EconSouth (Third Quarter 2004)

The trucking industry today is on the upswing after a deep and difficult shakeout following the 2000 recession. The surviving carriers are enjoying higher profits and a rising demand for their services. But to remain in business over the long haul, trucking firms must continue to innovate to meet the persistent challenges of driver shortages and rising costs.

You’d think Frankie Willis would be jumping for joy. The president of Trucks Inc., a Jackson, Ga.-based trucking firm that operates 320 tractor-trailers, Willis is turning away business every day. Like truckers across the nation, Trucks Inc. is so busy hauling goods for retailers, manufacturers, and other customers that the firm has too few trucks and drivers to meet the surging demand.

“In the last four months, every customer I’ve had has called saying, ‘Can you handle this?’” Willis said. Some shippers—the trucking firms’ customers—are even paying higher rates to secure space on trucks in the traditionally busy fall shipping season, industry executives and analysts report.

From all indications, trucking firms have rarely been busier. Analysts at the securities firm Morgan Stanley reported this summer that as of late spring trucking was experiencing “some of the best industry fundamentals in 20 years.” Trucking concerns, Morgan Stanley said, have been able to selectively raise rates and pass along much of their rising fuel costs to customers through surcharges. Indeed, the Bureau of Labor Statistics’ producer price index shows that prices rose in each month of 2004 through July in the long-distance freight trucking industry.

Buckhead Beef, a large, privately owned meat purveyor based in Atlanta, faces the same headaches as other trucking companies in running its own truck fleet throughout the Southeastern states and beyond.

Truckers try to keep “shiny side up”
Trucking firms in turn are widening their traditionally paper-thin profit margins. Bob Costello, chief economist for the American Trucking Associations (ATA), said multiple carriers have reported to him that they are making more money in 2004 than in any year in the past 20.

Still, thorny issues remain, among them a persistent driver shortage, ever-rising costs, and pricier but less fuel-efficient engines mandated by federal environmental standards. (The engines emit less pollution but burn more fuel. According to industry experts, devices that limit emissions, like the engines themselves, also burn diesel, thus using more total fuel.)

Thus in a business with literally an array of moving parts, good times can seem fraught with peril. It’s this thought that keeps Willis from celebrating too much. Even the current trucking resurgence was born, in part, of a brutal shakeout that eliminated large chunks of the industry’s capacity, helping create an imbalance between supply and demand. A confluence of recession, high fuel prices, and soaring insurance premiums from 2000 through early 2003 killed some 12,000 trucking companies, according to Costello, and that number doesn’t count potentially tens of thousands of failures among outfits with fewer than five trucks.

With that load on their minds, Willis and her fellow trucking pros find plenty to fret over even amid an upturn. Scott White, the president of Alabama Motor Express Inc. in Dothan, Ala., said even as shakeout survivors like his firm squeeze out a shade more profit, trucking remains a “pennies and nickels business” that rises and falls with the general economy.

“It seems like something pops up every time we get our head above water,” he said.

A bumpy road in fuel costs and insurance premiums
What’s popped up lately are diesel fuel prices and insurance premiums. Diesel prices had risen by late August to an average nationally of $1.87 a gallon, according to the Department of Energy (DOE) (see chart). That price was 37 cents higher than a year before and tops the previous high of $1.77 in March 2003 just before the Iraq war began.

Fuel is typically a trucking firm’s third-biggest cost, behind salaries and payments to owners and operators of trucks and trailers. According to several filings with the Securities and Exchange Commission, fuel accounts for 12 to 16 cents of each expense dollar at publicly traded trucking firms. Overall, according to Costello, the industry consumes more than 30 billion gallons of diesel fuel a year. So a penny-a-gallon price increase translates to $300 million on the industry’s annual fuel bill.

That’s obviously a lot of money, but through surcharges truckers today can recoup 60 to 70 percent of their fuel costs above a certain threshold. With few alternative truckers to call on, customers generally agree to the charges.

