Price of fuel could “degrade” truck freight volume

Price of fuel could “degrade” truck freight volume

The main worry of analysts about the recent surge in oil prices will have on trucking isn’t so much about how the spike will up operating costs for carriers, but how it will impact freight volumes in the U.S

The main worry of analysts about the recent surge in oil prices will have on trucking isn’t so much about how the spike will up operating costs for carriers, but how it will impact freight volumes in the U.S.

“The biggest risk remains freight demand degradation,” said Benjamin Hartford, a transportation analyst with investment bank Robert W. Baird & Co., in the firm’s monthly “Freight Flow” brief.

Yet if that “degradation” does not occur, the industry could conversely find itself sitting in an even better position to increase freight rates.

Baird’s analysis indicates trucking’s supply/demand dynamics reached near-equilibrium from October last year through January this year, then sharply tightened in February due to harsh winter weather and higher demand.

Thus, unseasonably tight capacity conditions could set the stage for healthy spot markets starting in March through the second quarter of this year. And that would support strong truckload rate improvement, per Baird’s research.

But if freight begins to disappear from the market as consumer demand retrenches in the face of higher fuel prices, it presents a much bigger problem for trucking as a whole, said Eric Starks, president of research firm FTR Associates.

“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 told Fleet Owner. “That would create a major ripple effect on trucking, putting a squeeze on freight activity and fuel costs [risings] simultaneously. That isn’t where we want end up.”

It’s a concern that even Federal Reserve Chairman Ben Bernanke addressed in testimony before Congress this week.

“The main risk from a price stability point of view would be if higher gas prices, for example, would start feeding into the broader [economic] basket,” Bernanke testified. “That would be the point at which we would become very concerned and make sure that we would take monetary policy actions to avoid any significant increase in overall inflation.”

Currently, oil prices remain high. In London, Brent oil futures for April delivery traded slightly lower, dropping $1.79 to $114.56 per barrel amid talk that Venezuela’s President Hugo Chavez – whose nation, like Libya, is a member of the Organization of Petroleum Exporting Countries – offered to mediate the ongoing fighting between those loyal to Libya’s dictator, Col. Moammar Gadhafi, and those being called “rebel forces,” a loose coalition of Libyan tribal groups and others seeking to topple the dictator.

Average gasoline prices in the U.S. jumped another 4 cents overnight to $3.427 per gallon, according to AAA – breaking the $3.40 per gallon average mark set in October 2008. The record is $4.11 per gallon, set in July of that year, AAA noted.

Ultimately, the upswing in oil prices translates into higher diesel fuel costs for carriers, said Baird’s Hartford. And such a hike tends to create a near-term earnings headwind for truckload carriers, railroads, and “integrators” such as FedEx and UPS-- given the lag in fuel surcharge recovery. Yet it can provide an opportunity for LTL providers.

“Rails and integrators recover most all of their fuel costs once a lagging fuel surcharge is applied,” Hartford noted. “Truckload carriers also face a lagging surcharge; however, these surcharges do not fully cover their costs. Ultimately, the higher fuel costs for truckload carriers disproportionately impact the smaller carriers, which could further accelerate the truckload pricing environment.”

The fuel price run-up puts more pressure on some smaller as well as less disciplined carriers given the rising expense/cash flow demands. And that can ultimately drive some carriers out of the market, Hartford told Fleet Owner.

“For the remaining/surviving carriers, they experience near-term pressure to profitability given the lag in fuel surcharge recovery,” he added. “But over the intermediate term, the shrinking capacity pool due to rising fuel prices will enable carriers to increase rates—ultimately a positive for the industry.”

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