Carrier cost growth set to exceed 5% in 2012

The market has benefited from low fuel prices during the second half of 2011. That situation is changing in early 2012. Our costs outlook remains unchanged from previous months, but the fuel wildcard is starting to rear its head again.

Strong equipment orders indicate that equipment costs will continue to grow. The price of a new tractor is 30% higher than the one it replaces. Used tractors are also rising in price. 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 as he price of a new tractor is ~30% higher than the one it replaces. 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.

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 7.5% during 2010. Labor costs and Margins rebounded significantly that year. 2011 saw another sizable increase, up 10%. This was led by a 30% surge in fuel costs. The only costs segment to show a weaker response in 2011 than in 2010 was Margins. Margins still grew but were down significantly from the nearly 80% growth that was achieved in 2010.

Outlook
Our data includes inputs for both fuel and margins. When you strip away the volatile fuel component, we estimate that the truckload sector saw a 6% gain in 2011 – a solid rate of growth, and well above overall inflation. If the currently escalating fuel costs ease soon then we anticipate the costs environment normalizing in 2012 and 2013 at about 6% growth per year – just slightly higher than our estimate last month. A rapid surge in fuel would change that outlook. Most of the increases in the out years are due to higher costs for wages and equipment as we still don’t think that the current rise in fuel prices is sustainable for very long without a dramatic escalation in the Iranian conflict. Costs in 2014 are expected to show stronger growth, up 8%, mostly due to higher labor costs from HOS implementation.

Outlook
We continue to expect rapidly increasing equipment costs. 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 30% higher costs than the ones they are replacing. They still aren’t adding to their fleets but are finally able to pursue full replacement strategies. Margin expansion slowed during 2011 after a very strong recovery during 2010.

We believe that 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.

We recently 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. 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.