The cost of terror

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In the weeks following terrorist attacks in New York City and Washington D.C., Daryl Deel, president of Joplin, Mo.-based R&R Trucking Inc., began to see costs rise. R&R Trucking, which hauls explosives and munitions, faced a battery of new expenses – from hiring procedures to delays at inspection sites and out-of-route miles.

Deel estimates he may spend more than $600,000 a year on armed security guards at R&R’s five terminals. No changes in federal law or regulations have forced Deel to hire the extra guards, but he says it makes sense in a time of uncertainty.

In other areas, new costs are hard to estimate, Deel says. Because the company also hauls munitions for the Department of Defense, trucks with certain loads must now park at secure military facilities that are usually out of route. “I haven’t seen a dollar sign on all my expenses yet,” Deel says. “But my costs are substantial.”

Although not every fleet will incur R&R Trucking’s heavy cost burden, few will be unscathed by the effects of the Sept. 11 attacks, economists say. From higher insurance premiums to inspection delays, carriers across the industry are already seeing the cost of terror in their businesses.

Before 9-11
On Sept. 10, most trucking companies and industry analysts would have voiced concern about the weakening economy but optimism about the next six months. The economy as a whole, teetering for months on the brink of recession, looked steady and was showing signs of improvement.

Trucking economists like Ken Kremar, an analyst who tracks transportation for financial information firm DRI/WEFA, says he thought the trucking industry had reached the bottom. “Prior to what happened at the World Trade Center, things looked pretty bleak,” he says. “But auto sales and housing starts were holding up pretty well.” He expected the manufacturing sector, mired in a recession for nearly a year, to begin a slow recovery.

Retail sales, buoyed by consistent levels of consumer spending, were keeping trucks rolling.
There were problems, of course. Cass Information Systems, a company that processes more than $7 billion in freight payables, said August freight expenditures declined to their lowest level in more than two years, and shipments were at their lowest level for 2001.

Fuel prices, which had declined most of the summer, were rising and threatened to go higher as crude oil destined for diesel and gasoline was diverted to heating oil production. The Organization of Petroleum Exporting Countries was talking about further production cuts to ensure crude oil prices stayed above $25 a barrel.

Even so, Bob Costello, chief economist with the American Trucking Associations, saw hope on the horizon. “For the third quarter, economic growth was going to be positive, although not too much positive,” Costello says.

Then the world changed.

Economic questions
In the weeks following Sept. 11, any hope of optimism disappeared. “We believe that the freight transportation industry may be in for a bumpy ride in the near term given renewed risks of a global recession,” says John Barnes, a trucking analyst with finance firm Deutsche Banc Alex. Brown.

A recession, which many economists now say is inevitable, could have serious consequences for fleets pushed to the brink by high fuel prices, increased business expenses and slow freight. A recession means smaller margins, more layoffs and reduced capital spending, Costello says.

Two weeks after the attack, a key index that rates consumer confidence, the bellwether of a slowing U.S. economy, plunged by its largest margin in a decade, according to the Conference Board. “There’s now a huge uncertainty factor among consumers,” Kremar says. “There’s a tendency to wait and see. Where before the attacks a consumer might have been planning to buy a house or a car, they’re now going to step back and wait. Consumers don’t fall off a cliff, but they do spend with less enthusiasm.”

A decline in consumer confidence generally leads to reduced retail sales, economists say, and that affects a large number of trucking companies. Salomon Smith Barney, for example, estimates that retail shipments account for 35 percent to 45 percent of all truckloads. Carriers who make their living hauling to retail stores are likely to see a decline in freight, Deutsche Banc’s Barnes says. According to his analysis of publicly-traded trucking company stocks, companies that rely heavily on retail deliveries will probably post significant losses. Before Sept. 11 such carriers had a fighting chance of turning a profit.

Retail sales fell dramatically in September, with many Americans spending time in front of television news reports instead of spending money at the mall, says Costello. Recovery will depend on improvements in the job market, military action and future terrorist attacks. In the meantime, he says, “Trucking companies are going to feel it.”

Retail-dependent carriers are not the only ones that will suffer, Costello says. “Consumer spending accounts for two-thirds of the entire economy,” he says. “That impacts everything from domestic manufacturing to imports. Consumer spending is not just key for retail hauling, but for fleets that carry manufactured goods and imports. Worldwide consumption is also affected. That means the export market will be down, too.”

ATA is advising carriers to pay close attention to holiday sales figures. If those sales are lower than retailers expect, then there will be little need for retailers to restock shelves or order new goods, Costello says.

On the horizon
The good news is most economists predict a relatively mild recession “because there’s no underlying fundamental problem with the economy,” Costello says. “Does that make it easier for companies going out of business? Certainly not.” Costello doesn’t expect bankruptcies among trucking companies – estimated at more than 3,000 a quarter – to decrease anytime soon.

