To paraphrase Charles Dickens from "A Tale of Two Cities," you can say 2005 was the best of times and the worst of times.
Overall, the economy throughout the year was strong. Many fleets generated record high profits, and most tire companies and commercial tire dealerships fared well, too. However, Hurricane Katrina-which hit land in late August-likely will end up being the single worst natural disaster in U.S. history. While this certainly was the worst of times, it brought out the best in Americans once again as the nation rushed to aid storm-decimated evacuees.
When we look back on the events of 2005 in the trucking and commercial tire industries, so many things happened that it's enough to make your head spin. Let's stand back and get a wide perspective on the events that shaped the year.
Driving the economy
As predicted, growth in the economy slowed somewhat from 2004. Around mid-year, American Trucking Associations (ATA) economists reduced their growth projection for freight tonnage for the year to somewhere in the range of 2.25 and 2.75 percent, down from their earlier estimate of 3- to 3.5-percent growth. However, that revised estimate was made before Hurricane Katrina crippled Louisiana and Mississippi, causing an estimated $100 billion in damage across 90,000 square miles.
The Federal Reserve raised interest rates Dec. 13-for the 13th straight time-to 4.25 percent. It signaled it may do so again "to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." It was concerned that higher energy and other costs have the potential to add to inflation pressures as prices may increase to cover increased transportation and petroleum-based raw material costs.
Earlier, the Fed said it believed that any slowdown in economic growth would be temporary and that there is a core resilience in the economy. Furthermore, it stated that all of the rebuilding that's going to be required in the hurricane-affected areas also is going to show up as a boost in the economy long-term.
The Fed must have been right because the Commerce Department reported recently that growth in the U.S. economy, as measured by the gross domestic product, improved to 3.8 percent at an annualized rate during the third quarter, up from 3.3 percent in the second quarter.
September brought improvements in freight volume, construction spending, manufacturing and the economy as a whole. Despite a drop in consumer confidence, this year's peak shipping season appears to be exceeding the strenuous levels of 2004. In fact, some truckload fleets have described this season as a business bonanza of historic proportions with demand for trucks far outstripping capacity.
So just what was the impact of Hurricane Katrina on the trucking and tire industries? Well, due to its widespread destruction, freight transportation in the southeastern U.S. came to a virtual standstill for a week or two following the storm. The hurricane forced nearly all ports, airports and railroad tracks in the region to close and all but destroyed Interstate 10 and U.S. 90, the only two major routes for commercial trucking across southern Louisiana.
Trucks had to get police permission to go south of Interstate 84 where it was basically a disaster zone through southern Mississippi and Louisiana.
However, almost as soon as the Gulf Coast waters began to calm, the trucking industry shifted into high gear. By Sept. 7, the Department of Transportation had marshaled more than 1,639 trucks to support the delivery of more than 3,370 truckloads of goods, including more than 25 million meals ready to eat, 31 million liters of water, 56,400 tarps, 215,000 blankets and more than 19 million pounds of ice.
Across the country, carriers from one-truck owner-operators to the nation's largest fleets hauled loads of canned goods, clothing, water and other supplies, including backpacks, teddy bears, a load of bison meat from a Montana Indian Reservation and a load of camper trailers to supply evacuees with temporary housing. Agencies and relief organizations called trucking associations in the impacted states for help in lining up transportation and got a can-do response from all.
Trucking as well as the tire industry offered monetary support, too. The ATA donated $1.5 million to the American Red Cross for use in relief efforts, and truck manufacturers donated millions of dollars as well as trucks to hard-hit areas. Trucking companies and their employees donated millions to the Red Cross and the Salvation Army as well as provided vehicles to the Red Cross, Federal Emergency Management Administration (FEMA) and the U.S. military to help with relief efforts.
Bridgestone/Firestone (BFS) gave $1 million to the Red Cross and collected money from its customers and employees for the relief efforts. Goodyear, Continental Tire North America Inc. and Michelin North America Inc. all donated money, resources, etc., to help support relief efforts.
