For the first time in several years, shippers in the U.S. are about to face significant truckload price increases, as the trucking industry succumbs to the effects of unavoidable cost pressures. When it comes to managing finances, the industry is entering a "perfect storm" and many truckers are fighting for their very existence. Now, with new evidence of major pricing increases from truckers, it's time to take a closer look at the issues. What is causing this trend and how shippers manage through this reality is critical for companies of all sizes as many transportation budgets may not be prepared.
Studies have shown that current truckload prices are at 2006 levels, as shippers have been successful at pushing back on proposed pricing increases over the past 5 years. As a multi-hundred billion-dollar industry, U.S trucking is giant but highly fragmented. With a low barrier to entry, trucking has been a small businessman's dream. Historically, small operators have relied on loans from truck manufacturers and relatively low oil prices to manage cash flow and realize enough to earn a living -- albeit on the road. In the smallest cities across this country, you can find extremely successful truckers who have made an extraordinary living running 50 truck operations. However, today a significant amount of capacity is forecasted to leave the marketplace, causing serious concern.
First, the average price for a new over-the-road tractor has risen to approximately $125,000, as new technology and more efficient truck engines are being introduced. That's approximately $50,000 more than the price of a new tractor cost just six years ago. For small trucking operations that increase is exorbitant. Small operators are, in turn, deferring purchases of new equipment and utilizing old trucks for longer periods of time, settling for poorer fuel mileage and additional maintenance. According to the American Trucking Association, the average truck is now eight years old.
Second, in the name of highway safety, the Federal Government instituted the CSA2010 program this year, aiming to remove truckers with poor driving records from the road. While this is a positive initiative overall, the impact to some operators has been a decrease of up to 10 percent of their driving force. Highways are safer, but the industry can't replace drivers quickly enough. Various studies have reported up to 150,000 available truck driving jobs across this country.
The current price of oil is yet another concern. Still relatively high compared to the historical mean, fuel is one of the major big ticket expenses for a trucker. Without the ability to continuously recoup fuel surcharges, coupled with the extra cost of inefficient trucking networks, high fuel prices eat into already slim margins.
Many Wall Street investors recognized the perfect storm earlier this year as public truckload companies stock prices doubled. The prediction came a bit early, though, as a shaky economic future brought the stock prices of trucking companies down to more earthly levels by summer. However, the long-term thesis is likely correct. The largest truckload providers who have the scale, systems and capital to invest in better drivers and new trucks that, ultimately, realize better fuel economy and less maintenance, will be the winners. Just last month, Celadon (a publicly traded truckload provider) invested in its publically traded competitor, USA Truck. Celadon bought USA Truck's shares with hopes of a potential "association" for the two companies. The deal marks the first time the trucking industry has seen one public company take a position in another but more importantly is an early indicator of future market consolidation.
For those managing a transportation budget, these facts are troubling. A capacity shortage and lack of drivers have reportedly left some shippers in the lurch this past summer, with their freight literally sitting on the docks, as truckers migrate in real-time to higher paying loads and routes. Even truck brokers can't find available trucks in some towns; there are none to be found.
It's clear that shippers need to start addressing the issues. Reported rate increases -- from 5-10% -- are only beginning to be discussed, as truckload carriers have few options. Rather than negotiating flat rates, transportation procurement managers must start planning. If not, shipments run the risk of not being picked up, in turn, causing customers to face significant disruptions to operations. Various strategies to help mitigate these risks exist: Initiate top-to-top discussions with trucking providers, negotiate dedicated fleet contracts, optimize entire logistics networks and leverage low-cost, Leverage internet-based transportation tools -- just to name a few.
The temporary spike in rates due to rising fuel prices we witnessed just three years ago is nothing compared to the current realities of the trucking industry. Now is the time to put strategies in place to manage market conditions that are here to stay.
- Steve Gold, Managing Director, Alvarez & Marsal