Carriers must cope with rising costs and find ways to attract new business
While our immediate transition into the new millennium was a relatively smooth one, there are several changes on the horizon that could signal a bumpy road ahead - if not quite a rough one - for the transportation sector.
In terms of costs, 2000 may not bode well for carriers. The price of diesel fuel is rising, a trend that's expected to continue throughout the year. (A year ago fuel was down around $1.10 per gallon, but had edged up to about $1.50 per gallon by the end of December). Fleets could see fuel-price increases of 18% over last year.
Driver wages are also on the upswing, with increases for 2000 averaging about 15%. What's changed? For one thing, the driver shortage has arrived - freight is sitting on docks waiting to be moved. Up until about September of last year, some analysts saw the driver shortage as more of an allocation problem. Fleets that needed drivers seemed to be those that were expanding or that had high turnover. But the freight was moving. Now it's not, and things will probably get worse. All this points to steady wage increases throughout the year.
Insurance costs have also taken a big leap forward. While managed care helped bring the double-digit increases in health-insurance costs down to near zero in recent years, this effort has reached a point of diminishing returns. The chances are high for a return to double-digit increases in 2000. In addition, the cost of workman's compensation and other catastrophic insurance is also expected to increase.
Together, wages, fuel, and insurance account for slightly more than half of a carrier's cost of operations. Assuming an average 15% increase in these categories, the net effect would be close to an 8% increase for overall costs. And we haven't even mentioned increases in administrative wages, interest rates, or in the cost of complying with a growing multitude of federal, state, and local regulations. Add these to the mix and the industry will be facing cost increases of nearly 10%. Keep in mind that none of these increases in costs come with any increases in productivity to offset them.
Care to bet on the kind of rate increases carriers are likely to see relative to their expected cost increases?
But there are some other changes that should be good for trucking. For example, there's been an increase in small-shipment activity - both business-to-consumer and business-to-business. This phenomenon is a direct result of the surge in e-commerce, which, although small in comparison to overall consumption, is estimated to be doubling every 10 months.
Carriers must figure out how to position themselves to take advantage of the increase in demand for small-shipment service that is being spawned by this exponential growth in e-commerce. Those that respond with initiatives such as partnering linehaul with local distribution and setting up warehouse operations will be rewarded with new business.
These changes could make the start of the new millennium as exciting as the years just after deregulation - but with the added twist of a growing economy to cover the sins of those who venture into uncharted territories. Mergers and acquisitions of the coming year will not be limited to the carrier-to-carrier paradigm. They'll also include strategic investors seeking to combine transportation, logistics, and information services.
Perhaps the era of "transportation.com" is upon us. And who wouldn't welcome those out-of-this-world price/earnings ratios?
