Tight trucking capacity, high fuel prices driving intermodal demand

Rising fuel prices and tightening capacity in the trucking industry have some shippers transporting more freight via rail as carriers feel the effects of high fuel prices, which are expected to remain elevated through 2018.

In May, intermodal freight costs rose 9.1%, from the same month in 2017, according to the Cass Intermodal Price Index. The index rose to 141.1, about two points less than the record high of 143.2 in March. Between March and May, average intermodal freight costs were up 7.1%.

“Tight truckload capacity and higher diesel prices are creating incremental demand and pricing power for domestic intermodal,” said Donald Broughton, analyst for Broughton Capital LLC and commentator for the Cass indexes. “Longer term, we continue to foresee oil trading in the $45 to $65 range and diesel in the $2.50 to $3.25 range throughout 2018 (without any refining interruption pressure produced by hurricanes or other catastrophic events.)”

In the first quarter of 2018, intermodal freight volume rose 7.2%, from the same period in 2017, according to the Intermodal Market Trends & Statistics report, which is released by trade organization Intermodal Association of North America (IANA).

“Drivers for first quarter growth were an overall strong economy, the continued growth of imports, higher fuel prices, tight over-the-road capacity and weak comparisons to lower 2017 volumes in some markets,” said Joni Casey, president and CEO of IANA.

Volumes in the Northeast-Midwest trade corridor rose 12.3%, followed by an 8% rise in the South Central-Southwest corridor. The only corridor to experience a decline was the Midwest-Northwest lane, with a 4.8% decrease, the fourth consecutive quarterly loss.

In mid-May, the average price for a gallon of diesel rose to $3.28, its highest level of the year and up about 75 cents from a year ago, according to the U.S. Energy Information Administration. The price has since fallen 4 cents to $3.24 per gallon, as of June 18, but the price is still up about 75 cents from the same time in 2017.

“We definitely feel the impact of increasing fuel prices,” said Stephen Ferguson, president and chief operating officer for Tontitown-based carrier Comstar Enterprises. “Fortunately, we have the best customers on the planet that make up 85% of our business. They all pay a fair fuel surcharge. However, there is a lag.”

The surcharge allows carriers to recoup the cost of rising fuel prices based on the existing price. For Comstar, the lag time is about one week between the time it takes customers to adjust the fuel surcharge to the increasing costs. The remaining 15% of the carrier’s business is with third-party logistics and brokerage companies, and they are more reluctant to pass on fuel surcharges, said Ferguson, adding that this has impacted the carrier’s income more than the lag time experienced with its other customers.

“All that to say this: I was taught by my grandfather to never base your income off fuel,” he said. “So we are fairly aggressive with our line-haul rates. This eliminates several variables and makes it much easier to manage our business.”

The higher fuel costs have led spot rates to rise, and dry-van and refrigerated spot rates were up 28% and 25%, respectively, in May, from the same month in 2017, according to DAT Solutions. As of June 16, dry-van rates rose to $2.30 per mile, matching the record high set in early January, and refrigerated rates increased to $2.70 per mile, a penny less than the January peak.

Russellville-based brokerage Little John Transportation Services operates in the spot market, and its revenue has risen 28% so far this year and is up 38% in the second quarter, said Chris Dale, president and CEO. For 2018, sales are projected to rise to $190 million, from $145 million in 2017, a 31% year-over-year rise.

For the brokerage firm, rates are up 25% and more than 50% in the spot markets, said Dale, adding that fuel costs aren’t a factor. The tight capacity and the enforcement of electronic logging devices have led to the price increases.

“Trucks are making so much money that they are working short weeks, and that makes the problems even worse,” Dale said. “No one I know is thinking one second about fuel cost. It might be a red herring, but to me and my customers, the issues are the prices that the trucks are charging.”

According to American Transportation Research Institute (ATRI), the research arm of trade organization American Trucking Associations, U.S. diesel fuel prices peaked at nearly $4.80 per gallon in summer 2008 before falling to about $2 per gallon in March 2009. After the Great Recession, prices increased to between $3.75 and $4.15 per gallon from 2011 to mid-2014. As U.S. shale oil production contributed to a global oil supply increase, the prices fell over the next two years to $1.98 per gallon in February 2016. Between 2008 and 2016, fuel costs declined 46.9% to about 33 cents per mile.

Historically, fuel expenses accounted for about 30% to 40% of a carrier’s cost per mile, according to ATRI, and until 2015, they were the top line-item expense for carriers. It’s since been eclipsed by driver pay, which has been rising for more than four consecutive years as a result of the driver shortage and the difficulty with recruiting and retaining qualified drivers. Between 2008 and 2016, driver pay costs rose 22.2% to 52 cents per mile.

As driver labor costs rise, carriers can expect freight demand to be strong and capacity to be tight through the third quarter and into 2019, according to FTR’s Trucking Conditions Index. The tight labor market, including the driver shortage, has kept carriers for taking full advantage of the higher rates.

“The latest jobs report suggests that carriers’ aggressive driver recruiting efforts are paying off but additional growth in freight volumes, continued impact from electronic logging devices implementation and extreme tightness in the overall labor market should keep conditions highly favorable for carriers,” said Avery Vise, vice president of trucking research.