The freight may not be stacking up as high as some carriers would like, but key truckload carriers say their profits are holding up thanks to improving costs and steady pricing.
In rapid succession this month, Swift Transportation and Celadon Group upgraded their earnings forecasts for the third quarter, belying suggestions that a softening national economy would cut into trucking business heading during the peak shipping season.
“With what Swift put out and what we are saying, the rate environment looks strong,” said Paul Will, executive vice president of Indianapolis-based Celadon.
Celadon projected its bottom line would improve as much as 50 percent over the third quarter last year. Swift told Wall Street it also projected its earnings would improve despite an earlier warning that freight demand was weaker than projected. Swift wasn’t suggesting demand was improving but said declining fuel prices and other cost factors were working in the carrier’s favor.
Declining diesel prices and improve-
ments in employee benefits costs “reduced expenses for the quarter by an amount sufficient to offset the negative impact of softness in the truckload freight environment,” the Phoenix-based truckload carrier said.
With fuel prices down more than 20 percent since early August, Will said, truckload operators are seeing the benefits even though fuel surcharges also are declining.
“The reality is fuel surcharges cover only about 85 percent of your fuel costs. You don’t get paid when trucks are idle or drivers are heading home. When the prices go down, you get that 15 percent that you hadn’t been absorbing. The net effect is,” he said, “fuel prices coming down is better for everybody.”
For shippers, analysts said, the twin reports from Swift and Celadon suggest the apparent soft demand heading into the busy shipping period isn’t opening up capacity and cutting into truckers’ rate leverage.
“We continue to believe that no meaningful capacity is entering the truckload market at present to muddy the pricing waters,” investment analyst John Larkin of
The Environmental Protection Agency says the trucking industry shouldn’t have any worries about adequate supplies of new ultra low sulfur diesel.
EPA Administrator Stephen Johnson told reporters last week the transition to ULSD, which service stations across the country were required to stock as of Oct. 15, would go smoothly.
“Production right now has risen to 2. 4 million barrels per day,” or 90 percent of the diesel supply needed in the United States, Johnson said. The law that set the ULSD mandate requires at least 80 percent of the diesel supply be low-sulfur.
The trucking industry and the service station industry have raised concerns over the past months about adequate supply for the national ULSD requirement. And over the summer, diesel shortages prompted rationing in Western states. Some service station owners blamed the impending ULSD requirement for the shortages because production facilities were transitioning to the new formulation.
Johnson said diesel users should expect to see prices rise about three cents per gallon for the new fuel.
But he said the benefits will outweigh the added cost.
“Today we find ourselves in the midst of a great transformation in which America’s economic workhorse is also becoming America’s environmental workhorse,” Johnson said.
He said benefits won’t be only to the environment. Johnson predicted that truckers will have to fill up less often and that eventually prices will fall below those of regular diesel.
Year-over-year change in revenue per loaded mile,
net of fuel surcharge, at Swift Transportation
and J.B. Hunt.
14%
12%
10%
8%
6%
4%
2% 1Q
Swift Hunt
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2004 2005 2006
Source: Company reports, Baird Equity Research
Stifel Nicolaus wrote in a report.
Will said the solid picture for the truckload operators is built on company-specific measures and larger factors in the trucking industry. Truckers, he said, can’t add much capacity because drivers are too hard to come by.
“The difference you have this year relative to other slowdowns is that you don’t have the drivers to get out on the road,” he said. “If you are not getting the drivers to seat the trucks, you might as well not lower your rates and focus instead on getting the trucks you are moving to get a good financial return.”
A growing list of reports, including figures from the housing industry and from maritime ports, suggests demand hasn’t accelerated as much as anticipated heading toward the holidays.
Some trucking reports, including a warning from LTL carrier Con-way of slipping tonnage and an earlier negative note from Swift, showed an economic slowdown moving toward trucking.
But fuel costs may be declining at a faster rate, and Will suggests Celadon and other large truckers may have changed their operations during the upturn to absorb at least some of the impact of a downturn.
“Across the board, we’ve done the right things, diversified our business mix, invested in our fleet and brought our costs down,” he said. Long focused on automobile manufacturing, Celadon now is “not dependent on any one industry, not dependent on any one customer. We really feel like we’ve insulated ourselves against blips in the economy.”
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