Carrier costs grow 10% in 2011

Lower fuel surcharges had been offsetting continued increases in both equipment and labor costs. Fuel prices are currently rising but are still below their 2011 peak. Our costs outlook is relatively unchanged from last month. The main wildcard for costs in 2012 will be fuel pricing – Iranian saber-rattling has begun to spook the commodities traders and oil prices have begun moving higher. The volatile labor and equipment costs will rise more strongly only if freight demand has an unexpected one or two quarter surge.

The crisis in labor costs will await the 2013 implementation of the FMCSA’s final ruling on HOS. Although those changes are less than originally feared, the new timing coincides with several other regulatory changes, producing a significant peak in driver shortages.

There are reports of higher maintenance costs from aging fleets. Although the fleets are ordering enough new trucks to blunt this trend, the savings will be in part offset by the much higher capital costs of new trucks. Equipment costs are a big deal during this recovery. U.S. and Canadian new truck order activity averaged just over 20,000 units per month during 2011. This is a solid level of activity but does not indicate significant amounts of new capacity coming into the system.

Fleets continue to do a better job of using their pricing power and base rates during most of 2011 saw year-over-year growth at or above 5%.

Note: We have changed our starting basis for this data so that the actual figures correlate to a starting reference where 2003Q1 = 100. This did not affect our overall growth rate, it is relatively unchanged. We did, however, make some historical adjustments to the underlying costs figures – most notably Labor and Overhead. Additional updates on the underlying components will be forthcoming.

Recent History
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. Growth moderated to gains of between 5-10% per year from 2006 through 2008. Costs dropped off considerably during 2009, down 18%, with Equipment costs the only segment to show a gain during the year. Costs rebounded to grow over 5% during 2010. Overhead costs continue to decline in 2010 as cost-cutting initiatives remained in place, however, Labor costs and Margins rebounded significantly during the year.

Outlook
Our data includes inputs for both fuel and margins. Our initial estimate for 2011 is for a gain of 10% for the year. When you strip away the volatile fuel component, we estimate that the truckload sector saw a 6% gain. If escalating fuel costs don’t continue in 2012 then we anticipate the costs environment normalizing in 2012 and 2013 at just above 5% 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.

Despite the further delay in the HOS regulations into 2013 our Labor costs outlook is unchanged. Originally, we expected the Fuel component to be less of a concern going into 2012, but recent Iranian activity makes that less likely.

We continue to expect rapidly increasing equipment costs, however, our outlook has been reduced some. After growing below 4% for five year years we look to see Equipment costs grow near double-digit levels this year and next. They will remain high 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 slowed during 2011 after a very strong recovery during 2010. 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.

Tight capacity, a rising driver shortage, and rising costs. It’s time to be prepared.

NOTE:
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, seasonally adjusted and are indexed to 2003.