Just Another Cycle, or a New Beginning? Part Two
by Richard Mikes, PhD & Lana Batts, Transport Capital Partners, LLC
New Equipment Cost Escalation
Annual cost increases for equipment in the last two decades has been around 7% per year, with most of the increases incurred in the last decade being due to EPA mandated engine changes adding approximately $15,000 per truck, coupled with poorer fuel economy and increased maintenance costs. Clearly, someone must pay the equipment bill as freight moves on truck assets owned by someone. Obviously brokers do not want to own, and even some carriers don't either, preferring instead to use independent contractors. Without adequate compensation for their capital or labor, contractors have been fleeing the industry. The economic returns to capital must be there or capital will not flow to the industry long term. This was evidenced by the fleet downsizing of the last few years. Lenders who have been 'burned' by repossessions and bankruptcies are not likely to return without seeing solid earnings evidence. The recent upward trend in Class 8 purchases is not to expand but rather to replace as carriers with an older fleet face mounting maintenance costs and a looming driver shortage.
The industry has recovered about half of the freight volume lost from the past economic high and is close to capacity. Pricing pressures for drivers, other costs, and equipment are clearly on carriers' minds per the TCP's 4th quarter survey. A quarter of the smaller carriers said they are considering leaving the industry if things don't improve.
Regulatory Issues - Drivers
The flip side of the equipment constraint is the driver constraint. In spite of 9% plus unemployment in the general economy, TCP surveys indicate 92% of fleets are preparing for driver wage increases of up to 5%. With the extension of unemployment benefits, carriers are finding it hard to attract potential drivers who trade off leisure time and reduced earnings with returning to a life behind the wheel. Negative long-term demographics are still a challenge.
CSA safety enforcement has the most immediate potential to remove unsafe drivers (as well as fleets) who do not meet the new guidelines. Larger fleets are purging high-risk drivers. We expect shippers will start gravitating away from marginal carriers during 2011 as CSA is implemented and understood. This could take 2-5% of drivers off the road.
Hours of Service (HOS) regulations are less certain in terms of timing and final form. However, the suggestion of reducing driving hours from 11 to 10, coupled with other forms of constraints, is keeping carriers scrambling. Fleet utility – and driver paychecks – could drop up to 10%, resulting in pay increases needed to retain drivers in the industry.
Fuel Cost Considerations
The potential of fuel cost escalation driven by global recovery raises the issue of timely compensatory fuel surcharge coverage. Rapidly rising fuel costs have an almost one-one correlation with trucking company bankruptcies. With rising fuel prices, we expect to see bankruptcies increase, thus further driving out capacity. While for-hire fleets have a plethora of fuel adjustment methods for dealing with rapidly rising fuel prices, they have varying degrees of success. In essence, it is the rare carrier who can actually recover the brunt of fuel prices due to rates not based on actual miles traveled, but out of route miles and congestion, reefer fuel and day-to-day-increases, none of which are reflected in the weekly DOE index.
Adding to the complexity are those shippers who:
- Desire to change the base rate for fuel surcharges from $1.15 per gallon to over $2.00;
- Demand that the average fuel consumption increase to 7 miles per gallon for surcharges, and;
- Delay paying their bills in a timely manner. 
As their pricing power increases, TCP anticipates that most carriers will bring these issues to the negotiating table in an attempt to recoup these losses.
The consequences of all these factors will result in second half of the year rate increases of middle to upper single digits, plus equitable compensation for fuel. Clearly as each month passes, and demand rises, a fleet with a constant capacity will gravitate to its highest and best use, i.e. to shippers who have compensatory pricing on their line haul rates, realistic fuel surcharges and willing to synchronize their dispatches to maximize carrier capacity and minimize delays; in fact, this has already begun. Over the last half of 2010, fleets began servicing preferred customers and freight movements to increase earnings by as much as 4-7 cents per mile, in addition to spot price spikes and contract renegotiations.
 We find it amazing that prior to deregulation, shippers managed to pay their bills in 7 working days. With today's technology of the internet, the web and EDI, it takes them 30-45 days.