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Diesel dip in price not fueling trucking recovery

December 8, 2008
Hampered much of the year by high fuel prices, trucking companies still may be in for a long haul before they're back on the road to recovery.

Recent drops in the cost of oil may seem encouraging, but they actually signal a decrease in global demand and paint a dreary picture for the year ahead.

"Certainly, the lower fuel prices have been a salvation for trucking companies," said Kenneth Cragen, president of the Indiana Motor Truck Association. "However, the economic conditions continue to make the future look bleak to many of our carriers."

The average national retail price for a gallon of diesel fuel sank to $2.80 in late November, down from a record $4.75 in July. As fuel prices fell, the collapse of both Wall Street and the financial markets triggered a credit crunch driving the country into recession.

Consumer prices fell 1 percent in October — the biggest one-month decline on records that go back to 1947. Falling prices reflect a drop in spending and the amount of goods sold.

For truckers, who haul nearly 70 percent of those goods, the outlook indeed is rocky, according to the latest report from the American Trucking Associations in Arlington, Va.

The amount of tonnage hauled in October dipped 3 percent, marking the fourth consecutive monthly decline and the largest drop during that time. Freight volumes for the automotive and retail sectors have been hit particularly hard.

ATA Chief Economist Bob Costello said the bleak numbers are an ominous sign for the trucking industry.

"I anticipate truck freight volumes to continue to fall before they improve," he said in a release. "It's a tough freight market, and there is nothing on the horizon that says this will change anytime soon."

Skimping on fuel

The latest quarterly report from Celadon Group Inc., the largest area logistics provider, fits in with the gloomy forecast. Its freight revenue (total revenue minus fuel surcharges) decreased 4 percent, to $146.9 million, from July through September compared with the same time last year.

Celadon attributed the decrease to a difficult freight market resulting in a drop in billed miles to 60.5 million during the three months compared with 62.6 million a year ago.

The trucking industry has experienced significant increases in expenses the past three years, Celadon stated in the quarterly report, particularly those related to equipment, driver compensation, insurance and fuel.

Until recently, many trucking companies had been able to raise freight rates to cover the increased costs, primarily due to a shortage of drivers. But as freight demand has softened, carriers are more willing to accept rate cuts.

"Given the difficult freight market confronting our industry, we believe achieving a profitability goal during fiscal 2009 is unlikely," Celadon stated, "although we continue to strive toward that goal."

Some solace can be taken in the lower diesel prices. Celadon's fuel expenses last quarter dropped to $10.5 million from $13.6 million the same quarter last year, partly due to a new plan to reduce fuel consumption. It involves purchasing more fuelefficient trucks, and encouraging truckers to reduce their speeds and idle time.

In an interesting side note, Celadon CEO Steve Russell noted in a conference call that the company fired 75 drivers the past four months for refusing to stop short-term idling.

Other local trucking companies such as Perkins Logistics LLC are adopting similar measures. Its truckers have been instructed to travel at 65 miles per hour on the open interstate, CEO Andy Card said. Other fuel-saving strategies include running semis with one tire on a rim instead of two, and installing automatic air-pressure systems so tires are properly inflated. Auxiliary power units that shut trucks off after two minutes of idle time are in use as well.

Card estimated that Perkins is saving $500 to $800 on fuel costs each week per truck. Even so, his outlook for the rest of the year — typically a busy time — remains tempered.

"I will tell you that we are not seeing the normal fourth-quarter push before the holiday like we normally do," he said.

Credit crunch adds to woes

If that weren't enough, the credit crisis is having an effect, too. Credit is needed to help trucking companies bridge the gap between the time the shipments are delivered and when the bill is paid.

As a result of the eroding credit market, companies may not be able to secure financing for future activities on satisfactory terms, or at all.

The problem "could impact our ability to provide services to our customers and may materially and adversely affect our business, financial results, results of operations, and potential investments," Celadon stated.

If the markets continue to erode, Celadon may need to incur additional debt or issue debt or equity securities to refinance existing debt, fund working capital requirements, or make investments, the company said.

Scores of trucking companies already have closed their doors. Through the first nine months of this year, 2,690 firms filed bankruptcy, cutting the size of the national fleet 6.5 percent, according to Avondale Partners, an investment banking firm in Nashville, Tenn.

On the bright side, experts note the reduction could help surviving companies raise rates once the economy improves and demand climbs.

Still, that could take a year, said Doug Williams, president of locally based Venture Logistics Inc.

"We've seen ups and downs," he said, "but this one seems to be a little harsher than most."
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