Oil Rout Puts $24 Billion of Truck Fuel Savings in Play
As shippers of everything from toys to tools enjoy as much as $24 billion in savings from lower diesel surcharges next year, trucking companies see an opening to raise freight rates at a pace not seen in about a decade.
American Trucking Associations calculates that each 1-cent drop spurs industrywide annual fuel savings of $350 million. About 85% of the savings goes to shippers through lower fuel surcharges.
That may soften shippers’ resistance to higher rates that trucking companies say they need to cover rising expenses for salaries, health care and new regulations that limit driving hours. Unlike previous times when fuel prices fell, stronger economic growth is increasing demand for cargo space while drivers are scarce, which spurs higher rates.
“If the overall cost for the shipper, which is your rate plus your fuel charge, is going to go down, then they may be a little bit more willing to pay that increase,” according to Eric Fuller, chief operating officer for Chattanooga, Tennessee-based U.S. Xpress Enterprises Inc. “It definitely won’t hurt our ability to get rate increases,” Fuller, whose company operates about 7,000 trucks, said in a Dec. 8 phone interview.
The decline in diesel adds earning power to an industry bolstered by cargo demand that’s exceeding capacity. A Bloomberg News index of so-called truckload operators -- those that fill trailers with goods just from one customer -- rose 39% this year, outpacing a 9.6% gain for the Standard & Poor’s 500 Index. The gauge of nine carriers includes Swift Transportation Co.
Large truckers boosted freight prices on average between 3% and 4% this year, and they may rise 5% to 6% in 2015, Jason Seidl, an analyst with Cowen & Co. in New York, estimated in a Dec. 4 interview.
“In this environment, the economy is decent and fuel is falling, which is the perfect combination for a truckload guy,” Seidl said.
The fuel was last below the Dec. 8 closing price of $205.49 a gallon in 2010 when the U.S. was still recovering from the recession.
Landstar Systems Inc., a Jacksonville, Florida-based long-haul carrier, this month declared a special $1 a share dividend, citing a “strong balance sheet and financial strength.”
A surge of U.S. crude production from shale formations in states such as North Dakota and Texas has caused the price of West Texas Intermediate crude to drop to as low as $60.09 Dec. 11, the cheapest in intraday trading since July 2009.
The U.S. economy expanded 3.9% on an annualized basis in the third quarter, while freight expenditures rose 5% in November from a year earlier, according to Cass Information Systems Inc. data compiled by Bloomberg.
Truckers have added fuel surcharges to contracts since the 1990s to protect against rising expenses. Under most agreements, shippers pay the difference between the current price and $1.05 a gallon, Fuller of U.S. Xpress said. The surcharges don’t cover fuel for hauling empty trailers and idling trucks, which is about 15% of the diesel expense.
Fuel is the largest expense for long-haul trucking companies before the surcharges, followed closely by labor, said Bob Costello, chief economist for the trucking association. Companies are combating a driver shortage with annual pay increases that could be close to 10% over the next few years, Costello said.
“We’re just in the beginning stages of a prolonged run for higher driver wages,” he said in a Dec. 3 telephone interview.
Independent truckload companies make up about 38% of the $680 billion industry and private fleets account for 37%, according to a Stifel Financial Corp. report in September.
The drop in fuel surcharges is a windfall for shippers, who have been grappling with higher freight rates and difficulty obtaining transport services, said Bruce Carlton, president of the National Industrial Transportation League, a shippers’ advocacy group based in Arlington, Virginia. The impact is more immediate for trucks, which adjust the charges weekly, than for railroads, which take up to 60 days to reset surcharges.
“Everyone is smiling,” Carlton said in a Dec. 3 telephone interview. “It’s been a very long time since any of us have experienced such a significant drop in fuel prices.”