Tire dealers formed relief fund drives for their employees and customers and made outright donations to hurricane relief agencies in addition to helping supply badly needed tires to devastated areas for fitment on emergency vehicles and equipment used in the clean-up effort. Those dealers with tractors and trailers used them to help get loads of supplies to areas on the Gulf Coast.
Many dealerships helped in any way they could, from forming job fairs and hiring evacuees, to finding them lodging and getting them needed medical help.
The fuel crunch
While clean-up and relief efforts were underway in the South, the impact of Katrina was being felt all around the country. Immediately fuel prices skyrocketed as a result of damage to Gulf Coast oil rigs, refineries and pipelines. Fortunately, early damage estimates were quickly adjusted downward.
Within 10 days, about half of the 20 refineries shut down by the hurricane had reopened. Two of the most critical pipelines that carry fuel to the Northeast and Midwest were running at 100-percent capacity. The U.S. government tapped into its Strategic Petroleum Reserve, and the International Energy Agency's 26 member nations agreed to make available an extra 2 million barrels of oil per day for 30 days, much of it as refined products.
While a crisis was averted, there were no bargains at the pump. Diesel fuel hit a record $3.157 a gallon the week ending Oct. 23. However, by Nov. 14 it had dropped back to $2.602-diesel's lowest level since it cost $2.59 a gallon on Aug. 29 before Katrina hit, thanks to working refineries that increased diesel production. This still meant truckers were paying 47 cents a gallon more than a year ago.
Oil prices continue to fall a bit even though 47 percent of daily oil production in the Gulf of Mexico remains stalled due to damage from the recent hurricanes. According to the Department of Energy, it appears unlikely that anything close to a complete recovery will occur before mid-2006. As a result, the prices for crude oil, petroleum products and natural gas are projected to remain high during the remainder of 2005 and into 2006.
The cost of fuel has been one of the top problems facing truckers all year. For most motor carriers, fuel represents the second-highest expense after labor, accounting for about 25 percent of operating costs. However, the smaller the company, the greater this percentage. As a result, many owner-operators and small fleets have opted to stop operating their vehicles until the price of fuel subsides to more reasonable levels, which has led to a reduction in industry capacity.
The trucking industry will now spend an unprecedented $85 billion on diesel fuel in 2005-up $23 billion from 2004, according to the ATA. This is significant since the trucking industry moves 70 percent of all freight and 80 percent of America's communities get the freight they consume only from trucks. Ultimately, rising fuel prices have the potential to increase the cost of everything that is moved by truck.
Another major problem plaguing the trucking industry is the driver shortage. It is estimated the driver shortfall is between 60,000 and 100,000.
Driver turnover continues to be a major problem-especially for truckload fleets, which are now seeing turnover rates of 129 percent. Driver churn, or turnover, costs fleets between $4,000-$7,000 per driver and, overall, costs the industry billions of dollars each year.
While freight tonnage is somewhat less than levels seen in 2004, it is still strong. Capacity is tight, primarily because fleets cannot find enough drivers, and high fuel and other operating costs continue to push an increasing number of smaller fleets and owner-operators out of business.
Reports from all truck manufacturers indicate that while new truck builds are high, the new trucks coming off the assembly lines are replacing old ones and are not adding to fleet size.
Carriers are continuing to buy new equipment in order to have young fleets that will not need to be replaced in 2007 when the new super low-emission engines are mandated. It is estimated that the new engines will add $5,000-$10,000 to the cost of a new truck, be less fuel-efficient and will require more maintenance than current model engines.
Class 8 sales in North America will probably total 325,000 units this year, making 2005 the second-biggest sales year ever. Trailer manufacturers are also cranking out units primarily to replace aging equipment as well, so 2005 should be a banner year for them with 260,000 trailers produced.