Other analysts think a recovery is likely late next year. “We’re hoping for signs of life in the second half of next year,” Kremar says. “These acts just shoved every thing out for six months to a year.” The economy for 2001 will likely grow only 1 percent, and in 2002 growth will be a meager 1.3 percent, with the bulk of that growth coming in the last part of the year.

Carrier failures and consolidation among trucking companies will pull capacity from the marketplace, says Deutsche Banc’s Barnes. That means surviving carriers should be able to raise rates and gain market share.

Spreading the risk
Another factor impacting trucking in the wake of terrorism is an expected jump in insurance premiums. Experts predict liability, workers compensation, medical and life insurance rates will rise as the insurance industry – hard hit by post-Sept. 11 claims totaling as much as $70 billion – tries to recoup those losses. Insurers, re-insurers and underwriters who back them are lobbying Congress for the same kind of relief the airline industry received after the attacks. If that relief isn’t forthcoming, insurance rate increases may be.

Rising insurance costs had already hit trucking before Sept. 11. Insurance rate hikes over the last few years have hurt carriers as much as fuel spikes, says Norris Beren, a risk management consultant to trucking companies and the principal at Risk Reduction Education, Inc. Because further increases could have a devastating effect, ATA went on the offensive less than a month after the attacks, lobbying state insurance commissioners in an attempt to keep prices down.

“Trucking company liability premiums have greatly increased in recent months and the events of Sept. 11 promise to exacerbate that situation,” says ATA interim President and CEO William Canary. “Market forces may dictate some increases in premium costs, but we are concerned that a few unscrupulous companies may attempt to take advantage of the recent turmoil and impose unconscionable premium increases on our industry.”

Trucks crossing the Canadian border into the United States several days after the Sept. 11 attacks found long lines due to stepped-up security. Carriers say cross-border traffic is back to normal.

Motor carriers should be prepared for higher rates, says Dave Golden, director of commercial lines for the National Association of Independent Insurers, a trade group that represents commercial carrier insurers among other insurance groups. “They are going to see larger increases again because all insurance premiums are going to go up because of what happened on Sept. 11. Insurers are going to take a $35 to $40 billion hit. If someone’s rates would have gone up 15 percent this year, they’re going to go up a few percentage points higher.”

Some carriers will be hit harder than others. Carriers that use excess insurance providers like Lloyds of London to cover expensive or dangerous cargo can expect dramatic increases, if they can get coverage at all. Hazmat haulers in particular face mounting premiums, says Cliff Harvison, president of National Tank Truck Carriers, an association for tanker fleets.

“Even before Sept. 11, we had an excess insurance crisis,” Harvison says. “Now prices are going through the roof. Foreign insurance carriers like Lloyds are going to take a hell of a hit as a result of this. They’re going to spread the risk.”

Daryl Deel, president of R&R Trucking, says his company was already looking at substantial rate increases before the attack and is now concerned about his policy renewal in 2002.
“There are very few insurance markets we can go to,” he says. “There are very few (insurance) carriers that want to insure this kind of risk.”

Beren says fleets like R&R are already seeing increases. “What risk managers are paying now for excess coverage is amazing.” He says a $200,000 premium for $4 million in excess liability coverage available before Sept. 11 won’t even buy $1 million on today’s market.

And the worse might be yet to come. If insurers are unable to get backing from the companies that reinsure them, freight with high liability may have to go uncovered or sit where it is, “or shippers who require higher limits will have to relax their standards,” Beren says.

Carriers hit with higher insurance bills may also have a hard time passing on those increased costs. “Shippers don’t want to pay the extra costs,” Beren says. Somewhere along the way someone will have to bite the bullet.”

That bullet may come in the form of an insurance surcharge added to freight bills, similar to those fleets added after fuel prices spiked last year, Beren says. “When you take a hit, insurers increase policies across the board,” NTTC’s Harvison says. “We’re going to take a hit, and it’s probably going to be considerable.”

Slowdown at the border
While DOT looks at changing hazmat rules, the U.S. Customs Service has stepped up its border security. In the hours immediately following terrorist attacks in New York and Washington D.C., traffic at the Canadian and Mexican borders ground to a halt. Government officials for all three countries closed the borders and when they reopened checkpoints, they did so with new security measures.

“The border between Canada and the United States was virtually paralyzed,” says Canadian Trucking Alliance’s David Bradley.

At the Mexican border, cartage carriers found more scrutiny than usual, and the U.S. Customs Service, which controls the borders with Canada and Mexico, reported a drop in drug smuggling due to the tighter security. Freight took longer to get across key ports at Laredo, Texas and Nogales, Ariz.

“The trucks have taken a lot longer to come through the border,” says Russell Stubbs, president of Texas-based Lisa Motor Lines. “They come into the yard later and later in the evening.”

The U.S. Customs Service says traffic delays have returned to pre-Sept. 11 levels, but the border remains on its highest security level, meaning delays can occur quickly. On Oct. 10, for example, several Canadian border crossings closed after a bomb threat was called in to a nearby building.

