July 2006 | Commentary | Viewpoint

Carriers Face Challenges, Shippers Pay the Price

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Unless shippers have just returned from Mars, they are aware that motor carriers have been hit with severe cost and capacity issues during the past three years.

At the same time, however, if they haven't been visiting other planets, they also know shippers are paying a heavy price.

Shippers first became aware of serious industry-wide capacity constraints in late 2003. Carriers were having difficulty meeting demands, and shippers were experiencing rate increases across the board.

By the summer of 2004, capacity and rate increases were standard discussion in the daily press and monthly logistics publications.

Truckers were caught in a perfect storm of fuel costs, equipment shortages, insurance rate increases, and driver shortages, said Chris Burrus, president of the Truckload Carriers Association, in one article. He was undoubtedly trying to paint a sympathetic picture.

Trucking is a difficult business, and many carriers have been operating on the ragged edge for a number of years. No one can argue that these are easy times for the industry.

In addition to the perfect storm Burrus described, carriers face expensive new mandates. Truck engines manufactured after Jan. 1, 2007—when new environmental mandates take effect—will cost almost twice as much as those made in 2002.

Some carriers have increased insurance deductibles to as much as $2 million due to higher insurance costs. In addition, carrier bankruptcies increase proportionately with the cost of fuel, which is inching higher every day.

But what Mr. Burrus failed to point out in discussing carriers' woes in 2004 is that the economy was turning around, and shippers were actively working to help mitigate carriers' difficulties.

Shippers Pitch In

When the temporary driver hours-of-service restrictions became effective in January 2004, for example, many shippers did whatever they could—they cut loading times, shipped unitized loads, and eliminated stops, among other actions—to minimize the rule's impact on their carriers.

And it is clear that many were successful.

A group of truckload carriers, for example, told investors their customers had taken steps to eliminate the causes of detention charges and were "showing good faith efforts" in other areas, as well.

The percentage of shipments that incurred detention fees kept falling, and carriers reported the number of stops had dropped 15 percent to 25 percent by mid-2004.

Jump the Gun or Wait and See?

So what was the problem?

More than a few carriers jumped the gun and raised rates based on the expectation of soaring costs.

They simply weren't willing to wait and see whether increased fuel surcharges or detention and stop-off charges would offset some of those costs.

How bad was the storm damage? Not bad at all.

J.B. Hunt provides one good example. In spite of the perfect-storm challenges carriers face, the company tripled profits in the first quarter of 2004 versus 2003. In addition, the BB&T capital markets index, which tracks the carrier market, rose 21.6 percent during the same period.

To add insult to injury, during this time period, carrier CEOs were quoted making statements such as, "Trust me, nobody is adding capacity," "It's a great time to be in trucking," and, "If I were a shipper, I would have grave concerns."

The latter statement certainly is true. Shippers did have concerns, and continue to have them today. In 2004, for example, 84 percent of shippers experienced rate increases, and 57 percent experienced service failures during the same period, according to a study by the Warehouse Education and Research Council.

Rate increases have continued through 2005 and into 2006, particularly in fuel surcharges. Currently, diesel fuel prices are up 44 percent from last year, and fuel surcharges are averaging 11 to 25 percent.

Some experts predict fuel will reach $4 per gallon this year, with resulting surcharges of 30 percent to 35 percent of net freight charges.

The shipping community faces a dilemma: How does a firm budget its transportation costs in such a volatile environment? How high will fuel costs go? Will other carriers follow the lead of those who already use fuel surcharges as a profit center? Where will it end?

Freight volumes are expected to grow 70 percent by 2020, according to Federal Highway Administration (FHWA) estimates. FHWA expects the value of goods moved to grow to $30 trillion—up from $9 trillion in 1998—and predicts truck miles will double.

As this growth proceeds, it exacerbates an already serious driver shortage, and will undoubtedly increase capacity challenges as well. Meanwhile, U.S. economic expansion continues at a steady 3.5 percent.

The major threat, of course, is high energy prices. The market for Class-8 vehicles is also strong, but much of the investment has been made to take delivery of equipment before the January 2007 Environmental Protection Agency deadline.

Carrier profits in some cases are at all-time highs—as are some shippers' costs. Carriers are pricing on supply and demand, and as long as they can maintain a supply of equipment and service that is less than the demand, they will do very well indeed.

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