C. F. Lynch & Associates

The Not-So-Perfect Storm

By Clifford F. Lynch

DC Velocity, August 2004

Perfect storm or perfect pretext? Back in June, Chris Burruss, president of the Truckload Carriers Association, described conditions in the trucking industry as a "perfect storm" (see "truckers in the driver’s seat," DC VELOCITY, June 2004). It’s not that truckers weren’t used to being squeezed by cost pressures from one quarter or another, he explained, but it was rare that four major forces – fuel, insurance, labor, equipment – should all come to bear at once.

Still, compared to what’s happening to the shipping public, many carriers are enjoying a day at the beach. To my way of thinking, the real "perfect storm" is the one brewing for shippers.

It’s not that shippers haven’t tried to ease the truckers’ pain. When the new truck driver hours-of-service (HOS) restrictions kicked in last January, for example, shippers did whatever they could – cutting loading times, shipping unitized loads, eliminating stops – to minimize the rule’s impact on their carriers. And it’s clear that many have met with great success. A group of truckload carriers recently told investors that their customers had taken steps to eliminate the causes of detention charges and were "showing good faith" efforts in other areas as well. The percentage of shipments that incur detention fees is falling all the time. And carriers report that the number of stops has dropped 15 to 25 percent.

So what’s the problem? The problem is that more than a few carriers jumped the gun and raised rates based on the expectation of soaring costs. They simply weren’t willing to wait and see whether fuel surcharges or detention and stop-off charges would offset some of those costs.

The result is that many truckers are doing quite well. J. B. Hunt, for example, managed to weather the "storm" by tripling the previous year’s quarterly profits. For 10 truckload carriers tracked by investment banker BB&T Capital Markets, earnings rose an average of 21.6 percent during the first quarter of 2004 compared to 2003.

And their leaders can hardly contain their glee: A recent article in Traffic World quoted several senior trucking executives who sounded like kids on Christmas morning. "It’s a great time to be in trucking," said Jerry Moyes, CEO of Swift Transportation. Gerald Detter, CEO of Con-Way Transportation, said, "I’m smiling again. Trucking is fun." David Hughes, director of business development, reported, "We are getting rate increases. We are culling accounts." And the gloating’s not confined to the pages of Traffic World. At a meeting two months ago, another trucking CEO told me, "You don’t price on cost. You price on supply and demand. That’s the way business is done." Ouch!

How should shippers respond? Should we stop using trucks? Of course not. We cannot and should not. But we’d be foolish not to consider our options. Among other steps, we should:

Review our relationships and demand to share in the savings. If a DC manager is doing his part to make his carrier partners’ operations more efficient, he should have something to show for it.

Explore intermodal. Once dismissed by shippers as slow and unreliable, intermodal service has made great leaps over the past few years. In fact, there’s already some evidence that shippers are diverting freight. Intermodal traffic as a whole is up 8 percent over last year, and NS and BNSF have reported increases as high as 15 to 19 percent.

Consider private carriage. Private fleets already account for 50 percent of the intercity truck tonnage. Many fleet operators are looking at setting up or expanding existing private fleet operations to increase capacity and cut costs.

Will shippers survive the storm? Sure they will. But when the skies clear, they’d do well to remember who held the umbrella for them and who sat in a dry office and laughed.



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