This year was a really busy one for most people in the truck tire business: Tire sales were up, retread plants were humming, fleet managers seemed to be in better moods.
But prices for tires went up, making selling more challenging; new tire orders seemed to be on backorder all the time; and the cost of running your business just seemed to escalate.
If you're wondering why, take a glimpse back in time with me and let's see what happened to shape the challenges you faced. Who knows, maybe we'll learn something.
Tons of fun
It seems like the pent-up demand over the previous three years finally burst and the economy exploded in 2004. Last year at this time trucking was just beginning to see better freight volumes as the economy began to start growing again.
Throughout the year it continued to gain momentum with manufacturing growing nearly 5 percent. Manufacturers-trucking's largest customers-boosted production levels significantly in 2004, and this industry is having the best year since prior to the recession.
Through August, truck tonnage was up roughly 7 percent compared with the same period in 2003. This is the best rate of growth since the late 1990s. (Yearly tonnage growth has averaged only 1.3 percent since 2000.)
This fall freight season should be the best ever. Retailers expect holiday sales to grow around 4.5 percent from last year and slightly down from 2003's rate of increase. That's due, in part, to high energy prices, but still is quite strong. This is great news when you consider that 25 percent of all retail sales take place between Thanksgiving and Christmas, and this is a vital season for trucking.
Total consumer spending should increase 3.4 percent in 2004 and real gross domestic product should grow at a 4.4-percent annual rate compared with the 3 percent pace it set in 2003.
Due to this increase in business, trucking revenues also are increasing robustly and were up around 5 percent in October and still accelerating. Revenues also were positively affected by freight rate increases and fuel surcharges that stuck throughout the year.
Rates were not eroded due to the tight capacity situation that currently exists in the trucking industry. Profits for publicly traded truckload (TL) carriers were up nearly 50 percent through October vs. the same period a year ago. For the first time since deregulation (1980), truckers were able to pass costs and margin growth through to shippers.
Along with the booming economy, new truck and trailer sales have exploded as well. U.S. retail sales of Class 8 trucks for the first 10 months of 2004 increased 42.6 percent over the same period in 2003 to 163,582 units. October's gain marked the 12th consecutive monthly increase.
The need to replace aging fleets, ease of low-cost financing and a more generous tax depreciation schedule for equipment is fueling this market, in addition to the strong economy and associated high freight volumes.
It is expected that by the time the ball falls in Times Square, 2004 will see final sales of 240,000 to 260,000 new Class 8 trucks sold in North America. This would be an increase of 44 percent over 2003. This is despite the fact truck prices have increased between $1,000 and $1,500 because of a jump in the price of steel.
It is expected that trailer manufacturers will produce between 230,000 and 245,000 trailers this year. In contrast, manufacturers shipped 183,163 trailers in 2003.
Fewer mergers, big fuel costs
There weren't many large fleet bankruptcies, mergers or sales this year since most of the fleets that survived the recession came out stronger in 2004 and the upswing in the economy helped almost everyone.
However, one fleet of note, New Jersey-based Guaranteed Overnight Delivery (G.O.D.) halted its LTL operation in October in the competitive Northeast market, which has been consolidating over the last 10 years.
In late 2003 Yellow Corp. purchased Roadway Corp. to form a combination that many analysts thought was doomed. The combined company, Yellow Roadway Corp., benefited from the accelerating economy, tight industry capacity, higher freight rates and a change in the hours of service regulation. That change shifted a significant amount of truckload freight to the LTL sector.
The company proved the analysts wrong by posting third quarter profits that were double last year's. It also made some significant cost-saving changes and expects to reach its stated goal of saving $100 million in the first year as a combined company.
The price of diesel fuel-the trucking industry's highest operating cost after labor-went through the roof in 2004. After declining in price in the summer of 2003 following the invasion of Iraq, diesel fuel prices really began to escalate at the beginning of 2004. The average price for retail diesel fuel set record highs for the seven weeks starting Sept. 13, peaking at $2.212 on Oct. 25. This was 72.5 cents higher than at the same point last year.
The root cause of these escalating fuel prices is global demand for energy. Global demand has now nearly matched global production capacity, leaving little flexibility to respond to even minor supply disruptions. Any setback in oil supplies, whether real or perceived, can have an exaggerated impact on oil prices.
Issues that can affect prices range from tax problems of a major Russian oil firm, turmoil in Nigeria, instability of the Iraqi infrastructure, concerns over lack of oil sector investment in Venezuela, to escalating tensions in Iran. Normally these things would have a relatively minor impact if global inventories were higher or there was more spare capacity available.
Hardest hit have been owner-operators who were not able to deal with the escalating prices. This summer truck repossessions climbed 33 percent between the first and second quarter-when truckers were battling rising fuel and insurance costs-but dropped 70 percent in the third quarter.
The political scene
As you well know, President George W. Bush won a second term in office in November, and the Republicans expanded their control of Congress. Though defeated in the election, Massachusetts Sen. John Kerry retained his Senate seat. Republicans gained four seats in the Senate to create a 55-44 split, plus one Democrat-leaning independent.
The results of the election should bode well for both the trucking and tire industries because of a general tendency for Republicans to favor business issues.
As one of its final acts before adjourning ahead of the elections, the 108th Congress voted for the sixth time to extend previous funding levels until April 2005 for road and bridge programs in the Transportation Equity Act for the 21st Century (TEA-21). It had been set to expire in September 2003.
Meanwhile, the House and Senate are trying to agree on funding levels for the next six years. The Senate wants to spend $301 billion and the House wants to spend $299 billion. President Bush has said that he would veto any highway bill with a price tag of more than $256 billion. Clearly the expansion of Republicans in Congress strengthens President Bush's position about fiscal conservatism and could change the funding levels each body of Congress previously was seeking.
In January new hours of service regulations went into effect that allow drivers an extra hour behind the wheel each day, but trimmed the number of consecutive hours they can work. In July a federal appeals court struck down the new rules, saying the Federal Motor Carrier Safety Administration (FMCSA) had not considered adequately the rules' impact on drivers' health as required by Congress.
Congress extended the existing work rules until new ones can be devised that address the court's concerns. Productivity losses due to the new hours of service rules are running at about 3 percent according to industry data-far below the 19-percent losses feared by many ex-perts. On the bright side, the new rules have improved freight efficiency through-out the supply chain as shippers have be-come more efficient and cognizant of delaying drivers due to the penalty charges they incur. Detention charges as high as $440 a day for a single trailer have gotten shippers' attention in a hurry. But the industry still needs more drivers, and these rules constrain capacity further.