Carrier costs outlook unchanged, but there is uncertainty
November 11, 2011
Recent declines in fuel surcharges have been offsetting continued increases in both equipment and labor costs. It appears that the period of falling fuel prices has ended, but we still don’t expect to see significant price appreciation until 2013. Our costs outlook is relatively unchanged from last month. Stronger increases are dependent on additional freight growth and the outcome of regulatory actions. If freight volumes accelerate further in 2012 and 2013 then the volatile labor and equipment costs will rise even more strongly.
Fleets are on the verge of a major round of driver pay increases, but will hold off if freight softens. Fortunately, it seems that we have finally moved past the economic slow spot. As such, fleets are again considering a second round of major replacement orders for equipment. This is being driven by significant increases in maintenance costs for aging equipment. Order activity has moved upwards in a typical manner for this time of year, however, we are still not seeing significant enough levels to indicate that fleets are adding capacity.
Fleets are having mixed results on their ability to pass along costs. They showed sharp increases during the spring, but the rate of growth has slowed recently. We are also recognizing that there is a significant spread between the highly competitive ‘dedicated’ market and the less competitive ‘random-route’ movements.
We saw a strong round of cost increases back in 2004/2005 when growth was between 10-15% each year. Increases at that time were led by fuel, labor, and overhead. This time we expect the fuel component to be less of a concern going into 2012, but labor wages continue to show strong gains. Our overhead component only shows modest growth and there is a likelihood that this cost will increase faster as companies will have to increase their hiring/training departments to deal with the coming driver crunch.
One new concern this time around is the rapidly increasing equipment costs. Equipment costs are up significantly versus recent history. They will remain so for the next few years as fleets take possession of new trucks at 20-30% higher costs than the ones they are replacing.
Margin expansion has slowed during 2011 after a very strong recovery during 2010. We expect a strong contrast between the very favorable costs characteristics of 2010 with those of 2011. We are at the beginning of an extended period of truck cost inflation that will top the 40% increase experienced between 2003 and the end of 2010.
Our data includes inputs for both fuel and margins. Our outlook for 2011 is for a gain of 11.5% for the year. When you strip away the volatile fuel component, we estimate that the truckload sector will see a 7% gain. If escalating fuel costs don’t come into play then we anticipate the costs environment normalizing in 2012 and 2013 at around 6% growth per year – still strong levels of increases. Most of the increases in the out years are due to higher costs for wages and equipment.
There is the possibility of seeing lower labor cost inflation during 2012 if the HOS regulations are delayed significantly. We would still expect to see reasonably strong growth as the supply and demand fundamentals of the active fleet remain relatively tight, even without the additional regulations.
Our truckload costs data is based on publically-available data from security analysts and trade organizations. We then forecast the cost and margin elements, factoring in inflation and industry conditions. The figures are for costs-per-loaded-mile and are indexed to 2003.
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