With gasoline and diesel prices on the rise, hitting levels not seen in over three years, people are feeling the pinch. But even more, one industry is feeling the pinch: Trucking.
While a higher price at the pump is something all commuters feel, truckers have big tanks to fill, so they are typically the ones who really feel the hit to their bottom line when gas prices rise. Yet rising gas prices are merely one of the reasons freight prices are on the rise.
That’s why we wanted to take a moment in today’s blog to discuss the different factors that are driving higher trucking industry costs. First up, we will take a closer look at current fuel prices and how they impact the industry that keeps our supply chain primed.
How Higher Fuel Impacts Trucking
Based on today’s prices at the pump, the average trucker can expect $340 worth of diesel to last one day! While fuel prices impact truckers based as much on the number of miles traveled as on anything else, distance plays a huge role in the overall fuel costs truckers must pay.
So, it is important to consider that what could be six or seven dollars extra per tank for most passenger commuters means hundreds of extra dollars for truck drivers and motor carriers. For most truck drivers, every 5-cent rise in the price of fuel equates to $20 per fill-up.
What does this mean? For truck drivers on longer routes, they could spend up to an extra $100 worth of fuel per week. Take a small trucking business with four trucks and you are talking up to an extra $400 per week, or $1,600 per month, which is no small amount of money.
The problem lies in the fact that the trucking companies must increase what they pay their truckers per load for them to not be out the additional fuel cost. Will we see freight costs continue to rise as motor carriers attempt to mitigate the impact of higher fuel prices? It could be that we are already witnessing it.
Higher Freight Costs Mean Higher Prices
Several U.S. companies have come out stating that higher freight costs are eating into their profits, which will either force them to absorb the cost or raise consumer prices. From Hasbro to Kellogg and Coke, shipping expenses are posing a problem for some of America’s largest companies. The primary factor driving higher trucking costs continues to be the tight labor market.
There is no denying that the trucking industry is a critical component of the nation’s supply chain. If Hasbro wants to get toys to retail distribution centers or Coke wants to get sodas just about anywhere, 70% of that action happens on a truck.
Yet, the problem remains. Companies paid 6% more this year than they did a year ago to ship their products, which is the fastest growth we have seen in nearly seven years. Executives from many companies, whether it be food services company Sysco or Tyson Foods, are reporting higher shipping expenses to Wall Street. Tyson Foods recently reported a $250 million rise in shipping expenses through the first half of 2018.
Companies are coming out stating openly that product prices must reflect the true costs of doing business. In other words, businesses cannot subsidize the cost of increased freight. What does this mean? Expect costs to be passed on to consumers.
In fact, 148 companies listed on the S&P 500 have openly mentioned freight, shipping, and/or trucking costs during earnings calls from the first quarter. This represents double the number that reported freight costs as an issue last year.
Boom and Bust in Trucking
It’s no great secret that trucking, along with many other industries, remains a boom and bust industry. The fate of our nation’s economy is tied closely with the fate of our nation’s motor carriers. Thousands of truck drivers lost their jobs during the Great Recession ten years ago. Yet, the industry has bounced back. Gas was cheap and trucking companies were on a hiring spree.
Now, with gas prices and employment shortages mounting, the costs for long-haul, 18-wheel trucking operators has hit a wall. Consider for a moment that there are only 500,000 truck drivers across the country. With overall unemployment at its lowest level in many years, companies must either employ their own private fleets or contract out to qualified truckers. All of this is cast within the light of a shrinking talent pool.
Whether it be the result of the lack of talent calling into recruiting offices or the strict federal regulations that have had a big impact on hours on the road, trucking operators are feeling the squeeze. Without a huge influx of new truck drivers, the industry is looking at a shortage of up to 63,000 truck drivers by the end of the year.
Retail Sales Add to the Numbers
While trucking companies are increasing the pay and benefits they offer new truck drivers, this means those costs will wind up down the proverbial consumer price food chain. Might Congress lowering the interstate truck driving age to 18, from 21, make any difference? Some say perhaps, others say perhaps not.
We are at a point where manufacturers must make more things to meet rising consumer demand, but in order to get these things from Point A to Point B, truckers have to be involved. Will the increase in demand result in a bottleneck at the dock? Only time will tell.
US Retail sales data came in for April and the numbers are telling. Many trucking companies experienced a better than average first quarter and remain optimistic about the rest of 2018. Retail sales are up 4.7% from one year ago.
When sales are low and freight volumes suffer, trucking companies abandon capital expenditures and fleet improvements fall by the wayside. With the financials now firmly on motor carriers’ sides, expect to see fleets continuing to reinvest in equipment.
In Other Trucking News
The trucking industry news cycle certainly has not been short of interesting tidbits. International Truck has announced the formation of an industry forum where commercial trucking interests can discuss emerging topics and help push forward industry change.
In other news, UPS is hoping that automation and price increases drive up their profit margin and lower costs. The question now is what do these revelations mean for consumers and businesses who utilize UPS to get items from Point A to Point B.
On the other side of the shipping giant spectrum, FedEx has announced that it has instituted testing blockchain technology for tracking high value cargo. In their statement announcing the move, FedEx has referred to blockchain as the “next frontier” in worldwide supply chain security.
The fact is, most indicators point to an improving economy and cautious optimism within the trucking industry. The United States is now entering its 9th consecutive year of economic growth. Since discounts are not a part of the financial game right now, companies need to do everything they can to maximize the value of their purchases.
Key economic indicators all point to a positive, or at the least, neutral trucking environment. Yet this does not mean there are no headwinds on the horizon. Business inventories have ticked up recently, which could be related to the need to keep products closer in case a customer makes an online purchase. Companies are moving slower lately when it comes to inventory concerns.
Many factors, from trade tensions to rising oil and fuel prices, are weighing heavily on motor carriers’ minds. But with continued growth expected in the near term, fleets have their fingers crossed. One example is in the flatbed sector, where loadings are up by 9% year-over-year. While growth in van and reefer operations are not as high, they will remain solid throughout the year.
Still, the question on most minds remains: How much has the ELD mandate impacted overall capacity? The most telling indicator remains the spot market. While some are quick to blame the ELD mandate for tightening capacity, data points show that fleets were phasing in the use of ELDs and tightening capacity well ahead of the mandate’s start date.
When you look at all the factors, one wonders why other intermodal modes of transportation aren’t seeing huge spikes. It could very well be that fleets are taking full advantage of a pipeline of new vehicles and are offering incentives that are bringing new truck drivers into the door. There doesn’t appear to be a catastrophe in the making where trucking is concerned. With the economy continuously improving, trucking numbers continue to show strength and resilience over the long-term.
Yet, history shows us that the economy does not climb in perpetuity. Periods of contraction will occur. As a result, trucking companies should be investing heavily in their operations and doing everything they can to decrease inefficiencies. When hard times do arrive, will your company be able to weather the storm?