers succumb.
But this is also a very different trucking industry than the one that faced a similar oil price spike in 2008, Starks pointed out. “This time, capacity is very, very tight, so carriers can go to shippers and get rate increases because there’s literally no one else to turn to,” he said.
Starks also thinks the industry’s current capacity footprint could allow it to handle significantly higher oil prices than in the past – event up to $150 per barrel – as long as such an increase is gradual.
“We’ve noted in previous forecasts that we expected the price of oil to rise – we knew it would not stay flat as the global economy recovered,” he explained. “The challenge for the trucking industry today is handling the extreme volatility in oil prices. The industry the way it stands today could handle $150 per barrel oil, but it cannot handle it if such an increase occurs overnight. It’s the huge swing that kills you.”
The additional concern with the current oil price run-up is that it could adversely affect the global economic recovery itself, Starks stressed.
“If [oil prices] start to slow the overall economy down, that’s different. It won’t even be an inflationary issue – it’ll act like a massive tax increase,” he said. “That also creates a major ripple effect in trucking, putting a squeeze on freight activity and fuel costs simultaneously. We this isn’t where we end up.”