Motor carriers: Half full or half empty?
Most large truckers have enjoyed prosperity in the booming economy, but other business, regulatory, and economic factors have kept the celebration in check.
By -- Logistics Management, 7/1/2000
The past two years have been pretty good for motor carriers by historical standards. The industry has been profitable, tight capacity has enabled carriers to make their rate hikes stick, and many truckers have introduced innovative and profitable new services. As a result, trucking remains the dominant mode of transportation by far.
And yet, though industry executives are confident, there is no euphoria. Trucking still faces economic, structural, and regulatory issues that cast shadows over the industry's future. Even in these best of times, margins for most carriers remain narrow from an investor's perspective, making it tough for truckers to attract capital. Diesel fuel prices that are a full third higher than they were a year ago have added costs that are difficult for carriers to recoup fully. And a strong economy with full employment has made it more difficult than ever to recruit and retain drivers, a perennial problem in the truckload sector.
Driver Issues Loom Large
And now, rules proposed by the federal Department of Transportation (DOT) that would govern how long drivers can sit behind the wheel each day (and each week) have carriers deeply concerned. Many fear that the rules, if imposed, would substantially reduce productivity, require them to redraw their networks, and send them out looking for new drivers at a time when they already have thousands of unfilled positions. To retain drivers already on the job, carriers are investing heavily in better equipment, raising wages, and making other efforts, but the problem persists.
The DOT's proposed hours-of-service rules have shippers worried, too, as recent testimony from members of the National Industrial Transportation League before the DOT suggested. The league, the nation's largest shipper organization, argued that the proposed changes could fundamentally alter distribution patterns established in the 20 years since trucking deregulation.
And many argue these rules would come with a high cost. Robert Delaney, a vice president of Cass Information Systems, estimates that the rules as written could add $50 billion over three years to the nation's trucking bill. In addition, he thinks that the potential delays could force businesses to increase inventory investment by as much as $100 billion, which would mean an additional $25 billion in inventory-carrying costs over those three years. (Delaney produces a widely used report on the state of logistics costs every year. For more on his latest study, see the story beginning on Page 43.)
Those numbers are preliminary and untested, but they exemplify the concerns being voiced by the shipping community.
Fuel Costs Dampen Profits
Even before the hours-of-service issue surfaced, motor carriers were already reeling from the effects of the recent fuel-price runup. Average on-highway diesel prices remained over $1.40 a gallon for most of the spring, compared with prices of around $1.06 a year earlier. Although many larger carriers were able to pass at least some of those costs on to their customers in the form of fuel surcharges, many independent owner/operators could not. The cost of fuel has worried the industry enough that the American Trucking Associations has asked President Clinton to convene an emergency White House conference on energy pricing and supply to address rising fuel prices.
In the meantime, concerns about driver and fuel-cost problems are reviving truckers' efforts to increase truck size and weight limits. Although there is little prospect for changes in the truck length limits any time soon, some shipper and trucking interests hope they can persuade Congress to increase the maximum weight to 97,000 pounds from the current 80,000 pounds if the truck has a sixth axle to improve braking and load handling. A coalition of businesses and trade groups, the Americans for Safe and Efficient Transportation, has campaigned for changes in the law to legalize those heavier vehicles.
Clean Bill of Health
All things considered, economic trends-other than the fuel-price increase-bode relatively well for carriers. At the same time, the competitive nature of the trucking industry has helped shippers.
Paul Schlesinger, vice president of equity research for the investment house Donaldson Lufkin & Jenrette, told the spring meeting of NASSTRAC, a shipper group whose members manage less-than-truckload (LTL) and small-parcel shipments, that overlapping services of regional and national LTL carriers in lanes of 400 to 1,000 miles have helped shippers. At a time when service options abound and rates are competitive, Schlesinger reported, shippers were making greater use of premium ground services in lieu of air freight. That may sting the air carriers, but it cuts shippers' costs while improving motor carriers' profitability.
"The trucking industry seems fully recovered from the recession of 1995 and 1996," he told the NASSTRAC audience. He added that truckers should not expect profit levels like those achieved in the late 1980s but said that carriers should remain healthy if they could maintain current margins. He also suggested that changes in distribution patterns toward smaller and more frequent shipments should favor the trucking industry, particularly parcel and LTL carriers. But he also warned the industry that efforts to add capacity now to address current demand could hurt pricing in the event of an economic downturn.
Jeffrey A. Kauffman, first vice president for Merrill Lynch, held a slightly different view of the industry. Speaking at the same meeting, he said that although both the LTL and truckload sectors were doing relatively well, cost issues loomed large. He cited the rising costs of recruiting and retaining drivers, and added that the proposed hours-of-service rules could push those costs even higher. Fuel costs showed no signs of moderating soon, he said. In addition, truckers face higher insurance and interest costs. That has implications for shippers: Kauffman expects that the cost of transportation will likely grow faster than the rate of inflation.
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