Commercial Carrier Corp. of Auburndale, Fla., for example, has for the past four years applied fuel surcharges on every load its 1,000 trucks haul, said Bud Coleman, the company’s president. The surcharges cover 60 to 70 percent of Commercial’s cost above a benchmark tied to the DOE’s diesel price index. But the charge is calculated based on the preceding month’s numbers, and as rapidly as prices have moved recently, that lag generally leaves the company’s surcharge behind current fuel prices, Coleman figures.

“If you didn’t have it today,” he said of the fuel surcharge, “you’d be underwater.”

Despite the surcharges, truckers track fuel costs intently. Alabama Motor Express, a midsized operator with 325 trucks that doesn’t have the resources of the largest carriers, has a staffer whose sole responsibility is to check prices across distributors and retailers. Using that data, the company compiles a network of preferred fuel vendors and rewards drivers for buying fuel within the network.

While soaring diesel prices are a more recent problem, insurance premiums have long been a headache for truckers. In June, G.I.Trucking Co., a California firm, said it planned to raise its rates in part to cover “significantly increased costs in health and liability insurance.” Many firms, especially smaller ones, have begun taking on policies with higher deductibles to keep premiums manageable. But this tactic leaves a firm vulnerable to a major accident that can instantly cost six figures.

“A lot of carriers, especially the smaller guys, have taken on a lot more risk,” Costello said. “So if they have a bad wreck or two, they are out of business.”

Truck tech paves the way for success
To help police costs and improve efficiency, carriers are turning to information technology as the preferred tool. Today’s trucking firms amass and process detailed data on every facet of their operations—for instance, average fuel economy and engine down time for each truck, time spent hauling empty trailers, or revenue per mile for each truck or salesperson. From her personal computer at Trucks Inc., Willis monitors 10 such key indicators that are updated every 10 minutes.

Average U.S. Retail On-Highway Diesel Fuel Prices
Source: Energy Information Administration, Department of Energy

If, for example, a trip is booked that will result in a trailer being empty for more than Trucks Inc.’s maximum of 20 percent of the time it’s on the road, the system automatically e-mails Willis. She can then ask the dispatcher why he or she agreed to haul the load and perhaps cancel it. These so-called deadhead percentages are among the quarterly goals the company sets for its dispatchers.

To make systems like Willis’ “dashboard” work, computers have become as ubiquitous in truck cabs as on desktops. Drivers receive e-mail instructing them where their next load is and giving explicit directions to reach it from their present location. Calling from pay phones is a thing of the past. “It’s all about saving time,” Costello said. “The more a truck is sitting there empty, waiting, it’s losing money. You’ve got to keep those assets filled and moving.”

All the while, customers demand to know where their cargo is, Willis said. So companies like hers use systems similar to those that allow UPS or FedEx customers to go online and locate their packages. Trucks Inc.’s information system, tied in with global positioning system (GPS) gear in each truck, automatically e-mails customers when their cargo is within 100 miles of its destination.

Theft of loads has also become more common, making it still more important to track the location of cargo. That’s where GPS comes in. Installing GPS equipment in trucks is a substantial investment, especially for midsized and smaller trucking firms like Trucks Inc. It cost the firm about $350,000 to outfit its 320 trucks, plus a monthly maintenance fee of about $12,000, Willis said. Because of the expense, the company delayed adopting the systems as long as possible.

But as the technology has advanced, enough additional capabilities have emerged to make it worthwhile, Willis noted. Her company uses GPS capability to communicate with drivers, to locate lost trucks and freight, and even to diagnose, from the home office, engine problems in a crippled truck on the roadside. “All the value-added features are the main reason we’re doing it,” Willis said.

Also in the name of cost control, many trucking firms employ online services that alert drivers to the location of fuel stations with below-average diesel prices. Trucking equipment is also increasingly sophisticated. Commercial Carrier deploys radar systems that alert drivers to potential hazards, such as a stopped or slow-moving vehicle, at night or when visibility is otherwise low. Alabama Motor Express outfits trucks with a system that automatically inflates trailer tires to the optimum level when that trailer is hooked to a truck. This system maximizes gas mileage and minimizes tire wear.

