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A problem too important to be ignored

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Source: dcvelocity.com/articles/20120727-a-problem-too-important-to-be-ignored/
By Mitch Mac Donald
DCVelocity

 

Hardly a day goes by that a news story on fiscal deficits or monetary bailouts doesn't throw around numbers that start with a "t," as in trillion. It's gotten so that talk of mere billions doesn't rouse much interest anymore.

But there's a number that anyone who ships, brokers, or transports goods for a living should sit up and take notice of: $53 billion.

That's how much Werner Enterprises, the Omaha-based truckload giant, estimates it will cost the truckload industry to "refresh" its fleet, reducing the average vehicle age from 6.7 to 5.5 years (which hardly puts it in the "spring chicken" category) over the next 24 months.

The number came from Werner's internal research, and lest one thinks it represents the work of some off-the-wall data cruncher, that figure—and the analysis behind it—has been vetted by multiple Wall Street houses, who've come to pretty much the same conclusion.

The root causes are plentiful and easy to identify. Of course, much has been made of the escalating cost of labor, fuel, and insurance. The cost of tires—and we're not talking the garden-variety Michelins you slap on your Camry—has risen an astonishing 70 percent just in the past 18 months, according to Werner. Then there have been the three separate mandates from the federal government—in 2002, 2007, and 2010—requiring engine manufacturers to upgrade their products to meet tougher emissions standards. A fourth directive is coming down the pike in 2014. The cost of compliance with the emissions rules alone equates to a 25-percent surcharge on the industry's rig bill, said Derek Leathers, Werner's president and COO.

The truckload industry works on a truck-trailer ratio of 1:3, meaning that for every tractor a carrier owns, it also has three trailers. The cost of replacing one rig, and the trailers that go with it, has reached $200,000, according to Werner data. Small wonder no fleet is adding capacity; it's tough enough just to replace what you have.

Meanwhile, prevailing freight rates are inadequate to allow many fleets to replace their equipment. Shippers are sensitive to this, but only on a macro level. They have their own cost pressures, and they continue to push back against the carriers.

"Shippers are holding the line on rate increases," said Lana R. Batts, a long-time trucking executive and now a partner at the consultancy Transport Capital Partners LLC.

Capacity has shrunk by 18 percent since the freight recession hit in 2006. And there's nothing to indicate the situation will ease anytime soon. Heavily in debt, facing sharply higher costs, and operating in a tightfisted economic climate, many carriers may simply throw in the towel, leading to a capacity washout that will make the last six years seem tame by comparison... Continue reading.

Source: dcvelocity.com/articles/20120727-a-problem-too-important-to-be-ignored/