News
‘Because the last thing a customer wants is empty shelves’
The cost of fuel is out of sight. Why then is it a good time to be an owner-operator?

By David Tanner, associate editor

It’s been a good long while since truckers were in a place to command better rates. According to some forecasters, the markets are in such a condition that the door to better rates is ajar. Do you have what it takes to step through? Perhaps it’s time you asked for a raise.

Many truckers have expressed worry over $4 diesel prices, and with good reason. But according to economists, owner-operators and carriers with good negotiating skills are in the best position they’ve been in since 2004.

It boils down to market conditions, says Noël Perry of freight transportation forecasting firm FTR Associates. Seeds that were sown during the past two years are taking root.

Perry says it’s all about capacity and the prices that customers are willing to pay to keep their shelves full.

“There may be some spot shortages of capacity, where the customer either has to wait or doesn’t get their goods at all for a significant time,” Perry said, adding that the last thing a customer wants is to have empty shelves.

“The cost of a supply chain failure is one hell of a lot greater than any price increase in freight,” he said.

In 2008 and 2009, a combination of high fuel prices and an ensuing economic recession led to large numbers of trucking companies going out of business, according to Donald Broughton, Avondale Partners managing director and senior transportation analyst.

Fast-forward to late 2010 and early 2011. With trucking running lean and mean, and the economy recovering from recession – however slowly – customers are paying higher rates.

Even with fuel prices shooting up to $4 a gallon in March, the resilient companies are more equipped to handle it than they were three years ago.

Broughton doesn’t believe another trucking cull will happen this time.

“There’s an overall expectation that the increasing price of fuel is going to have an effect similar to what it has had in recent history and that it will force a large number of people out of business. And I don’t know if that is accurate,” Broughton told Land Line in late March, when the national average diesel price was about $3.92.

“Whether you are an independent owner-operator or a small fleet operator, or even a medium or large fleet, and you’ve made it through the last two or three years and all the vulgarities of a cycle, then you’re probably capable of making it through what is a tough period with fuel.”

Perry’s firm, FTR Associates, agrees that today’s truckers are in a position to profit. He looks to the commodities market, also known as a spot market, for his forecast.

“If you look at spot prices, they’re going up pretty rapidly, and it’s not fuel. I mean, it’s a little bit of fuel in there, but the big issue is just capacity,” he said.

Could we see empty store shelves? Perry says it’s possible, and it could be considered the ultimate supply chain failure. Because shippers and receivers know that’s a death knell, many are willing to shell out a few more bucks.

Perry says a recent anecdote speaks to that. A large retailer, whom he won’t name, recently offered $6 per mile for peak hauls.

“That’s actually good news because that particular customer gets it – that paying an extra buck a mile is nothing compared to a supply chain failure.” No empty shelves for that customer.

He shares a second anecdote, this one about a large retailer that fired its shipping manager for increasing load pay by 8 percent.

“Furthermore, the anecdote goes, they rebid all of their business,” Perry said. “They not only blamed their traffic manager, but they blamed their carriers, too. Just when the carriers are starting to get the upper hand, this particular customer is alienating them.”

Truckers and carriers may even keep a grudge list against the shippers who are hasty to rebid their business, Perry said.

“When it comes time to honor commitments over the next two years, if you’re on the top of the list, you’re the last guy to get a truck.”

 

Be ready to negotiate
For most truckers, asking for a raise isn’t easy. But being shy or failing to negotiate the best rate possibly leaves money on the table.

“Everybody’s margins are going to go up, but there will be a lot of fleets whose margins won’t go up enough,” Perry said. “They say, ‘I’m going to get 6 or 8 percent, and the customer will probably pay that without screaming at me … but if I ask for 10 or 11 percent, they’ll scream at me even though I can get it.’ ”

Fuel surcharges factor in as well. Perry says customers should be used to them by now, and trucking companies have had years to tweak their formulas.

“The ironic danger is not increasing prices enough in the upturn,” he said. “And the ironic danger on the customer side is not being willing to pay enough to keep your capacity.”

  In essence, the money is there if carriers and owner-operators properly negotiate the rates.

OOIDA Life Member Bill Esser of Springfield, OR, an independent owner-operator, says a fuel surcharge is a must, even if customers show reluctance.

“If I’m pulling a spot market load, then every load is negotiated at the time it’s pulled. Then it will usually just be a flat rate,” Esser says.

“My broker is really good about making sure that the spot market rates reflect the change in the fuel. We have, however, been having difficulty with customers (who are) unwilling to pay more when the price of fuel goes up.”

He has a point about the upswing. Large increases in fuel prices in short periods of time are troublesome for carriers and owner-operators, and it’s about having the cash to cover the difference in pay versus expenses.

“The effect on the customer is the increase in price, and that’s usually about a month late. The effect on the carrier when fuel is on the way up is a cash flow problem,” Perry said.

When fuel is level, negotiations are easier, and when fuel drops, both the customer and carrier benefit, Perry said.

Tanker hauler Michael Goldstein, an OOIDA life member from Los Angeles, says the modern trucker has to keep fuel efficiency in mind to maximize profit.

“I do pay for my own fuel and the company does collect a fuel surcharge, of which I get 100 percent,” he said. “Bottom line is that I know where my numbers need to be and if the load doesn’t pay enough to cover my overhead – fuel included – it doesn’t go on my truck.”

Analysts Perry and Broughton say right now isn’t such a bad time to be an owner-operator.

“The owner-operator has survived a long time,” Perry said. “I’ve been seeing the same headlines about ‘death of the owner-operator’ for 40 years, and they ain’t dead,” Perry said. “It’s because they’re valuable. Small-business entrepreneurs work their butts off, and they take care of their equipment because it’s theirs.”

Perry says as long as oil and fuel prices do not go completely bonkers, trucking will remain well-positioned. He cautions, however, that because the economy is cyclical, the old adage is true: What goes around comes around.

“This recovery is only temporary,” he said. “We’re going to have another recession in another three or four years, so if you haven’t used the opportunity to put some money aside, you’re going to be in just the same mess you were two years ago. … It’s also important to get a price because you’re going to be giving some of it back in 2015.” LL

Aug/Sept Digital Edition