Inside the Numbers

Could fuel prices wreck trucking’s recovery?

avise@randallreilly.comavise@randallreilly.com

Throughout most of the economy, truck fleets are working harder than they have in the past few years. Fleet owners are putting more trucks into service, replacing aging trucks and buying new ones to expand operations. Virtually all economic indicators — even some in the troubled housing market — are pointing at least to recovery if not necessarily a rebound. That’s good news, of course, for the people who supply parts and service equipment.

But not everything is rosy. The notion that we live in a global economy truly hits home when you consider the connection between international affairs and the health of a domestic U.S. industry.

The price of both diesel and gasoline have been rising since the start of the year, fueled by tensions with Iran over the status of its nuclear weapons program.

That’s understandable since much of Iran’s coast is on the Strait of Hormuz, which is a key shipping route for a huge chunk of Middle East oil.

As of March 26, diesel prices have risen 35.6 cents, or about 9.5 percent, since the beginning of the year. Prices also have risen for nine straight weeks and for 11 of the last 12 weeks. Gasoline prices have soared 62.5 cents, or nearly 19 percent, since the beginning of the year, have risen for nine straight weeks and for 13 of the last 14 weeks.

Both diesel and gasoline are significant factors in the industry’s health.

As fuel price surges go, this one is mild. The price hikes during the spring of 2008 or in the weeks immediately following Hurricane Katrina were far more dramatic. In fact, the current pace of diesel price increases isn’t even as bad as last year when prices soared 60.1 cents, or 18 percent, in the midst of rebellion and protests in the Middle East and North Africa.

The fact that the current surge isn’t as bad as past ones is of little consolation to truck owners and motorists. In trucking, rising diesel prices obviously increase costs, and not all of those increases can be recaptured through fuel surcharges.

Even more detrimental to undercapitalized fleets is the cash drain that results from to the lag in the payment of fuel surcharges, which often is 45 to 60 days or more. Fuel surcharge revenues actually coming in don’t cover current fuel prices.

A more subtle effect of rising fuel prices is the pressure on freight rates. In the Randall-Reilly MarketPulse survey of for-hire trucking executives covering February, one executive said that increased fuel costs “will further assault customers’ budget allotment for transportation spend, which will then begin to attack core linehaul rates once again.”

Another said, “It really concerns me with fuel continuing to go up that it will be difficult to get the increases we need to offset our overhead.”

Between the cash drain and pressure on rates, it would not be surprising to see at least a small spike in trucking failures even though the demand side of the business remains strong.

Remember, carriers have to pay for fuel and driver pay almost immediately, but shippers don’t pay carriers that quickly. When freight demand rises and costs surge, many carriers simply run out of cash.

Diesel prices obviously have a direct impact on trucking, but gasoline prices have a significant indirect impact.

When gasoline prices rise, motorists have to spend more of their disposable income on gasoline, leaving less money to buy the things that trucks haul.

“Turmoil around the world is causing a spike in fuel prices, which could result in consumers pulling back and a freight slowdown,” said one trucking executive in the February MarketPulse survey.

In general, the trucking industry is rebounding, but you need to watch fuel prices.

If they keep rising — and especially if those gains accelerate — you might find that some of your customers aren’t around anymore.

Avery Vise is executive director, trucking research and analysis for Randall-Reilly Business Media and Information.

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