Taming the wild ride

Freight demand and rates are strong. Trucking capacity is tight. Times are great. Be afraid. Be very afraid.

If there is one thing more dangerous than a bad business environment, it’s a very good one. Revenue may be growing due to both volume and pricing, but costs aren’t lagging far behind. The profits you rake in today may be at risk the next time freight volume softens.

Consider that diesel as of late November costs more than $2.10 a gallon retail on average – 42 percent higher than a year earlier. Lower-sulfur diesel as required by the Environmental Protection Agency within a couple of years will add further to fuel costs. And there’s little relief coming as refineries are operating at near capacity.

Labor costs aren’t growing as fast as fuel costs, but they aren’t anything to cheer about. Base pay alone for over-the-road truckload drivers in 2004 is up more than 4 percent over 2003, according to The National Survey of Driver Wages. Throw in new or higher detention pay this year and the increasingly common sign-on bonuses, and overall driver compensation certainly has increased substantially. Major truckload carriers are speaking matter-of-factly about drivers earning $60,000 within a couple of years. And because the overall work force is aging, recruiting only will get tougher without higher pay.

Equipment isn’t getting any cheaper. Sharply higher costs for raw materials, especially steel, will mean higher costs for trucks. The next generation of low-emissions engines will add still more to the cost of equipment. And we’re facing other incremental costs, such as heftier brakes to comply with a stricter stopping standard.

But today, shippers are covering those costs and trucking companies are bullish. In a CCJ survey conducted last month, more than 70 percent of for-hire carriers said they planned to grow their fleets during 2005. Barely 2 percent expected their fleets to become smaller.

With unparalleled levels of freight demand, I’m certainly not suggesting that you cut back on capacity. But how much growth is reasonable in light of the driver shortage? Sure, higher driver pay can provide some relief. If you can use pay hikes to recruit better and more experienced drivers, then it’s probably a good investment. But if higher pay just means an increase in mediocre or underexperienced drivers, is that a smart move? Thanks to the insurance crisis, you probably are far more exposed to risk than you were during the last super-heated freight market in the late 1990s. Cutting corners is dangerous business.

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Prepare now for the downturn. Don’t assume that a weak freight market will mean lower costs. High diesel prices are here for the long term, and labor costs aren’t likely to drop anytime soon. How many drivers will stick around when you lower your pay per mile?

Now is the time to decide whether to raise driver pay significantly. Today is the day to specify fuel-efficient equipment, even if surcharges and rates are covering your costs. Or perhaps you want to change your mix of used and new equipment or the mix of company equipment and independent contractors. Those decisions are better made when profits and cash flow are strong and your options are many.

The task is especially daunting because it’s more difficult to exercise control over an organization during good times than in bad. When times are tough, employees and managers tend to rally around leadership. Everyone battens down the hatches, hunkers down and tightens their belts. That kind of discipline and focus is hard to impose when the company is making money – especially after an extended period of tough times.

Don’t get depressed. Because of the driver shortage in particular, capacity should remain tight, and profits should remain strong for quite some time. But eventually, unhappy days will be here again. Get ready now.