Opinion: Trucking's Economic Year in Review

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b>By Bob Costello

I>Vice President and Chief Economist

merican Trucking Associations

Trucking was no stranger to excitement in 2005. Congress delivered a highway bill that was a mixed bag of results. Fuel prices surged to levels never before seen in the industry’s history. Driver turnover simmered just below its all-time high as motor carriers struggled with a driver shortage against increased freight demand.

The Federal Motor Carrier Safety Administration issued yet another round of changes to the driver hours-of-service rules. Not to mention the further strain put on the industry when a calamitous hurricane season ravaged the Gulf Coast region.

Surprisingly, these insufferable and incongruous events failed to stymie one cohesive outcome: Because they came against the backdrop of a growing economy, the past 12 months ultimately marked continued growth and profitability for the nation’s motor carriers.

Thankfully, 2006 is expected to be more of the same.

Without question, 2005 dealt a few blows to many bottom lines. But unlike years past, 2005 illustrated that motor carriers have become more adept at weathering industry challenges.

Fuel serves as a clear example. It used to be an iron law in trucking that whenever fuel prices surged, profits would plummet, driving many motor carriers out of business. After all, fuel represents as much as 25% of operating costs, and a 1-cent increase is a significant figure in trucking’s world of slim profit margins. This belief is so widely held that the trucking industry has struggled to promote the fact that the correlation between rising fuel prices and motor carrier failures has weakened.

In a year when diesel posted its highest price on record — reaching $3.157 a gallon in October — the number of carriers exiting the industry did increase, but failed to reach previous highs. Given the same level of high fuel prices, we expect fewer failures today, compared with years past.

Energy analysts and economists may not agree on exactly where oil prices will settle in 2006, but one thing looks clear: Fuel prices will remain high.

The Energy Information Administration projects diesel will average $2.50 per gallon during the 2006 first quarter as crude oil averages $62.42 per barrel. That compares with $2.06 per gallon a year earlier, and oil prices of $50.06.

In a related move, American Trucking Associations recently increased its estimates for 2005 diesel fuel costs to an unprecedented $87.7 billion, which was nearly $22 billion more than the industry spent in 2004.

Although higher costs continue to be a challenge, if 2005 is any indication, fleets should continue to post robust revenues in 2006. ATA’s measures of revenue per load and revenue per mile for the truckload sector were up 11% and 11.9%, respectively, year-to-date through October 2005, compared with the same period a year earlier.

For the less-than-truckload sector, the year-to-date increase in average revenue per shipment increased 8.8%.

The average revenue per ton increased 6.9%.

At the time of this writing, tonnage growth also was apparent, posting its third consecutive monthly increase in November. The latest boost followed gains of 0.3% in September and October, respectively. November’s tonnage index stood 2.7% higher than a year earlier, representing the largest year-over-year gain since March 2005.

By year end, several fleets reported they were scrambling to find other carriers to take loads off their hands, as they were more than 100% booked.

To be sure, some things will not change in 2006.

Truckload carriers, for example, will continue to struggle with a driver shortage. As a result, capacity will remain relatively constrained moving forward.

Strong driver demand, coupled with limited supply, also will force motor carriers to continue increasing driver wages.

At the same time, in 2006 the economy could moderate. That is not to say that growth will not remain solid. It will. Gross domestic product growth is expected to average between 3% and 3.5% this year, after rising approximately 3.7% in 2005.

Manufacturing, which has long served as trucking’s largest customer, will expand about 3%, roughly the same pace as in 2005. Business investment is expected to accelerate moderately in 2006. But some slowing will occur in the consumer sector as personal consumption decelerates amid higher energy prices, rising interest rates and a slower housing market.

To this end, the impact on trucking could mirror the overall economy, with truck tonnage growing around 2%, the same amount as in 2005. However, with capacity so constrained and fleet sizes relatively static, carriers would struggle to increase volumes significantly. Strong demand relative to current operating sizes magnifies volumes and makes them seem strong even if the industry experiences only moderate aggregate gains.

That is not a bad thing.

One certainty is that 2006 will provide a wealth of challenges to the industry. But ultimately, trucking relies upon the strength of the economy to function as well as being a large contributor to it. I am optimistic about both in 2006.

ATA, the largest trade association for the trucking industry, is headquartered in Alexandria, Va. ATA owns Transport Topics Publishing Group.

This opinion piece appears in the Jan. 16 print edition of Transport Topics. Subscribe today.