Trucking may be the lion of the transportation industry but it’s not exactly growing fat on its kills
August 12, 2007
August 12, 2007
In my past two blogs dedicated to understanding the changes driving today’s motor carriers, we examined the increasing importance of accountability and the greater amount of complexity fleets face today. One thing that has NOT changed is the importance of cost control – yet it’s a major driver nonetheless.
Motor carriers are getting hit from both sides. Consider some of the financial performance numbers I go through every quarter.
· Second quarter 2006: Revenues up 5.7%. Expenses also up 5.7%.
· Third quarter 2006: Revenues up 5.0%. Expenses up 5.5%.
· Fourth quarter 2006: Revenue up 2.3%. Expenses up 2.9%.
That’s the performance for the nation’s largest carriers. If we were to look at small and medium-sized carriers, the jumps in revenues and expenses would more pronounced but the trend would be the same. Costs are rising as fast, and some times faster, than revenues.
If we use 1993 as the base year, power unit costs were up almost 18% and that’s before the impact of the 2007 engines. Trailer costs are up 43%. I don’t need to tell you what’s happened to fuel costs and driver costs.
From the end of 2003 to about the beginning of 2006, carriers were able to absorb these rising costs because they were able to do something unheard of since the industry was deregulated more than 20 years ago. Pass through, wide-ranging significant rate increases, and reduce profit leakage through fuel surcharges and other accessorials.
You have to look at a chart to see just how different those years were. Back in 1999 only one quarter of shippers agreed to an increase in their truck freight. By 2004, it was 80%.
And the size of those of those increases. Back in 2004, one half of shippers were accepting rate increases greater than 4%; a year later almost 2/3 of shippers were doing so.
We know the main reason why. Capacity in both TL and LTL got tight enough that shippers for the first time in a long time became significantly concerned there were not enough trucks on the road to move their goods. So they played a lot nicer at the contract bargaining table.
Some predicted a whole new era for trucking. Some believed the balance in the shipper-carrier relationship had reversed for good. I think it’s important to remember one thing about shippers. Despite their focus on accountability. Despite their focus on complexity, they remain vigilant about costs. Year after year our survey of shippers shows that only do the vast majority – 8 in every 10 — consider cost control one of their top challenges but that it is the challenge to which they attach the highest priority.
They had their hands tied when there was a capacity shortage; they agreed to some substantial rate increases but that didn’t mean they were going to continue to do that. In fact, soon as capacity started to loosen as the North American economy dipped while carriers were adding capacity through the pre-buy, we saw a marked drop in rate increases. This year, 6 in 10 shippers may still be accepting rate increases for their truck movements but only 40% — compared to more than two thirds two years ago – are paying more than 4%.
I think this situation will change again as the economy picks up and capacity tightens, but to expect large rate increases year after year is far too optimistic. And to really put the issue in perspective, even during the best of times, when carriers had driven the operating ratio down to 0.92 – so carriers were making 8 cents on every dollar spent – look at how that compares with other transportation sectors. Short-line railways make 8 cents on the dollar, regional railways make 15 cents on the dollar, the Class 1 railways make better than 20 cents on the dollar. Only air freight operators have to live with tighter margins.
Trucking may be the lion of the transportation industry. But it’s not exactly growing fat on its kills.
With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics. All posts by Lou Smyrlis