A Tough Road for Truckers

June 1, 2008

by Lara L. Sowinski, World Trade Magazine

During conversations with trucking executives earlier in the year, most expressed cautious optimism that the outlook for the year would improve slightly during the second half. Now that we’ve arrived, however, it’s difficult to gauge whether the sector has turned the corner.

Rising fuel costs are the single issue to blame and worse yet, it doesn’t look likely to dissipate anytime soon.

“It’s creating an incredible impact on customers’ transportation budgets,” says John Hickerson, Senior Vice President & Chief Marketing Office, FFE Transportation Services and President, American Eagle Lines and FFE Logistics (www.ffex.net). “There’s no denying it’s real. Our customers stop at the fuel pump on their way home and they experience it.”

Trucking companies can only recover so much from fuel surcharges, Hickerson adds. “Fuel costs have risen so sharply and so fast that it was impossible for the manufacturing and consumer goods sectors to anticipate that when they were building their budgets last year.” Moreover, senior management at a lot of companies has begun “pushing back” when it comes to fuel charges, he says. But, something’s got to give. “You essentially have two components of the freight bill: the basic line-haul rate and the fuel surcharge. If you can’t get your fuel surcharge, guess what, your line-haul rate comes into scope and there’s pressure out there to reduce that too.”

Hickerson says his refrigerated business has also been affected because fewer people are eating out at restaurants. “Our delivery of high-end meats and quality foods has definitely diminished,” he says.

“We think the $150 billion in federal tax rebate checks will help the economy and consumer spending, which in turn will shore up the transportation sector a bit,” he explains. “But, we understand this is somewhat of an artificial economic stimulator.”

And, that’s not all when it comes to the grim forecast. The issue of driver shortages is also dogging trucking firms. “While we are at least able to hire drivers now, we’re experiencing a problem with retention,” Hickerson remarks. “They’re not getting the miles they want due to the softer freight environment. Furthermore, everyone’s out there recruiting drivers, so they’re jumping ship a little easier than before.” This turnover coupled with the loss of an employee that’s received considerable training and investment from the trucking firm compounds the problem. Not to mention that “when demand does pick up again, and it will, this driver shortage issue will be every bit as profound as we always believed it was,” says Hickerson.

Matthew Bowles, co-leader of the Transportation Team for Grant Thornton (www.grantthornton.com) acknowledges the concern in the marketplace over rising fuel costs. In his view, the best response is to shift the focus towards “alternative fuels, alternative equipment, and saving money from an operating perspective.” For example, companies need to take the time to re-evaluate the lanes they’re servicing, he says, because some are simply less profitable than others. “Eventually, management will have to make a decision to keep a certain customer because there’s an opportunity for a backhaul, for instance, or they may need to reconsider the value of keeping that customer.”

He also thinks that public officials need to get tougher on safety issues, which are contributing to the overcapacity in the marketplace.

“There are over 59,000 carriers in the FMCSA (Federal Motor Carrier Safety Administration) database. There are so many guys that peddle with one truck, and they’ll approach a potential customer with very cheap rates. But, a lot of these smaller companies run after-hours when the weigh stations are closed or they run the back roads. The only thing that will change the situation is a change in the regulations, specifically, clamping down on safety.”

PPPs: the silver bullet for infrastructure funding?

Even if the price of fuel were to suddenly drop to $60 a barrel tomorrow and hundreds of well-qualified drivers showed up to apply for jobs, the transportation sector still has a huge problem on its hands—the nation’s deteriorating infrastructure.

This single topic was at the forefront of transportation executives’ concerns during the recent Milken Institute’s Global Conference 2008 (www.milkeninstitute.com). According to Douglas Duncan, President and CEO of FedEx Freight (www.fedex.com), shippers and transportation providers have optimized supply chains to take inventory out of the system and implement an efficient flow of goods. Yet, “Infrastructure problems threaten to reverse the supply chain savings we all worked so hard to achieve,” he said. Duncan, like the others on a panel devoted to America’s infrastructure, pointed out that “if we start adding costs back in to the supply chain, we lose U.S. competitiveness.”

Indeed, in his presentation before the U.S. House of Representatives’ Committee on Transportation and Infrastructure in April, Robert Puentes of the Brookings Institution noted: “The interstate and intermodal movement of goods is projected to get more difficult. The changing nature of the American economy—particularly increased overseas manufacturing and ‘just in time’ delivery supply chain operations—directly impacts America’s infrastructure needs especially when it comes to the movement of goods by freight. Although trucks make up about 7 percent of all vehicle miles traveled in the U.S. in 2005, Department of Transportation statistics show that on about one-fifth of the interstate network, truck traffic accounts for more than 30 percent of the vehicles. That number is expected to grow substantially over the next 20 years. Those portions of highways designated as truck routes are already consistently more congested than the overall network.”

Meanwhile, China is expected to construct 52,700 miles of roads and add 66 gigawatts of electricity capacity this year, which is more electricity than the entire UK uses annually. Along with India and other developing countries, China is implementing infrastructure using technology that is way ahead of current U.S. standards. Transportation executives are therefore urging public officials to start getting serious about fixing the nation’s infrastructure or risk getting left behind.

