Roller coaster diesel prices may be masking a new carrier pricing cycle

They took off like a rocket and fell like a stone. The spike and subsequent plunge in diesel prices over the last six months has quieted many analysts who are normally quick to give you a prediction of fuel costs. Roll in the unknown effects of a global credit freeze, a stock market free-fall and you have a shipping environment unlike anything we have seen in the past.
David McClimon, who has spent over 28 years in the transportation industry and most recently ran Con-way Freight, is now advising some of our clients on their transportation and logistics issues. I asked him to contribute to this blog, and here’s what he had to say….
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Before the spike, carriers had been chasing a declining level of tonnage, keeping rates low. During the price spiral, fuel surcharges swung the price pendulum emphatically the other direction. As fuel prices came down, common wisdom would expect the pressure to keep rates down would exert itself again. This seems especially true as shipments in core industries such as auto have dropped dramatically. In short, any company that is still shipping should be in the driver’s seat on prices.
Before we all celebrate too much, though, there are warning signs ahead. The surge in diesel fuel prices put many marginal carriers right out of business. According to America’s Commercial Transportation research group, more than 45,000 vehicles, or 3% of the tractor fleet, have disappeared from the industry since last year. Carriers with at least five trucks are going out of business at an accelerated pace. The American Trucking Association reports that in the first quarter of 2008, 935 operations shut down. This is up from 385 in the first quarter of 2007 and is the highest quarterly failure rate since the 2001 recession.
Don’t expect the contraction to end quickly, either. There are analysts projecting truck capacity in the U.S. to drop at a rate of 2% per quarter, or 6% by mid-2009. Add that to the number already gone and we might have a total capacity loss of more than 10% over an 18-month period.
When the economy turns, capacity is not likely to come back as quickly as demand, and prices may rise accordingly. Of course, no one is ready to predict the timing or the pace of a turnaround, so there is considerable uncertainty in the market.
Whenever uncertainty is high, risk is also preeminent. Here are some ways to mitigate risks if your business expects to survive this recession and capitalize on a recovery:
1.    Be sure your fuel surcharges are current – based on latest, falling prices. With barrel prices collapsing a week’s change could be a big change.
2.    Assess the financial health of your most important carriers. Do they have the resources to deliver right through a recession? Failure of a strategic supplier could disrupt your supply chain during a downturn. Weigh the benefits of leveraging now with the risk of losing the low-bid carrier to bankruptcy and the cost of lining up new carriers when the capacity is scarcer and carriers have the upper hand.
3.    If you see an opportunity to take advantage of current overcapacity, do so carefully. Evaluate each situation individually. You might be able to lock in long-term base rates that make you look very good in 18-months, but only if your carrier is still in operation. There is no good reason to leverage your current advantage into a supplier failure.
In summary, look through the wild swings of fuel surcharges to the fundamentals that are still at work in logistics. Don’t get caught up in driving prices down unless you have carefully assessed your supplier.
Establish relationships, because if you plan on being in business 18 months from now, you want your primary carriers to be in business as well. Those shippers that have been able to develop long lasting relationship with their carriers, vs. taking advantage of short term pricing pressure opportunities will be in the best position when the power of the pricing pendulum swings in favor of the carrier.

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One response to “Roller coaster diesel prices may be masking a new carrier pricing cycle

  1. Donald Driessen

    Dave makes some excellent points. I think some of the highly discounted programs will be naked as fuel goes down–if they were negotiated without a cap. There is hidden yeild there and the programs will become less profitable leading to an evaluation the base rates and discounts.

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