Inflated Expectations

Inflated Expectations

Copyright 2004, Traffic World, Inc.

Have you bought a gallon of milk lately? The jug that cost $2.79 not too long ago is up to $3.49 and rising.

Transportation carriers and shippers may not be running their operations on milk (not yet, anyway), but the prices of commodities, consumer goods and commercial services are going to start figuring more prominently into the cost calculations of any connected to the transport world.

The impact of costs is becoming more evident as the financial reports from trucking companies, airlines and their shipping customers start to come in and the prospect of oil prices exceeding $50 a barrel are casting a longer shadow on forecasts for the fourth quarter and 2005.

By last week, the price of crude oil had cleared $55 a barrel. Diesel prices were more than $2.21 on average nationwide and nearing $2.40 a gallon in California. For truckers, hedging programs pretty much have disappeared down the fuel tank and many are reporting 40 percent increases in fuel costs in the third quarter over last year.

But truckers and airlines also say they are recovering those costs from their customers through fuel surcharges.

For shippers, the scale of the additional charges is taking a bigger bite. Swift Transportation, the nation's largest truckload carrier, collected $114 million in fuel surcharges in the first nine months of 2004 and the company concedes it has not been as aggressive as it needs to be in recovering its rising fuel costs.

LTL carriers treat the fuel spending generally as a straight pass-through and the impact was evident there, as well. Overnite Transportation reported its yield for the quarter was $15.98, but 96 cents of that was made up in fuel surcharge revenue. Without that, Overnite's yield actually declined in the quarter.

That's why the admonitions of Bob Brescia, the logistics vice president at Michelin North America, at the recent trucking industry capacity summit are especially important. Looking at what he calls a new "era of revenue restitution" - that means higher rates - Brescia says shippers need to be more active than ever in managing their operations.

To shippers, that used to mean managing their carriers. But Brescia is really looking at logistics operations in a different way, a perspective that reflects what we believe are deeper changes in logistics and the way manufacturers, retailers and others see their shipping fitting into their larger supply chain strategies.

A growing field of shippers, it appears to us, is managing operations as if they were carriers themselves. In execution, that may mean configuring shipments and routing networks as would a carrier, an exercise aimed not only at getting lower rates but at improving service.

As fuel costs rise, the stake a shipper has in improving those internal operations grows even greater and shippers, like their carriers, are searching for any way they can to cut their spending on fuel.

"We looked at hedging (fuel spending) ourselves," said Tom Pellington, senior director of transportation services at The David J. Joseph Co. and chairman of the National Industrial Transportation League. "But we decided it's not our expertise and we could get slaughtered. But for our business, we can pass the cost along to our customers."

That's fine as long as that customer can absorb those costs and pass them along, of course. But at some point, the bill comes due and someone has to pay, and that's when all the operational changes and surcharge pass-throughs don't help because the consumer draws the line at the added cost.

That's when all a consumer can do is sit back, wait for the prices to retreat, and perhaps enjoy a glass of milk in the meantime.