Thursday, April 24, 2008

In Trucking Capacity Counts More Than Fuel

Landline Magazine reports that more trucking companies went under in the first quarter of 2008 than at any time since 2001. http://www.landlinemag.com/Special_Reports/2008/Apr08/042208_Trucking_takes_hit.htm, Fleet Owner tells us that truck repossessions so far this year have risen markedly. http://fleetowner.com/management/truck_repossessions_increase_0320/. We recently had talk of an owner operator shutdown – and that’s when diesel sold for $3.50 a gallon. It’s now over $4.00. The slowdown in the housing market continues to affect the demand for everything from bricks to bedspreads. All in all you could say the outlook for the trucking industry looks a little grim at the moment.

Yet dig a little deeper, and you might find some cause for hope. People tend to focus on the price of fuel as the root cause for all that ails trucking. Wilma, I just spent $53 dollars to gas up the Buick. Imagine what that poor guy with the truck pays. Yes, he pays a fortune, but strange as this sounds it hardly matters. The widespread use and acceptance of fuel surcharges has enabled truckers to dump fuel price increases onto shippers. As a result, profit margins for truckers stay relatively constant regardless the price of diesel. It’s not a perfect system particularly in a rising price environment. Surcharges tend to lag behind prices at the pump by a few weeks. Also for lease operators carrier arranged surcharges usually apply to loaded miles only. Still the industry has done a pretty good job of managing this challenge.

Of course the key to collecting fuel surcharges is pricing power. It’s not like shippers pay surcharges out of the kindness of their hearts. They have to pay the man if they want the goods moved. In trucking pricing power is a function of freight levels and capacity. And there’s subtle signs of good news on both fronts. Freight levels while down from the fat years of 2005 and 2006 still remain relatively strong. In fact some indicators point to an up tick in available freight. http://www.bts.gov/press_releases/2008/bts016_08/html/bts016_08.html#table_01.

In the meantime capacity, which in trucking refers to the number of trucks available to haul freight, has declined. This gets back to the Landline and Fleet Owner articles. While no one likes to see a person lose his business those who survive enjoy stronger pricing power.

So after a fairly rough six months have the planets started to line up again for truckers? I recently attended the Mid American Truck Show (which of course once again reported record vendor and attendee turnout) http://www.fleetmag.com/web/online/Industry-News/MATS-2008--Mid-America-Returns-To-Full-Force/1$1259 and had the opportunity to speak with many owner operators. Most seemed pretty upbeat. More than that in conversations with managers of flatbed, tanker and heavy specialized carriers the mood seems relatively positive as well. Unfortunately, that sentiment does not extend to dry van operators where over capacity issues still exist. But when is that anything new? The high flyers who run these companies tend to load up with trucks whenever freight is strong only to gasp for air at the first sign of a down turn. Eventually things will re-balance - even in this crazy segment.

The high price of fuel provides a convenient distraction, but it's really all about capacity. Therefore, keep your eye on truck count relative to freight levels. If freight levels hold steady trucking will pick up again. Never bet against the American trucker.

Thanks for checking in…

Ed, III


As Featured On EzineArticles

10 comments:

Dan Ribar said...

Nice post Ed.

The deflection technique combined with self-proclaimed entitlement will ruin anyone.... but isn't that how the king of the beasts makes it to the top?

You're right on [as always].

John Langlois said...

Some leading edge truck routers use advanced heuristics to find the "fastest path" from loading dock A to destination B. That will be another response to rising gas prices that will keep total freight steady.

Though I'm not sure about your premise ... that there's some kind of downturn or slowdown in the market. Only 30% (up from 10% in Jan) of economists now think we are in a recession. The majority are still waiting for data. And the government can't confirm or deny that we are in a recession until the data collects for six months.

Shouldn't we all just wait patiently for the "experts" to confirm what we see every week at the pump and grocery store before we use provocative terms like "slowdown?" Perhaps the market will be rebalanced before they actually confirm the dip? :)

Salil said...

Nice post. Soaring fuel prices are not be controlled. Otherwise it will burn the pockets of those who are in trucking

Salil said...

High Fuel Prices need to be controlled ASAP. Otherwise this will bring trucking business to stop.

Yosemite Sam said...

Ridiculous that you act as if you know and understand how fuel surcharges work. In truth, shippers have been griping to freight brokers, who in-turn have reduced the fuel surcharge that truckers were getting. And if you think that $.32 a mile fuel surcharge makes a dent in $4.89/gallon deisel fuel on a vehicle that gets, at best, 7 miles to the gallon - then I am afraid of the economics with which your run your insurance agency. It seems that you take a view from the standpoint of the freight brokerage executives and not he guy on the road. Try again!

Salil said...
This comment has been removed by the author.
Salil said...

What about the fuel prices now? anyone planning to come back to the trucking business?

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