Higher fuel costs drain away trucking's potential profits

Sept. 1, 2004
With the economy picking up steam and industry capacity tight, one would think trucking operations would be making money again. But with diesel fuel nationwide

With the economy picking up steam and industry capacity tight, one would think trucking operations would be making money again. But with diesel fuel nationwide averaging around 19.5 cents per gallon higher than this time a year ago — at $1.74 per gallon recently — whatever profit could be made is being wiped out by the higher prices.

For truck fleets, fuel costs are the second-highest operating expense next to labor and typically represent 10% to 20% of their expenses. Historically, most fleets attempt to pass increased fuel costs along to shippers in the form of a surcharge. But now only part of those costs can be recovered because those surcharges do not cover empty or out-of-route miles, and carriers can't keep up with rapid spikes or increases.

“This can wipe out whatever profit a carrier might be able to earn,” says Rick Todd, president of the South Carolina Trucking Association. “While most carriers are adjusting to persistently high diesel fuel costs, any rapid spike in prices is particularly detrimental to earnings.”

As one moves west across the nation, the price changes from a year earlier get significantly larger. For example, the East Coast average price is 7.4 cents higher than at this time in 2003, while on the West Coast, the average price is 50.6 cents higher. The West Coast region has been experiencing a diesel shortage due to continued refinery problems in California. Long-haul carriers have to buy fuel as needed where they operate, so they are hit even harder.

Trucking industry financial analysts report that truckload carriers could lose up to 5% of expected earnings this year because of skyrocketing fuel prices. According to news reports, Energy Secretary Spencer Abraham said recently that motor fuel prices were likely to rise further because of growing worldwide demand for fuel and because Congress had not developed an overall energy policy.

With the economic recovery, many trucking operations look to expand their fleets to take advantage of growing business opportunities. This time around it is particularly difficult because lenders are particular about who they're willing to extend credit to after a three-year freight recession and record carrier bankruptcies. Insurance costs have also made it difficult for marginal carriers to obtain or afford federally mandated truck liability insurance. Increasing fuel costs make it even more difficult for carriers looking to expand.

Diesel's price is increasing, and no relief is in sight. Truckers have been trying to boost their profits by raising freight rates in the economic recovery, but carriers could wind up pumping some of that revenue gain back into fuel tanks.

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