Freight Up but Profits Elusive

Freight volumes are reaching record levels this year and yet many carriers – railroads and truckers – are struggling not only to keep pace with freight demand, but to profit from it as well.

For example, Omaha NE-based rail conglomerate Union Pacific posted a record $3.1 billion in operating revenue for the third quarter – the second consecutive quarter of revenue over the $3 billion mark and the best total revenue performance ever for the company, said Dick Davidson, UP’s chairman & CEO. Yet rising business costs, especially for fuel, eliminated much of the profits UP expected from that revenue.

“One fact that stood out clearly this quarter is that Union Pacific, and the entire rail industry, is experiencing unprecedented levels of demand,” Davidson said. “Unfortunately, operational challenges associated with these record volumes and our resource shortages are preventing us from making the most of this increasing demand.”

He added that UP’s operating margin fell in the third quarter this year to 13.6%, compared to 20% in the third quarter last year.

Trucking is experiencing the same problem, though its use of fuel surcharges recovers some of the losses associated with record fuel prices.

“Fuel prices were high during the entire [third] quarter and the effect was compounded by a steep increase during the second half of the quarter,” said Randolph ‘Randy’ Marten, chairman & president of Mondovi, WI-based refrigerated truckload carrier Marten Transport. “Our average cost per gallon for fuel increased 29.4% to $1.76 in the 2004 quarter, compared with $1.36 in the 2003 quarter, before considering the benefit of fuel surcharges in each period.”

“Rapidly escalating fuel prices are a significant challenge for our industry, and our sales and operations associates are working diligently with our customers to mitigate the negative impact of fuel prices,” Kevin Knight, chairman & CEO of Phoenix-based truckload carrier Knight Transportation said.

“For the quarter, we increased fuel surcharge billings by 149% compared with the same quarter last year. These efforts helped us limit the negative impact of fuel prices to approximately one cent per share compared with the third quarter of last year,” he said.

Yet trucking companies continue to struggle with an ever-tighter supply of drivers. That is hurting their ability not only to provide sufficient capacity today, but also to expand for the freight market’s needs of tomorrow.

“Transportation companies are heavy users of both labor and capital. The health of our industry is dependent on these two factors,” said Christopher Lofgren, president & CEO of Green Bay, WI-based truckload carrier Schneider National.

“Capital spending across truckload, less-than-truckload and rail has fallen more than 30% since 1998 while growth in the U.S. labor pool has not kept up with driver demand,” Lofgren added.

“Competition for high-quality drivers remains intense and we expect this situation to continue for the foreseeable future,” added Marten Transport’s Marten.

“As a result of improving business levels and recent employee retirements, ABF has experienced an increased demand for additional employees … particularly for over-the-road drivers, city drivers and freight handlers,” said Robert Young III, chairman, president & CEO of Ft. Smith, AR-based Arkansas Best Corp., the parent company of national LTL provider ABF Freight System.

“Although the ABF positions are highly desirable in the industry, our pace of hiring has been slower than we would have preferred, due to the improvement in the economy,” he added. “In many cases, additional business enhances the productivity of ABF’s dock and city employees. However, in certain locations, productivity has been negatively impacted because of high freight volumes.”

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