Fuel costs drive earnings angst

July 17, 2008
As second-quarter earning reports begin to trickle in, the high cost of diesel fuel is clearly becoming an operational and fiscal bane-- although many carriers are staying profitable

As second-quarter earning reports begin to trickle in, the high cost of diesel fuel is clearly becoming an operational and fiscal bane-- although many carriers are staying profitable.

“We continue to be challenged by steep rises in fuel prices and, as typical in the truckload industry, unrealistic fuel economy assumptions in most customer-specific fuel surcharge programs,” said Kirk Thompson, president & CEO of J.B. Hunt Transportation Services, in his company’s second-quarter earning statement.

“Fuel increased dramatically during the [second] quarter, climbing 70 cents per gallon, or 18%, from its low in early April,” he said. “We incur non-billable fuel consumption from idle time and extra miles from deadheading and mileage guide variances. Higher fuel costs, net of fuel surcharge revenues, reduced JBT [J.B. Hunt Truckload] operating income by approximately $3.2 million compared to the second quarter last year. We are evaluating JBT’s most unfavorable customer-specific fuel surcharge programs and will begin aggressively seeking improvements to better recover the high cost of fuel.”

“Conditions in the truckload industry have been challenging, characterized by suppressed freight volumes due to the slowing U.S. economy and record diesel fuel costs,” said Cliff Beckham, president & CEO of USA Truck. “This difficult operating environment appears to have caused an escalating exodus of truckload capacity from the marketplace.”

Beckham is particularly pleased, however, with USA Truck’s improved utilization and its reduced empty mile factor (minus 55 basis points) in light of shortened loaded length of haul (routes shortened 9.1%). That helped the carrier increase revenue in the second quarter 2.1% to $103.8 million versus the same period last year, while posting net income of $2.1 million.

United Parcel Service reduced its profit expectations several weeks ago for the second quarter, noting that earnings would end up at 83 to 88 cents per diluted share compared to the 97 cent to $1.04 per share the company originally anticipated.

“Slow U.S. economic growth and an unprecedented increase in the cost of fuel have resulted in lower-than-expected U.S. package volume and an accelerating contraction in the use of premium air products,” UPS said. “In addition, the anemic U.S. economy is negatively impacting package volume into the U.S., affecting results for [our] international segment.”

Still, despite the bottom-line pressure from fuel costs, many carriers are staying in the black for the second quarter. J.B. Hunt reported earnings of $50.6 million on $977 million in revenues for the second quarter this year – profits below the $63.9 million earned in the same period last year but revenues 14% higher than the $856 million booked in the second quarter of 2007.

More intermodal and dedicated contract carriage business helped J.B. Hunt compensate for the tough going in its truckload division, said Thompson. “Results for the current quarter continue to reflect our customers’ confidence in our intermodal product as they look for alternatives to high fuel prices paid to over-the-road providers,” he noted. “As a result, our short-haul loads continue to grow at a 40% plus pace. The resultant lane mix change drove overall length of haul down 4% and pricing up 2% in the second quarter.”

“Our shorter length of haul is the product of a shift among our customers to shorten their supply chains in the face of higher transportation costs – mostly due to fuel – and our own strategic efforts to serve the shorter-haul markets,” said USA Truck’s Beckham. “Shorter lengths of haul typically produce higher revenue per mile … and our base trucking revenue per total mile did improve 1.2%.”

View more Fleet Owner news relating to alternative fuels, fuel conservation, fuel economy and diesel fuel prices.

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