Inflated Expectations

Inflated Expectations

Copyright 2004, Traffic World, Inc.

Anyone who has bought milk at a grocery store recently can tell you where transport prices are heading.

The gallon that cost $2.90 a few weeks ago is now up to $3.35, a glaring example of how the skyrocketing cost of oil is being passed down through the supply chain. You no longer have to fill your car or even pay a freight bill to feel the bracing impact of $40 a barrel on the economy.

Shippers certainly are feeling it and the bad news for them is that they will be hearing more about higher fuel costs as the spring''s surcharges become entrenched in the invoices of transport operators.

"It is no secret that fuel costs of all kinds have risen dramatically over the past year," Deutsche Post Global Mail explained in a notice to customers that pointed to increases of 36 percent in jet fuel prices and 25 percent in diesel. "Unfortunately, these cost increases are largely passed on to all companies in the logistics sector and have become a major cost driver."

How much of a cost? Consider that United Airlines says the rising price of jet fuel is adding $750 million in costs to its system this year. That''s not the total cost, keep in mind, but what''s been added because of higher prices for oil and, ultimately, jet fuel.

Whether in the air or on the ground, the first round of surcharges are likely to be just that, an initial round that we suspect will lead to a second notice of added charges and, in the end, entrenched higher prices. Some airlines already are looking at new rounds of surcharges and truckers and railroads surely won''t be too far behind as shipping budgets grow.

Rail shippers already are complaining that the railroads are raising their rates well beyond any increases the rail companies face in their operating costs, and that the higher prices are coming with poorer service, to boot.

It''s the flip side of economic recovery and from here it''s beginning to look a lot like inflation - that long forgotten fact of life that seemed to disappear in the ever-rising plateaus of productivity that marked economic expansion in the 1980s and 1990s. In transport, at least, that productivity has limits and the rate increases announced by truckers in recent weeks suggest that those companies are focused on investing and growing rather than squeezing more cost savings from their operations.

Can shippers accept that?

For now, manufacturers and retailers appear to be more focused on managing the accelerating flow of goods to tap into the country''s economic recovery. As Yellow Roadway Chairman William Zollars describes it in an interview in this week''s Traffic World: "They''re more worried about capacity, reliability, dependability and taking advantage of the recovery."

But he also suggests that shippers have limits and that their higher costs must be tied to the rising prices of oil to carry through. If the price of oil "stays up high enough in the long run, then I think it becomes a concern," he says.

Shippers - they buy milk, too - suggest that they can accept the surcharges as long as growing demand for their goods is spurring sales at the end of the chain.

"Of course we''re seeing the change and of course we''re mad about it, as everyone is," said Marianne Handel, manager of international logistics in the United States for Swatch Group. "But it hasn''t changed the way we do business. We budget for this sort of thing and we have enough bumpers and buffers to handle it. We''re handling it now and if prices remain this high and the surcharges remain in place, then it becomes the cost of doing business."

If all else fails, of course, you can still cut your consumption. But that, too, is becoming more difficult. You see, Hormel Foods this month raised the price of Spam 4.5 percent.