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Sunday, June 23, 2024

A fundamental market reality: All key operating costs are on the rise…. By: David Bradley

Market fundamentals dictate supply and demand, which ultimately is reflected in prices. Price times volume (revenue) minus cost equals profit, or if costs exceed revenue, loss. That’s economics and business 101. Coming out of the worst recession in the post-war period, it is only natural that there has been a lot of focus on such fundamentals as volume (is it coming back and how quickly?) which reflects demand and the available capacity (the supply of trucking service). Carriers and shippers are increasingly concerned about whether there will be sufficient capacity to maintain service to all customers now and in the future, even with modest economic growth. But in all the concern over where the economy is heading, the fundamental reality that every key component of operating cost in the trucking industry — everything from labour to fuel, to equipment, parts and maintenance — has been increasing has, in my view, been given short-shrift. Another market fundamental are costs.

The number one operating cost for trucking companies — accounting for 40% to 75% of total costs — depending on the type of carrier, are labour costs. It is difficult to determine average wage increases for drivers in Canada as it is dependent on a number of factors — region, type of operation, experience, etc. A number of carriers report average wage increases of around 2%. Other information points to even higher increases where carriers who had to make significant wage cuts may be trying to get driver wages back to where they were prior to the recession. However, everyone agrees that with the demand for drivers rising and with supply shrinking, the upward pressure on labour costs — wages, benefits and recruiting — is expected to continue and intensify. The cost of group health and medical insurance is increasing virtually across the board and many provincial workers’ compensation boards are raising premiums. In addition, the increased availability and accuracy of driver profiles with the introduction of programs like CSA, could also lead to an increased stratification of wages in the form of premiums for quality drivers. Along with rising labour costs for drivers, the industry is also experiencing increased costs for licensed mechanics due to the chronic shortage of skilled labour.

The second largest component of cost for motor carriers is the cost of fuel. Recent increases in the price of diesel fuel at both the retail and the wholesale level (as measured by rack prices have been well-documented, up 30%-40% on a year-over-year basis. Moreover, fuel is the number one cost for independent contractors, increasing the proportion of revenue that needs to be paid out to them. A number of North American jurisdictions have raised diesel fuel taxes over the past year and more are expected to follow. With a federal biodiesel mandate scheduled to kick in on July 1st, 2011, increases in fuel costs are, based on US experience, expected to be exacerbated. The price of the primary feedstock for biodiesel in Canada (canola) is at record levels. Moreover, insufficient biodiesel production capacity exists in Canada, so about 85% of this country’s biodiesel demand will be met through imports. And, biodiesel cannot be shipped by pipeline which should also add to cost pressure.

The costs of equipment and parts are also on the rise. The purchase price of the new smog-free generation of heavy truck engines has contributed to a 10% to 15% increase in the purchase price of a new tractor. In addition, the new tractors require additional maintenance. Some OEMs are changing their warranties. The price of trailers is being pushed up by the increased cost of steel, aluminum and lumber. Carriers report increases in the purchase price of trailers up by more than 15% compared to a year ago. The cost of tires is also up significantly on a year-over-year basis by over 20% in many cases (and over 7% in the last month alone) reflecting a worldwide shortage of natural rubber and increased oil costs. Installation of environmental packages (e.g., aerodynamic fairings, auxiliary power units, trailer skirts, etc.) on new equipment or as retrofits on existing equipment — in order to improve fuel efficiency or in preparation for the new North American fuel economy/GHG regulations — is also adding to equipment costs. Used equipment has been subject to increased valuation, with carriers reporting prices for used tractors up by more than 15% in some cases. Used prices are expected to continue to rise, reflecting tight availability of low-mileage and late model units.

With an aging fleet reflecting deferred vehicle replacement, and increased maintenance intervals in part reflecting increased regulatory oversight of the mechanical fitness of vehicles under programs like CSA, as well as the labour costs of mechanics referred to above, maintenance costs have increased by as much as 15% on a year-over-year basis.

Regardless of what happens with volume and capacity, the market is going to have to deal with the fundamental reality that these costs have to be paid for.