“They have to keep figuring out how to be more productive, more efficient,” Costello said.

While technology is critical in the drive for efficiency and productivity, operating methods are also part of that mix. For instance, a method known as “drop and hook”allows carriers to reduce the time their trucks and drivers spend waiting for a trailer to be unloaded. Many large companies, Costello noted, are buying extra trailers so that a driver can deliver a load and, rather than waiting for the same trailer to be unloaded, then reloaded, immediately hook up a different trailer and depart.

Jacking up rates
Meanwhile, some firms have found that this time of high demand and truck scarcity has allowed them to raise rates. Commercial Carrier ties its prices to benchmarks such as the producer price index, making the timing and amount of increases clear and therefore more palatable to customers, Coleman said. That arrangement, he points out, also means that Commercial Carrier lowers prices to customers when the index drops.

Nationally, several large carriers in May and June announced rate hikes of about 5.9 percent, including FedEx Freight, ABF Freight System Inc., and G.I. Trucking. Truckers appear to be instituting rate increases in 2004 that aren’t much higher than those of 2003, but because of surging demand for trucking services, the increases are coming several months earlier, according to a June survey of 1,500 shippers by the securities firm Smith Barney, a unit of Citigroup.

Smith Barney notes that carriers, because of limited supply and surging demand, hold the upper hand in rate negotiations. But raising prices is not easy, according to executives and shippers interviewed for this story.

SP Newsprint Co., a supplier of newsprint to newspapers, uses three carriers it retains on long-term contracts, one of which expires at the end of 2004. As that deal winds down, SP Newsprint will negotiate with its current carriers as well as send bid packages to others to sample the market, said Tod Glenn, SP Newsprint’s transportation manager for the Southeast region, which includes a mill in Dublin, Ga.

“We try to play hardball as much as we can,” Glenn said. “But we’re also cognizant of the relationships we’ve built over the years.”

SP Newsprint’s cost consciousness is typical of commodities shippers, which make up a big portion of trucking customers. In a time of static demand for newsprint, it is nearly impossible, Glenn said, for SP Newsprint to raise its prices to offset higher shipping costs. Consequently, the company tries intently to keep its own costs in check, a task that includes driving a hard bargain with its truckers. So while companies like SP Newsprint might stomach a rate increase when they have to, they do so reluctantly.

Keeping it in high gear
If the current industry dynamics persist, eventually the number of trucks in the marketplace might increase, bringing supply more in line with demand. Indeed, in late July the truck manufacturer Freightliner announced plans to add a second shift and 700 workers at its Portland, Ore., plant because of stronger truck demand nationwide. Data gathered by Eaton Corp., a large maker of truck drive trains and other systems, show that heavy-duty truck production in Mexico, Canada, and the United States was up 41 percent in the second quarter of 2004 compared to the same period in 2003, according to Fleet Owner, a trucking trade magazine.

As long as the economy, especially the tangible goods and manufacturing sectors, is healthy, the trucking industry should be stable, Costello said. Take, for example, Commercial Carrier, the Auburndale, Fla., truckline. Coleman, the company’s president, notes that Florida’s booming construction business keeps his trucks humming with loads of concrete. Likewise, continued population growth in the Sunshine State means more water consumption, which in turn creates more demand for the lime that water treatment plants use to balance the pH level in water. Commercial Carrier hauls lime to the plants.

Coleman said that even though the company’s core business is very strong, he has diversified the carrier’s mix of cargo to add more consumer-oriented goods such as plastic water bottles and cardboard for soft drink cases.

Such moves are typical of the kind of far-sighted strategies trucking firms must employ. Even in happy times they cannot afford to ignore cost pressures and inevitable economic shifts. Consequently, industry experts predict ongoing consolidation as bigger firms acquire smaller operators. Failures will also no doubt continue, though it appears most firms today are lean and clever enough to stay on the road.

