Truck costs slow but above inflation

The first half of 2012 has seen moderation in most of the major cost categories, but this hasn’t affected our overall outlook for truck cost inflation. The market should still see costs above general inflation, but well below the more than 10% level that we had in 2011. Our costs outlook hasn’t changed substantially over the last few months. If the economy is able to stay in positive territory and HOS is implemented next July then look for cost increases to begin to show stronger growth during the second half of 2013.

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.

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 fuel costs easing during Q2 (but now popping back up) the costs environment should slow during 2012 – growing 5.0% for the year. 2013 should see an increase to 6.0% growth as costs pressure rise due to HOS implementation but we also have an expectation of a flat fuel price environment. Most of the 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 7.6%, mostly due to higher labor costs from HOS implementation.

The first half of 2012 has seen moderation in most of the major cost categories:

  • Soft demand has kept wages and purchased transport rates down.
  • Reduced new equipment purchases have kept capital costs down, although maintenance costs continue to rise for an aging fleet.
  • Fuel costs are 9% below their April peak. That may last for some time… or not. On-highway diesel prices were up nine cents in one week due to a renewal of saber-rattling in the Middle East.

Soft demand and strong increases in natural gas supply could create a favorable oil market for the remainder of the Teens. That doesn’t mean that fuel prices will fall but, rather, that there is the potential that the decade of strong increases in fuel during the Oughts will grow much slower. Look for pump prices to rise back above $4 by 2013.

Cost increases are in a precarious balance between soft freight demand and increasing regulatory drag and conservative capacity management. Recent surveys have determined that CSA compliance has increased driver costs 2-3% before factoring in any tightness of supply.  With little excess supply, the market is vulnerable to any supply or demand shocks. This is despite very disappointing demand growth.

Equipment: After averaging growth of just over 3% from 2007 through 2010, equipment costs surged over 6% in 2011 and is expected to stay at this high level for the next several years. This is caused by the significant increases in both vehicle maintenance and new equipment prices.

Labor: Labor costs have been relatively subdued during this recovery, growing just over 5% in 2011. This is mainly due to the conservative approach to capacity that truck fleets are exhibiting. Carriers are not adding capacity and the modestly tight capacity utilization isn’t enough to warrant significant wage increases…yet. That is expected to change once HOS implementation occurs in mid-2013. By 2014 labor cost growth is expected to approach double digits.

Overhead: Overhead saw a large decrease in costs during 2009, down nearly 30%, and management was able to keep that low overhead sustained during the recovery of 2010 and early 2011. We expect to see a modest uptick in 2012, with growth of less than 10%. Overhead costs tend to grow late in a recovery and the pause in the freight markets during much of 2011 should keep cost increases low until the driver shortage kicks in in 2014.

Margins: Margins saw a big rebound in 2010 (up 50%+) after suffering through 3 straight years of falling margins. 2011 growth slowed considerably but was still very strong, up more than 20%. Growth in 2012 should still show some slowing, but the recent drop in fuel prices during Q2 lead to a sharp uptick in margins as fleets were able to convert fuel surcharges into better rates.

Fuel: Fuel always remains the major wildcard when it comes to truck costs. That will remain so. Fortunately, truckers continue to get better and better at utilizing fuel surcharges. A decade ago it was rarely seen, now if you don’t have one – you’re out of business. Our fuel outlook calls for pretty flat growth over the next two years. This is predicated on the fact that we are in relative supply and demand balance and the global economy is slogging along with weak growth. We urge you to assume the Boy Scout motto for fuel: Be Prepared.

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