In my past two blogs dedicated to understanding the changes driving today’s motor carriers, we examined the increasing importance of accountability and the greater amount of complexity fleets face today. One thing that has NOT changed is the importance of cost control – yet it’s a major driver nonetheless.
Motor carriers are getting hit from both sides. Consider some of the financial performance numbers I go through every quarter.
• Second quarter 2006: Revenues up 5.7%. Expenses also up 5.7%.
• Third quarter 2006: Revenues up 5.0%. Expenses up 5.5%.
• Fourth quarter 2006: Revenue up 2.3%. Expenses up 2.9%.
• 4th Quarter 2006: Revenues up 2.3%. Expenses up 2.9%
Even when expenses started to drop in 2007, mainly as a result of reduced freight activity, they were not dropping as quickly as revenues.
• 1st Quarter 2007Revenues down 2.0%. Expenses down 1.1%
• 2nd Quarter 2007Revenues down 1.3%. Expenses down 0.5%
That’s the performance for the nation’s largest carriers. If we were to look at small and medium-sized carriers, the jumps in revenues and expenses would more pronounced but the trend would be the same. Costs are rising as fast, and some times faster, than revenues.
If we use 1993 as the base year, power unit costs were up almost 18% and that’s before the impact of the 2007 engines. Trailer costs are up 43%. I don’t need to tell you what’s happened to fuel costs and driver costs for motor carriers.
From the end of 2003 to about the beginning of 2006, carriers were able to absorb these rising costs because they were able to do something unheard of since the industry was deregulated more than 20 years ago. Pass through, wide-ranging significant rate increases, and reduce profit leakage through fuel surcharges and other accessorials.
You have to look at a chart to see just how different those years were. Back in 1999 only one quarter of shippers agreed to an increase in their truck freight. By 2004, it was 80%.
And the size of those of those increases was considerable. Back in 2004, one half of shippers were accepting rate increases (exclusive of the fuel surcharge) greater than 4%; a year later almost 2/3 of shippers were doing so.
The main reason why, of course, was that capacity in both TL and LTL got tight enough that shippers for the first time in a long time became significantly concerned there were not enough trucks on the road to move their goods. So motor carriers had the upper hand at the bargaining table.
Some predicted a whole new era for trucking. Some believed the balance in the shipper-carrier relationship had reversed for good. I think it’s important to remember one thing about shippers. Despite their focus on accountability. Despite their focus on complexity, they remain vigilant about costs – because they have to. Year after year our survey of shippers shows that only do the vast majority – 8 in every 10 -- consider cost control one of their top challenges but that it is the challenge to which they attach the highest priority.
Shippers may have had their hands tied when there was a capacity shortage; but that didn’t mean they were going to continue to do that. In fact, soon as capacity started to loosen as the North American economy dipped while carriers were adding capacity with their pre-buy strategy to get around paying for the costlier new engines, we saw a marked drop in rate increases.
I think eventually this situation will change again as the economy picks up and capacity tightens, motor carrier expectations of large rate increases year after year were far too optimistic. And to really put the issue in perspective, even during the best of times, when carriers had driven the operating ratio down to 0.92 – so carriers were making 8 cents on every dollar spent – they still didn’t compare all that favorably with some other transportation sectors. Regional railways make 15 cents on the dollar, the Class 1 railways make better than 20 cents on the dollar. Only air freight operators have to live with tighter margins than motor carriers.
Trucking may be the lion of the transportation industry. But it’s not exactly growing fat on its kills.