“We’ve gone through such a shakeout in the last few years,” said Willis, “that the companies that have survived are probably here for the long haul.”


The most nettlesome problem facing trucking companies today is a chronic shortage of qualified drivers. The root of the problem is simple but difficult to overcome: truck drivers, especially long-haul truckers, usually spend at least a week at a time away from their families. It’s hard to find people who want to do that. In addition, federal law requires big-rig drivers to be at least 21, so the industry has a tough time luring younger people into its ranks, said Bob Costello, the American Trucking Associations’ (ATA) chief economist.

Qualified drivers are especially scarce during an economic recovery when greater numbers of other jobs are available. Costello noted that in mid-2004, because of a weak pool of applicants, large carriers were rejecting about eight of 10 people who applied for driver jobs even as the companies were scrambling to fill their positions.

In addition to forcing carriers to leave trucks idle, driver scarcity breeds fast food industry-like turnover as drivers jump from job to job for a better paycheck and cash signing bonuses. In the first quarter of 2004, turnover at large carriers averaged 109 percent, meaning that in a year the equivalent of a company’s entire staff of drivers would leave, according to the ATA. For smaller carriers, the turnover rate was more than 90 percent. High turnover means, among other problems, high training costs, according to Frankie Willis, president of Trucks Inc. in Jackson, Ga.

It also leaves expensive trucks sitting. Swift Transportation, a large trucking firm based in Phoenix, Ariz., stated in a filing with the Securities and Exchange Commission that its first-quarter 2004 earnings dipped to $6.4 million from $8.9 million in first quarter 2003, a 28 percent drop, primarily because of driver availability issues. The company began 2004 with approximately 400 trucks without drivers, and that number climbed above 600 during the first quarter.

“The driver shortage is the biggest challenge facing any truckline today,” said Bud Coleman, president of Commercial Carrier Corp. in Auburndale, Fla.

Trucking firms are trying an array of tactics to lure and retain drivers. Increasing pay is an obvious one. The average annual trucker’s salary in 2003 was about $43,000, up from $40,000 in 2000, after it dipped during the shakeout, Costello said. In late 2003, several big carriers—including J.B. Hunt Transport Services, Heartland Express, Schneider National, and Swift Transportation—announced increases in their per-mile driver pay.

Like many firms, Commercial Carrier pays $1,000 bonuses to new drivers and a $750 payment for a referral. In addition to those incentives, the company Web site recently promoted a “hiring event” in Chattanooga, Tenn. The company, Coleman said, spends “a substantial amount of money” wooing prospective drivers with newspaper and radio ads and this year introduced its first television commercials. The firm also maintains a department that focuses exclusively on driver recruiting and retention.

And this is a company whose drivers cover shorter routes, mainly within Florida, so they are at home almost every day. The trick is to fashion predictable schedules for drivers, Coleman explained.

Alabama Motor Express Inc., reflecting an industry trend, is experimenting with ways to get drivers home more often. One idea is to divide long routes among different drivers, allowing one to pick up the same load from another. But it’s hard for the Dothan-based company to hire drivers in the Northeast or Midwest because union pay scales are higher than the company’s typical pay scale for drivers, 85 to 90 percent of whom live within 200 miles of Dothan, said Scott White, the company’s president.

What’s more, shifting from driver to driver idles tractor-trailers, creating costs that trucking firms try desperately to minimize. “It gets complicated,” White said.

The persistent driver shortage and revolving-door turnover are in fact so complicated that the industry has discovered no reliable way to remedy these problems, Costello said. Better pay and benefits help, Costello and other executives noted, but have so far not been a panacea. The ATA has commissioned a group of labor economists to examine the issue and try to formulate strategies to combat it.

“I don’t know the answer,” said White. “We’ve got to find something to make it more attractive for these younger guys. We all think money will help, but I don’t know if that’s the total answer.”

 

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