ROCHESTER HILLS, Mich. (Oct. 14, 2002) - Well, summer's over, fall has fallen upon us, and now that you're back from vacation, you're trying to figure out just what financial state your business is in.
If you know what state it's in, you're probably scratching your head trying to figure out what you can do about it—or at least understand what's going on in the trucking industry. Don't worry, you're not alone. The trucking in-dustry is doing the same thing.
There's all kinds of uncertainty in the trucking in-dustry. As a Labor Day surprise, Consolidated Freightways CEO John Brincko told CF employees in a recorded message: “Thank you for dialing in on this holiday weekend. I hope you and your family are enjoying the time together. I have some extremely urgent and sad news to share with you today…Your employment ends immediately.” Happy Labor Day. Don't choke on your burger.
CF's decision to file for Chapter 11 bankruptcy was long in coming. The company lost $7.6 million in 2000, $104.3 million last year and $36.5 million the first quarter of this year. Mr. Brincko was hired three months ago to turn the company around but couldn't pull off the hat trick of removing severe restrictions imposed on the company's credit, insurance affordability and real estate values.
The final blow came when one of the company's surety bondholders cancelled coverage related to the company's self-insurance programs for workers' compensation and vehicular casualty. Since it couldn't raise the money to bridge the surety bond gap, it was curtains for CF.
Plethora of problems
Insurance has been a big problem for everyone since 9/11. Trucking has been hit especially hard, with 3,670 reported trucking failures in 2000, and 4,200 last year as a result of a decline in freight volumes and the higher costs of fuel, wages, and insurance.
Things do not bode well this year for the industry as evidenced by CF's situation. Some carriers have seen their insurance rates increase 300 to 500 percent. Many be-lieve this is the biggest shakeout the industry has seen since deregulation in 1980.
Another issue that's causing alarm is the federal government's requirement that all new Class 8 trucks built after Oct. 1, 2002, be equipped with low emission engines.
In 1998, the Environmental Protection Agency (EPA) began investigating charges that diesel engine manufacturers were using their engines' computers to alter timing and injection rates to “cheat” federal emissions tests for nitrogen oxides. That probe eventually culminated in a settlement signed in 1999 by the six firms that make 95 percent of the diesel engines sold in the U.S.
The companies agreed to pay record fines ($1.3 billion), fund environmental projects, meet tougher emissions standards in 2002 and rebuild engines already on the road.
The tougher emission standards cut two key pollutants by 90 percent; oxides of nitrogen (NOx) and non-methane hydrocarbons (NMHC) to a combined 2.5 grams per horsepower/hour.
Most domestic diesel manufacturers will use “cooled exhaust gas recirculation (EGR)” to meet the new regulations. This new technology uses engine coolant to extract heat from exhaust gas before sending it to the cylinders. Cooled exhaust gas cools combustion, which reduces the amount of NOx being produced.
However, EGR development has been costly and the equipment will be expensive. These new engines along with larger radiators and other underhood changes will raise the price of a new truck by $3,500 to $7,000.
Many fleets are skeptical about the new engines. For the most part they feel that the engines are not fully tested and will probably be problem-plagued in addition to being quite costly.
As a result, truck manufacturer order boards have been filled the first half of this year, but orders have dropped off for post-October production.
Fleets are planning to run their current equipment longer or purchase used trucks, which are still quite plentiful. As a result of the drop in the order boards, truck manufacturers are planning layoffs.
Production of Class 6-8 trucks should total about 269,000—just below last year's 274,000 units.
The price of fuel this year has been lower than fleets have seen in 2000 and 2001. Despite a spike in April through June, the overall average has been in the $1.30 per gallon range. If the U.S. avoids a war with Iraqi leader Saddam Hussein, fuel should remain fairly stable.
While the economy seems to have slowed, a double-dip recession is extremely unlikely. Economists expect economic growth to double to more than 4 percent in the second half of this year and then rise to more than 5 percent in 2003.
This is good news for you as well as the trucking industry, which has experienced a soft rate environment. Rates have not risen in two years for truckload carriers and in eight months for LTL (less-than-truckload) carriers.
A stronger economy should im-prove pricing and shippers should be willing to accept price increases to cover higher fuel and equipment costs. So things should be looking up soon for your fleet customers.
“Manana” is still the word when talking about NAFTA (North American Free Trade Agreement).
Mexican trucks are still not allowed in the U.S. In March, the U.S. Department of Transportation (DOT) unveiled new safety requirements for Mexican motor carriers to operate inside the U.S. in preparation for opening the border for Mexican trucks by mid-year.
However, in late June the DOT's inspector general released a report saying inspection stations at the U.S.-Mexican border wouldn't be ready for the hoped-for mid-July border opening. Now officials refuse to set a date and Mexican trucks are still limited to a narrow commercial zone in the border states.
In regards to truck tire sales, numbers through April of this year indicate that U.S. aftermarket shipments of medium/wide base truck tires improved 3.3 percent to 999,000 for April and rose 7.4 percent to 4.09 million for the year as the economy improved and more freight was moved in the first quarter of the year.
However, while up over the depressed levels of 2001, sales are still running about 7 percent below the 2000 pace. U.S. original equipment tire shipments were all up in April and year-to-date reflecting the increase in new truck orders. But production of light and medium truck tires still lagged behind the 2001 level.
As a result, this low production level continues to put pressure on tire prices as excess truck tire capacity is still available and tires normally earmarked for new truck and trailer manufacturers are directed to the aftermarket.
Do your part
Lately, the economy's performance has been getting mixed reviews. But if it improves in the remaining months of the year, your fleet accounts should be hauling more freight, running more miles and buying more tires and retreads.
However, since the bottom will probably fall out of the new truck market, there will still be a glut of tires available for sale, which will put significant downward pressure on truck tire prices.
What should you do? Well, continue to follow good business practices of developing new fleet accounts (those with good credit standings), providing great service to existing customers and providing new, innovative services that fill and satisfy both your existing fleet accounts and potential customer's needs.
Then get yourself ready for Halloween!
Peggy Fisher is president of Fleet tire Consulting in Rochester Hills Mich.