Lisa Oakley, president of Factory & Steel Transportation Inc., says her company has survived most of the delays at the border, and things have returned to normal. Companies like hers that haul freight into Canada, however, are now required to fill out new paperwork and to designate certain drivers to loads crossing the border. “Security has certainly tightened up,” Oakley says. “There’s probably no cost except time right now.”

In October, the Senate approved a bill authorizing $609 million for new border patrol, Customs and Immigration and Naturalization Services personnel along the northern border.
What impact the additional staff will have on crossing times is uncertain, but border traffic will have to return to normal if the U.S. economy is to rebound, says ATA’s Bob Costello.

Canada is the country’s largest trading partner-more than $1 billion in exports and imports move across the border each day. Mexico is now the United States’ second largest trading partner, and although cross-border commerce has been hindered by security and disputes over the North American Free Trade Agreement, any additional slowdown will hurt. More than 80 percent of freight that moves between the United States and Mexico moves by truck. At the Canadian border, a truck clears Customs every 2.5 seconds.

“The economies of the United States, Canada and Mexico are linked,” Costello says. “If we sneeze, they get a cold.”

Carriers are struggling to calculate the overall costs of the Sept. 11 attacks and their aftermath and many are looking at the uncertain future with caution. There is one thing those carriers can count on, says ATA’s Costello.

“The slowdown in the economy will cost us a lot more than security.”

Fear of additional acts of terrorism involving hazmat prompted the DOT to begin a special survey of hazmat carriers to release a list of security recommendations.

Hazmat haulers hit first

In the aftermath of the terrorist attacks, the FBI uncovered a plot by suspected terrorists to obtain commercial driver’s licenses with hazmat endorsements. Fear of additional acts of terrorism involving hazmat prompted the DOT to begin a special survey of hazmat carriers to release a list of security recommendations.

While the recommendations – which include steps such as improving security fences, communications equipment and interview techniques – do not carry the weight of a government mandate, trucking companies are taking steps to comply.

That’s wise, says Clay Porter, an Atlanta attorney who specializes in trucking issues at Dennis, Corry and Porter. “If DOT puts out an advisory that’s safety related, and you do not follow it, you open yourself to liability,” he says.

For hazmat haulers, added security expenses may be negligible since few hazmat haulers store dangerous chemicals at their terminals, says NTTC’s Cliff Harvison. Most carriers already perform extensive background checks and have DOT-recommended satellite tracking systems.

But James Suttles, president of hazmat hauler Dana/Suttles Trucking, says the heightened attention being paid to carriers that haul hazmat is already costing money.

“Doing business will end up being a lot more expensive,” he says. “We’re spending a lot more time following our loads, and time is money.” Changes in security at chemical plants are adding as much as 30 minutes a load to his company’s shipments.

“These changes are taking a lot of extra time. Our trucks are being stopped a lot more by troopers. I talked to one driver who was stopped twice in Mississippi in a week by state troopers even though he comes through there with the same load every week. He’s usually never stopped.”

R&R Trucking’s Deel says the delays are enough to make him consider charging his shippers more and increasing his driver pay to compensate them for waiting time. While he mulls those issues, he’s also increasing the level of his background checks. Drivers who haul for the Department of Defense will undergo FBI background checks. Deel already uses DAC for background checks. Now DAC/STA, the company has provided trucking companies with background data for 20 years and says their service can weed out most undesirable drivers. Within days after the FBI suggested terrorists were trying to obtain CDLs, DAC saw a surge in interest from carriers.

“I think we’re starting to get more calls from hazmat people,” says Victoria Burge, DAC marketing manager. She says thorough background checks through DAC could alleviate most of a carrier’s concerns, as long as the carrier can provide a name, date of birth and social security number. The company’s average prescreening search costs less than $10. A more thorough search costs more, but the basic search can tell carriers whether a potential driver has a valid SSN and verify most of their CDL history.

“You ought to catch a lot of stuff on the prescreening,” Burge says. “At least you’ll find out where a driver has had a CDL and for how long.” If a person is a foreign national with valid work papers, they should have a valid SSN, Burge says. For a few more dollars, the company can search through a database with more than five million criminal records.

For now, security changes are voluntary since the DOT hasn’t changed any rules and Congress hasn’t passed any new laws. In fact, Paul Bomgardner, ATA’s director of hazardous materials policy, says no costly changes are currently in the works.

In October, DOT Secretary Norman Mineta proposed changes to the current law governing hazardous material handling and inspections, but those laws should not increase carriers’ costs, says Bomgardner. “What the DOT put out is really something that’s been in the works for four years,” he says. (See story on page 10.)

Industrywide, carriers may spend as much as $2 billion on security improvements, says Cass Information Systems’ Robert Delaney. But the real cost will be borne by logistics companies and shippers. “Complying with security may lengthen transit times and require us to add safety stock as an operational buffer,” says Delaney, who is also a consultant to ProLogis, which operates 1,700 distribution facilities worldwide. Delaney estimates that following the attacks, logistic companies, shippers and receivers may spend $18 billion on safety stock as a buffer for just-in-time deliveries.