As we close out the fourth quarter of the year, carriers face a great deal of uncertainty. Although many fared well during the third quarter, cost pressures were evident. Fuel, driver pay, and maintenance costs are all issues that are not going away.

Overall, the majority of less-than-truckload carriers did well, with strong top and bottom lines in the third quarter. For example, Thomasville, NC-based Old Dominion had a record-breaking period, according to chairman & CEO Earl E. Congdon Jr. Net income jumped 30.5% to over $15.9 million, and the company's third-quarter net profit margin of 5.8% was the best it had produced in 14 years as a public company. Many other LTLs had impressive results as well.

The truckload segment, on the other hand, had mixed results. Heartland Express, for example, reported a modest earnings increase of 2.8% to $17.5 million, despite a 16.1% jump in gross receipts of $136.2 million. Some, like Landstar, did well due to Hurricane Katrina relief hauling. J. B. Hunt would have shown a profit, were it not for a one-time settlement payout, and Werner Enterprises reported income in the third quarter that was not much more than the same period last year. “Cost pressures were more an issue on the truckload side than the LTL side,” noted Jon Langenfeld, analyst at Robert W. Baird & Co.

The stronger than expected economy is primarily responsible for the positive third-quarter results. “News of the death of the economy was greatly exaggerated, despite fuel increases,” says Donald Broughton, an analyst at A.G. Edwards & Sons. “Demand is extremely strong and capacity is constrained.”

The capacity struggle hit the TL segment especially hard. About half of truckload shippers moved freight to LTL carriers and about a third moved to intermodal, according to Morgan Stanley's Freight Pulse Survey. The majority of shippers polled say they will return to truckload if capacity becomes available, but about a third say they will not go back to truckload carriers. Their attitude could change, of course, if capacity increases and the price is right.

In discussing the encroachment of rails onto truckload turf, Langenfeld notes, “From the rail standpoint, they are increasing prices, not volume. Any freight they take from the truckload segment is significant for the rails but not for the truckload space.”

Although the full effect of hurricanes Rita and Katrina is yet to be fully recorded, it appears that the disruption to freight movement and refinery capacity was temporary. Government economists peg the New Orleans area's contribution to the nation's GDP at about 1%, and any storm effects will be reflected in the fourth quarter.

According to analysts, although carriers were successful in passing along fuel surcharges, the coming cold weather and increased fuel consumption could continue to drive up the price of diesel. Carriers will continue to be successful in passing along fuel surcharges as long as capacity remains tight. “Our view is that fuel costs keep undisciplined carriers from adding capacity,” says Langenfeld. The other major drag on capacity is the driver shortage. Adds Broughton: “Driver shortage is the lynchpin.”

The other unknown is consumer spending. Because year-end consumer buying drives much of fourth-quarter results, carriers — especially LTLs — are hoping for a strong season. So far, the news is good. Several of the country's major consumer confidence polls show upswings. The University of Michigan's preliminary index of consumer sentiment rose to 79.9 in November from 74.2 in October. The main reason appears to be the easing of record-high gasoline prices. Another positive note is the fact that businesses pared inventories during the second and third quarters. Dwindling supplies could spur increased freight and help produce a strong fourth quarter.

“If the demand continues strong and capacity is constrained, carriers will have a good fourth quarter. It's that simple,” concludes Broughton.