On the heels of record freight volume so far this year, fleets are still coming to grips with a variety of challenges— namely high fuel costs, a lack of drivers, and more expensive equipment— as the holiday freight season prepares to get under way.
“Despite high freight volumes we’ve experienced so far this year, the historical challenges [of trucking] remain with us,” said Chris Burruss, executive director of the Truckload Carriers Association (TCA).
“It’s still a highly competitive industry, despite tight capacity, so there is pressure on rates,” he told Fleet Owner. “We’re still dealing with low profit margins, volatile fuel prices, and the cost of insurance is still high. Though rates are higher, equipment costs have gone up. Not only were the low-emission engine products introduced in 2002 more expensive, they also suffered a dip in fuel economy. That’s extra expensive for fleets right now as diesel fuel prices are at record highs.”
TL carrier Werner Enterprises, for example, said its 2002 EPA-compliant engines are suffering a fuel mile-per-gallon degradation of approximately 0.3 mpg to 0.5 mpg– a 6% to 9% reduction in fuel efficiency. Werner adds that, as of the end of June, 23% of its company-owned trucks are now powered by Caterpillar’s ACERT engine and Detroit Diesel’s EGR product.
Fuel Prices and Freight Tonnage Flying High
And fuel prices are projected to remain high for the rest of the year. The Energy Information Administration (EIA), for example, expects the price of diesel to average $1.79 per gallon in both the third and fourth quarters of this year (revised up from $1.66 and $1.69, respectively), after averaging $1.72 per gallon in the second quarter. Currently the national average price of retail on-highway diesel as fluctuated above $1.81 per gallon at several points this summer— an all-time high.
The increased likelihood of global terrorism, the continued legal problems of Russia's largest oil producer (Yukos), OPEC’s lack of excess production capacity and increased worldwide oil demand are some of the factors causing crude oil prices to remain extremely high, said Bob Costello, chief economist for the American Trucking Associations (ATA). The effects of higher oil prices put upward pressure on diesel prices – and it appears that relief is not imminent, Costello added.
However, even as fuel prices stay high, freight tonnage is growing just as rapidly – and Costello said he “remains bullish” on truck freight volumes for the rest of this year.
Though ATA’s Truck Tonnage Index only rose 0.5% in June, compared to June 2003, the unadjusted index surged 11.1%. This marks the second largest year-over-year increase in a year and a half. The largest surge was a 13% jump that occurred in March 2004.
“June’s data shows that the trucking industry continues to deliver a robustly growing economy,” Costello said. “Even more impressive than the month-to-month increase is the strength from May 2003. And year-to-date, for the first half of 2004, compared to the same six-month period in 2003, truck tonnage grew an impressive 7.2%, after increasing just 3% for all of 2003.”
Smooth Sailing Ahead— Mostly
“We thought 2004 was going to be a good year – now it looks like it’s going to be even better despite the challenges of higher fuel prices and an uncertain hours of service (HOS) situation,” said Mike Deegan, vp of brokerage services for third party logistics company, APL Logistics.
“However, at the strategic level, we will need to address several key issues as time goes on,” he said. “The high price of fuel is one, but the insurance issue may even be greater. The balance of trade is another key concern as the high import-to-export flow we’re experiencing can throw a wrench in the freight market.”
“Fuel prices remain a challenge – but fuel surcharges at least help fleets manage it,” said Stephen Laskowski, vp for the Ontario Trucking Association. “But shippers have to understand that the cost of fuel is only one of many issues we’re facing, from [tight] capacity to a qualified driver shortage. Shippers have to understand these are all major issues and won’t be solved anytime soon.”
Lance Craig, TCA’s chairman, added that the key to getting over these business hurdles in trucking might be the durability and desirability of a carrier’s freight network. “One of the things we’ve really noticed this year is that there’s a much larger number of opportunities for us to bid on freight,” he said. “Shippers don’t like to use the word ‘bid’ but more have been willing to open up their freight this year, looking at ways to better optimize their freight transportation service.”
As president of Craig Transport— a small Midwestern carrier that relies on owner-operators for the bulk of its tractors— Lance said that “willingness” on the part of shippers to discuss options with trucking operations his size is a great opportunity – especially after the rough economic waters of the last few years.
“Since 2000, we usually had to make very tough decisions – where keeping the wheels turning ate into our profits and even our revenues in a lot of cases,” he explained. “At this point, now, for us, it’s almost like being in a candy store.”
That’s why trucking executives such as Clarence Werner, chairman & CEO of Werner Enterprises, said the overall outlook for trucking remains positive.
“Freight demand and pricing continues to strengthen … as truckload industry capacity struggled to keep up with an improving freight economy,” he noted. “We were consistently overbooked during the second quarter and expect a further tightening of truckload capacity in the second half of 2004. Also, we once again increased our net income and earnings, despite pressures from abnormally high fuel costs and an extremely competitive driver market.”