According to the Motor Carrier Annual Report, which is prepared by the American Trucking Associations, carrier fuel expenses in 2002 ranged from 5.4% to 11.9% of total operating expenses, depending on the type of carrier. It was also reported that insurance expenses for that year, including claims, ranged between 2.6% and 4.6% of total operating expenses.
Together, fuel and insurance costs — which have been among the most volatile of a fleet's operating expenses in recent times — accounted for between 8.8% and 14.8% of total operating expenses in 2002, depending upon the type of motor carrier. At the same time, net profit margins ranged from 0.54% to 3.44%.
Since 2002, the price of fuel has increased by approximately 50%, going from $1.20 per gallon to $1.80 recently. The increase in insurance costs is more difficult to quantify, however, since motor carriers often adjust exposure to risk to keep costs in line. But I don't think it would be a stretch to say that insurance costs have probably increased by about 30% in the past two years. In fact, health insurance premiums and cargo liability premiums have seen that level of increase and then some.
A number of analysts have correctly pointed out that when adjusted for inflation, the cost of fuel is lower now that it was in the 1970s and 1980s. But this doesn't tell the whole story.
The problem lies in the phrase “adjusted for inflation.” On the surface, it seems logical that access to cheaper fuel (when adjusted for inflation) would have at least a neutral if not a beneficial impact on a carrier's bottom line.
But things really only work out this way if all of a fleet's costs and revenues undergo similar adjustments. Needless to say, carriers have not been able to raise the rates they charge to haul the freight by an amount similar to the 30% increase in insurance costs they've been sacked with. As a result, other expenses have had to absorb the burden of the steep increase in insurance.
But back to fuel prices for a moment. As far as the good news goes, I saw an article recently indicating that crude oil prices are expected to be $10 below current levels next year at this time. The bad news is that under the original premise that is relatively cheap right now compared to 20 or 30 years ago, we might expect prices to rise in the future as the oil industry tries to recapture the lost value of this precious commodity.
After reviewing the structural changes that motor carriers have gone through recently, I think there could be a significant collision ahead regarding carrier survival rates. Using profitability as my gauge, I'd say that among the most well managed carriers there seems to be minimal room for balance sheet adjustment in the near future. In addition, we can expect interest rates, as well as equipment prices, to increase.
What I'm trying to say is that we're quickly approaching crunch time. The only other time I've seen the trucking industry in such a financial bind was right after deregulation. As a consumer, I certainly don't want to see price increases for the things I need to purchase. And I'm aware that in many sectors of the economy, increases in manufacturing costs are being offset by gains in productivity, changes to products, or price adjustments. But I don't see this happening — at least not on a broad enough scale — with motor carriers.
We are approaching the time of year, i.e, the holiday buying season, when demand for Class 8 equipment is historically high. And we find ourselves in a situation where our foundation is not solid enough to support the financing of these trucks. From a business standpoint, it's not a good position to be in. But then again, it's never stopped us before.