What’s the answer? Well, even though it’s not a ‘silver bullet,’ the concept of public-private partnerships (PPPs or P3s) as part of the solution for funding the badly needed overhaul of the U.S. infrastructure is starting to gain considerable traction.

Richard Little, director of The Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California, discussed the role that the private sector can play in providing resources for this effort with former City of Chicago CFO Dana Levenson and former Colorado governor Bill Owens in a recent article.

Levenson, who today heads the North American Infrastructure Finance and Advisory Group at The Royal Bank of Scotland (www.rbs.com), explained: “States and cities across the country are owners of cash-generating assets such as toll roads, bridges, tunnels, airports, and harbors. These assets can be ‘leased’ under long-term agreements that can yield billions of dollars in up-front payments that can be used to build other infrastructure or finance repair projects. This is one of a range of strategies that have become better known as Public-Private Partnerships, or PPPs.”

While PPPs are common in Europe and elsewhere in the world, they are relatively new to the U.S. and not surprisingly have been met with some resistance. Levenson believes this thinking can change, however.

“When people come to the realization that hundreds of millions of dollars, if not billions, are coming their way that can be used to build new and repair existing infrastructure without the need to raise taxes, the negative turns to a positive. Also, when people come to the further realization that it is pension fund money (in many cases, their own) that are the ultimate investors in these assets, the reaction by taxpayers becomes more positive.”

Levenson outlines another “plain but unfortunate fact—the federal government doesn’t have the ability anymore to finance infrastructure repair. Moreover, few politicians are willing to raise local taxes to pay for debt service associated with bonds issued to pay for the same.”

Speaking to delegates at the 15th Annual National Conference on Public-Private Partnerships in Toronto last November, Tyler Duvall, Assistant Secretary for Transportation, U.S. Department of Transportation, said he expects a big surge in private sector investment in the U.S. transportation infrastructure, not only for roads but also for airports and mass transit. He added though, that there has not yet been much talk about building the institutional mechanisms, similar to those that exist in Canada and the UK, to facilitate PPPs.

“Virginia has a good structure in place, but many states lack expertise,” he noted. “There is a great risk that some states will race out ahead without having a clear understanding of what they are doing, and there could be a backlash.”

According to Duvall, the upcoming reauthorization of federal transportation programs next year is driving exploration of the PPP model.

Specifically, the federal Highway Trust Fund (HTF), which is 90 percent funded from gas and diesel taxes and in turn pays for 46 percent of all highway capital projects in the U.S. is about to slip into a deficit for the first time in history—from a $20 billion surplus in 2000 to a projected shortfall of at least $6 billion in 2009.

Duvall says the situation is spawning two trends. “One is a major toll road movement. Every new highway project over $500 million will be a toll road. The other is that we have huge amounts of private capital around the globe looking to invest in U.S. assets. These trends have been running parallel to each other, but ultimately they will converge.” wt

Sidebar: Running on Empty

Recent data compiled by the American Trucking Associations (ATA) shows just how high the cost of fuel has risen this past year and how it’s impacting the trucking sector.

Consider that:

•            Just a one-penny increase in the price of diesel annualized over an entire year costs the trucking industry an additional $391 million a year.

•            At the current price, compared with five years earlier, it costs 180 percent, or $800, more to fuel up a typical tractor-trailer. Compared with 10 years earlier, it costs 287 percent, or $923, more to fuel up a typical tractor-trailer.

•            Rising fuel costs are having a huge impact on the trucking industry. For many motor carriers, fuel is now equal to labor as the highest expense; and for some carriers, fuel has likely surpassed labor as their largest expense.

•            Because trucks haul 70 percent of all freight tonnage, and 80 percent of communities receive their goods exclusively by truck, rising fuel costs have the potential to increase the cost of everything that Americans consume that comes by truck.

•            The trucking industry spent more than $112 billion on fuel in 2007, and we’re on pace to spend $141.5 billion in 2008—a record high. That’s up from $106 billion in 2006. In 2007, the industry’s diesel expenditures were about equal to the entire New Zealand economy. Additionally, at $112.6 billion, the industry’s diesel bill was 9 percent larger than the entire Kuwaiti economy, the sixth-largest oil exporter in the world.

•            The price we are seeing reflected at the pump is due to two main factors: surging crude oil prices and increased global demand for diesel fuel. Demand is not falling. We’re seeing increased demand both in the U.S. and internationally, particularly in China, India, and Europe.

•            The longer oil prices stay above $100 per barrel, the less we can expect significant price reductions for diesel. There is a strong correlation between crude oil prices and diesel prices. More than 60 percent of what we pay at the pump is due to the cost of crude. The same is true for gasoline.

•            Commercial trucks consume 53.9 billion gallons of fuel each year. About 39 billion gallons, or 73 percent, is diesel. The remaining 27 percent is gasoline.