Transportation & Logistics

Transportation Update: More Challenges Ahead?

By Eugene DeFrank
April 02, 2009

The trucking industry is considered by many to provide leading indicators from a macroeconomic standpoint. So what do we make of the more than 3,000 trucking bankruptcies in 2008? 

 

The startling reality is that a single item, the cost of diesel fuel, is largely responsible for many of these failures. During 2008, the average price for a gallon of diesel fuel in the U.S. soared from $3.30 in January to $4.70 in July – a 42% increase in six months! Conversely, the average price then decreased dramatically during the 4^th quarter to a December average of $2.45 per gallon. This sharp decline was significant in limiting 4^th quarter bankruptcies to 375 trucking companies, or about 12% of the 2008 total.

 

The U.S average diesel fuel prices continued to decline for nine consecutive weeks in 2009 to $2.02 in mid-March. We were about to reach the $2.00 mark for the first time in over four years, even after the 42% increase in six short months less than one year ago! Then, again, the downward trend stopped there and the average price was up to $2.22 at the end of March. While this does not appear to be all bad when considering the $4.70 cost last July, experienced truckers will focus on the 10% increase in the past two weeks.

 

Managing the vulnerability to fuel prices is a major issue as fuel costs now rival labor as the trucking industry’s highest operating cost. Many companies charge shippers fuel surcharges, but these typically are lagging from a cash flow perspective and are not sufficient to cover sharp cost increases in many instances. Many truckers buy fuel in bulk, which has risk due to the price volatility. More sophisticated companies enter into fuel hedging arrangements to combat this volatility. These carriers will not enjoy all of the benefits when fuel prices decline significantly, but also are protected in periods of rising prices. Of course, these hedging activities are subject to complex accounting rules.

 

Indeed these are trying times in the trucking industry as freight volumes are expected to fall in excess of 5% in 2009. Freight volumes have a ripple effect on many businesses and industries in our country. The decline in freight volume will put downward pressure on the rates as more truckers compete for the same loads. Coupled with these challenges, many companies will not survive if fuel prices spiral upward as they did in the first half of 2008.

 

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh and Columbus.

 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for the promoting, marketing or recommending to another person, any tax matter.