“The simple fact is that we have not been getting enough freight revenue per tractor to justify serving all of our lanes.” –David Parker, chairman, president, and CEO of Covenant Transportation Group
In many ways, Covenant Transportation Group’s recently released third quarter earnings report neatly presents the struggles the industry is facing in microcosm.
The carrier watched its revenues drop 2.1% to $161.4 million compared to the same period last year, leading to a net loss of $11.2 million versus profits of $1.9 million in the third quarter of 2010. Though an after-tax non-cash goodwill impairment charge of $9.4 million represented the bulk of Covenant’s red ink, David Parker, the company's chairman, president, and CEO, stressed in written comments that rates simply aren’t keeping up with the costs the carriers is facing these days.
“The simple fact is that we have not been getting enough freight revenue per tractor to justify serving all of our lanes,” he explained. “We have been working with our customers on improving this over the last year, and will continue to evaluate decisions in coordination with our customers as to which freight is worth transporting. Then, we need to agree on rates, lanes and freight levels that make sense for both of us.”
In stark detail, Parker laid out the problem areas his operation faces – areas that are increasingly becoming sore points for carriers large and small these days:
Rates remain too low: Covenant said its freight revenues declined $10 million, a drop only partially offset by higher fuel surcharges totaling $9.1 million. The $10 million decrease in freight revenues corresponds to a 4.6% decrease in average freight revenue per tractor per week, with average freight revenue per tractor per week declining to $3,019 during the third quarter this year from $3,163 over the same period in 2010.
An example of how Covenant is trying to change this matrix came from its Star Transportation regional subsidiary, which increased rates on specific lanes that previously were below what the carrier termed “market levels.” That helped Star gain a 6% improvement in rate per total mile; however, equipment utilization dropped 5% as a result – no doubt due to freight lost over the rate increase. It will be interesting to see if that rate increase eventually compensates for the reduction in freight volume.
Less miles, wrong miles: Like many long haul carriers, Covenant said its fleet witnessed a decline in average miles per tractor by some 9.7%; a decline only partially offset by 7.5 cent per mile (or 5.7%) boost in freight rates compared with the third quarter last year. At the same time, Covenant’s percentage of “non-revenue miles” increased by 20 basis points as compared to the same period in 2010.
Higher fuel costs: Parker noted that diesel fuel prices averaged approximately 91 cents per gallon (or 31%) higher in the third quarter compared to the same quarter last year. Those higher prices resulted in a 1.5 cent per mile increase in Covenant’s per mile cost of fuel, net of fuel surcharge revenue, compared to the third quarter of 2010.
“As our trucks were moved less efficiently, more fuel was burned while sitting idle and as we experienced more empty miles as a percentage of our total miles,” Parker pointed out. “Since we do not collect fuel surcharge revenue related to un-billed miles, our fuel surcharge recovery diminished.”
To combat the fuel issue, Covenant plans to redouble efforts aimed at managing our idle time and truck speed, investing in more fuel-efficient tractors, implement a disciplined approach to locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are deemed inadequate to recover a fair portion of rising fuel costs.
Maintenance costs rising: Covenant noted its operations and maintenance expense increased 2.5 cents to 13.6 cents per mile in the third quarter from 11.1 cents per mile during the same period last year, largely due to inflationary pressures related to tires and vehicle parts, as well as additional maintenance conducted when truck utilization declined.
Drivers scarce and more expensive: Covenant noted it had to boost driver wages by 2.6 cents per mile in the third quarter versus the same period last year to keep its trucks filled. On top of that, the company’s transition to a new software operating system resulted in a temporary increase in driver turnover from the middle of July through the first week of September that resulted in a higher average of unseated trucks for the third quarter. While Covenant noted that problem is now corrected, it shows that technology is not always the “silver bullet” it’s often touted to be.
Health insurance claim costs: In addition to increased driver pay, Covenant experienced a 1.4 cent per mile increase in workers' compensation expense related to adverse claims development and a 1.3 cent per mile increase in group health insurance expense related to unfavorable claims experience. Those numbers right there show in stark detail why driver health and insurance costs remain of huge import to this industry.
There are, of course, many costs left unsaid in Covenant’s earnings reports – indeed, costs ubiquitous to trucking overall, such as higher sticker prices for new equipment
New trucks now cost more than ever, largely due to the series of stringent exhaust emissions reduction mandates that were put in place over the course of the last decade. For example, to meet the first round of stricter emission rules in 2002, anywhere from $1,800 to $3,000 was added to the base cost of a Class 8 truck. For 2007, an extra $5,000 to $10,000 got tacked on, followed by another $6,700 to $10,000 extra last year to meet the final round of emissions mandates.
Higher maintenance costs followed sticker price increases as well to cover all the extra emissions-related components, including all the new computer controls and wiring harnesses.
To counteract this, many fleets are extending their ownership cycles to pay for that additional base sticker cost, moving from the 36-month trade cycles that were popular a decade ago to north of 60 months simply to gain time to pay off that additional investment. That extra time, by the way, also beefs up maintenance expenses, too.
Of course, we’re also sidestepping the potential impact of future regulatory efforts now circling the industry like angry wasps, such as hours of service (HOS) reform and fuel efficiency mandates, among others.
Then there are so-called “run-of-the-mill” costs that keep rearing their ugly heads, such as higher tolls, fees, etc.
It all combines together to create one wicked set of struggles for truckers large and small, that is for certain – and those struggles are only going to intensify.