"Hold tight
Wait till the party's over
Hold tight
We're in for nasty weather
There has got to be a way
Burning down the house

Here's your ticket pack your bag: time for jumpin' overboard
The transportation is here
Close enough but not too far, Maybe you know where you are
Fightin' fire with fire"
Talking Heads

We're now more than half way through the first quarter and it's getting really interesting. Here's what I think lies ahead for us in 2011?

Fuel

Fuel is the largest expense of running a truck. In Week 6 of 2011, the DOE price of fuel was up $.76 or 22% year over year. A truck running 120,000 miles per year at 6 miles per gallon at $2.77 per gallon pays $55,400 per year for fuel. At $3.53 per gallon, the same truck pays $70,600 for fuel, an increase of $15,200 per truck. At 6 cent increments, a fuel surcharge does not reimburse for this increase.

• Trucks run odometer miles where most fuel surcharges are calculated on computer generated "short miles" – a significant difference.
• Trucks necessarily incur empty miles, which go unreimbursed.
• Drivers must either use fuel to run a generator or idle their truck to keep comfortable and protected from extreme temperatures.
• In the winter, winter blend fuel drops mpg by at least ½ mile per gallon.

Only fuel surcharges which have 5 cents increments protect the carrier from increases in fuel prices.

When fuel prices increase many trucking companies lack sufficient working capital to finance the increases. During the extreme price increases in the first half of 2008, many carriers folded because they did not have the additional working capital needed to float this money for shippers for 30, 45, 60 or even longer shipper imposed payment terms.  

Drivers

The driver shortage has arrived and is worse than ever. One analyst went so far as to describe this as "The Mother of all Driver Shortages."  Drivers will become increasingly scarce as the next two years unfold. The Driver War has begun. The first shots have been fired and the battlefield is shifting from sign-on bonuses to rate increases. We expect the rates paid drivers to increase throughout the year as the competition heats up and strong companies vie for market share.

Many trucking companies can't afford to increase driver pay. In the coming months, these companies will have a lot of old trucks lining up on the fence for lack of drivers. Without drivers, a company can't generate either revenue or cash flow. The driver shortage will restrain any growth in capacity. These trucking companies are in jeopardy, just as others are approaching days of record profits.

Equipment

Carriers that chose to not increase rates in 2010 are now finding themselves in trouble. Those rate increases were necessary for most trucking companies to return to profitability. As year-end financials are being generated, lenders are now seeing a divide between the haves and the have-not's. Used equipment prices have recovered nicely and the fear of repossession is no longer driving loan deferrals. Trucking companies which didn't increase their rates in 2010 didn't generate the healthy financial statements they need to secure loans to update their old equipment and increase driver pay to compete in the driver war.

Thanks to the EPA, another $8000 to $10,000 has been added to the cost of a new truck in 2011. This puts the costs of purchasing or leasing a new truck out of reach for most owner operators at current rates of pay. Orders for trucks and trailers are up as companies make orders that were deferred during The Great Recession. As the supply and demand equation reverts to the OEM's and inflation kicks in, prices will increase even further. As a result, many carriers are trying to maintain their fleet size by recruiting owner operators since they bring their own truck. But the owner operator population is a very small percentage of the overall driver population and is not large enough to meet the growing need.

Maintenance

One rule of trucking physics is that older equipment increases maintenance costs. The average age of the tractor on the road today is 6.7 years. This is obsolescence. I am hearing from many truck salesmen that they have lots of orders for trucks, but they can't secure financing for the buyers. Whereas a new truck might incur maintenance costs of 7 cents per mile during its first three years, an old truck will be closer to 15 cents or more, plus downtime costs for breakdowns and repairs.

Lost Productivity

With CSA and Electronic Logs, the industry is experiencing a significant loss of productivity. CSA incents drivers to comply with the Hours of Service Regulations. Electronic Logs are quickly becoming standard in the industry. Most of the large carriers have implemented EOBR's and medium sized carriers are following suit. I recently saw a survey of 60 companies with a combined truck count of over 11,000 trucks. Most were small to medium sized carriers. 46% of their trucks now have EOBR's. Carriers tell me they experience a loss of productivity of 6 to 10% with EOBR's. The proposed Hours of Service regulation will cut productivity even further as drivers' on duty drive time is limited and their flexibility restricted. Utilization will suffer at least 10 %. The drivers' rate of pay must be increased to make up for this loss in miles just for them to stay even. The same applies to truck rates.

Inflation

As a result of The Great Recession, trucking companies are as lean as they can possibly be. There is nothing left to cut. Carriers which didn't implement rate increases in 2010 will find that inflation will eat any gains they enjoy in 2011. The Federal government has decided to weaken the Dollar. It is the only way they can deal with this country's mountain of debt. All commodities are traded in Dollars, so when the Dollar goes down, the price of commodities such as oil, rubber, non-precious metals, precious metals, grain, etc., go up. In addition to driver rate increases, we are already seeing large increases in the price of equipment (12% increases in the price of tires and 22% and climbing for fuel). The major drivers of cost for a trucking company - fuel, equipment, drivers, tires and maintenance - are all rising rapidly, and inflation will continue upward pressure on these prices.

Later in 2011 or early in 2012, expect the Federal Reserve Bank to start increasing interest rates to combat inflation. The trucking business is very capital intensive and a trucking company without debt is a rare animal, especially after The Great Recession. For those who are able to borrow, their interests costs will rise.

Bids

Currently we are in the middle of the Spring bidding season. There are still plenty of sport truckers putting in low rates. Target rates on the bids are shockingly unrealistic. Analysts say that rates will increase 4 to 6% and shippers are expecting this. With all the cost increases, 4 to 6% falls well short of what will be needed to provide sufficient capacity.

I have no doubt that at the end of the bidding season shippers will have rates in place, but I have to ask myself, "Will these rates come with a truck?"