Trucking cost inflation remains elevated

The truckload market should continue to see costs above general inflation, but well below the more than 10% level that we had in 2011. Our costs outlook is nearly unchanged from last month, but the risk environment has evolved. After rising strongly and then quickly falling, fuel prices look to have bottomed and are moving back up. The economic picture has become murkier and is making it more difficult for truckers to prepare for the next 12 months.

We do not expect a prolonged continuation of the first quarter’s disappointing rate increase. Signs of stress in some driver segments and reports of strong rate gains in the last month support our forecast of higher rate increases for the remainder of the year.

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 10.2%. 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 70% growth that was achieved in 2010. Our estimates show that overhead costs have been essentially flat for the last 2 years after a significant drop in 2009.

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. With the recent easing of fuel costs coming in more dramatically than anticipated the costs environment should slow during 2012 – growing 5.3% for the year (possibly less if the fuel trend continues). 2013 should see an increase to 5.9% growth as costs pressure rise due to HOS implementation. Over the next year we expect to see fuel prices moving higher – not stagnating at the current low price. Most of the cost increases in the out years are due to higher costs for wages and equipment as we don’t have an expectation of fuel prices having a sustained rise with the global economy still struggling to get above modest growth levels. Costs in 2014 are expected to show stronger growth, up 8.8%, mostly due to higher labor costs from HOS implementation.

Analysis
First quarter data show soft pricing. Given continued strong cost inflation in equipment and labor inflation above consumer inflation, fleets suffered modest margin compression. We expect this situation to reverse some in the second half of 2012 as capacity again tightens. Anecdotal reports of tightening truck and driver capacity strongly support this forecast.

On highway diesel prices are down 7% from over a month ago with further reductions possible. This reflects even greater reductions in crude prices, driven by strong supply and weak demand. The same media outlets that trumpeted $5 diesel several months prior are now talking of less than $3 diesel. We suggest a more modest set of expectations with near-term prices in the $3.50+ range. There is still risk of a price run up should the Iranian political stress reignite.

The labor environment is slowly tightening under pressure from increased capacity utilization and regulatory pressure. Nonetheless, the tightness levels are well below what we expected a year ago.

Data from the first quarter of 2012 showed that trucking cost inflation softened from its prodigious 2011Q4 rate. The biggest change was apparently a reduction in purchased transportation as fleets needed less peak capacity.

We expect costs to increase as the year matures due to tightening capacity. Should, however, tonnage remain soft and regulatory drag be delayed, costs will increases much more moderately, in the 3-5% range. Fuel price hikes aside, Equipment leads the cost escalation parade, although history suggests a spike in Overhead costs soon. Labor costs will begin to move upward late in 2012 and 2013.

We are still on course for the 2013 exposure due to the HOS implementation in Q2 of that year. Given the relative “reasonableness” of the FMCSA’s proposed changes, the courts will probably not delay implementation of the new regulations. The court cases will, however, drag on – adding a sustained level of instability to the market indefinitely.

We continue to believe that we are at the beginning of an extended period of truck cost inflation that could top the 40% increase experienced between 2003 and the end of 2010.

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.