- Most small carriers are well above the breakeven mark and can absorb, if not pass on, rising fuel prices.
- Diesel prices would need to climb another $1.30 per gallon before rising costs threatened motor carrier profitability.
The timing of a run up in diesel prices runs parallel to improving freight conditions.
Israeli and U.S. strikes on Iran this past weekend spurred the biggest jump in oil prices in four years.
Diesel prices averaged $3.90 per gallon nationwide as of March 2, according to the most recent update from the U.S. Energy Information Administration (EIA). The cost of a gallon of diesel climbed for the entire month of February before jumping almost a dime between Feb. 23 and March 2.
The financial impact on trucking companies, however, could be fairly muted, assuming the Middle Eastern conflict and the effective closure of the Strait of Hormuz—a key thoroughfare of energy exports—can be resolved sooner rather than later.
"Had this happened two or three months ago, I would say that it had the potential to knock out a large number of carriers," said Avery Vise, FTR’s vice president of trucking. "That’s still a possibility if it’s an extreme run-up similar to March 2022 following the Russian invasion of Ukraine. But if this is more like a 30- to 40-cent surge—or less, of course—then the recent strength in spot rates probably will keep most operations afloat initially, especially if spot rates accelerate to some degree to offset the cost, as they likely would. If we are talking about a much larger increase—and certainly if it is lightning-fast as in March 2022—then we could see another big hit for very small carriers."
Fuel price swings have a disproportionate effect on small fleets and owner-operators in the spot market, noted DAT principal analyst Dean Croke. Spot rates are "all-in" rates and do not include a separate fuel surcharge, so carriers will have to negotiate higher spot rates to compensate for increased fuel costs. That’s going to be a challenge, he said, given that March historically is a lull in the freight calendar and rate recovery in the spot market has been mostly driven by supply-side changes as opposed to higher volume and demand.
Crude oil makes up about 38% of the cost of a gallon of diesel. The cost of a gallon of diesel has jumped 42 cents this year, according to the EIA, and Vise pointed to the fortunate timing of an upswing in diesel syncing up with improving overall freight conditions.
"Dry van and reefer started to strengthen notably in December, even before the end of the month, probably due to holiday spending distortions. For the first three weeks of the year, those rates were falling as they typically do, but the winter storm in late January significantly reset the market, even though rates—especially reefer—have come down quite a bit," he added. "They are still very high year-over-year, though. And flatbed spot rates just keep rising, as they have consistently for more than three months. That’s probably due to a combination of a stronger manufacturing sector and the surge in data center construction."
Also of note, Croke said, is that many smaller carriers have returned to healthy profitability margins and likely have enough wiggle room to absorb a spike at the fuel island, adding that small carriers are, as of late February, approaching the profitability they experienced in the early part of 2018, a strong year for carriers overall.
"Assuming dry van rates hold at this level, diesel would need to rise to $5.20 per gallon to return spot carrier profitability to zero or near breakeven, which is where it has been for the last couple of years," he said. "We're talking Russia invading Ukraine, the level of impact on fuel prices in February '22 (from the current crisis), and the subsequent spike in diesel to $5.82/gal over the following summer before carriers would be left with zero profit margins—assuming spot rates hold at current levels, which are 25% higher year-over-year and 22% higher than the five-year average."
Just how much margin is there? A typical dry van owner-operator on the spot market running 100,000 loaded miles and 15,000 empty miles—including $60,000 in wages, insurance, and all other costs associated with running a long-haul truck—shows breakeven costs around $1.88 per mile as of this week, Croke said.
"That's with fuel at $3.90 per gallon per the EIA (as of Tuesday) morning and dry van all-in rates, including fuel surcharge, at $2.38 per mile," he added. "Gross profit margin at that level is approximately $0.21 per mile, or $21,000/year."
