ROCHESTER HILLS, Mich. (Dec. 19, 2005) — 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.
Another event that impacted the trucking industry occurred on July 29 when Congress finally approved the Safe, Accountable, Flexible, Efficient, Transportation Act: A Legacy for Users, which is a comprehensive $286.4 billion highway spending plan. The previous highway act, called the Transportation Equity Act for the 21st Century, or TEA-21, expired in September 2003 but Congress continued that law with 12 extensions.
In addition to funding highway and transit projects over the next six years, the bill also:
* Provides millions of dollars for commercial vehicle safety enforcement;
* Authorizes several exemptions to federal hours-of-service rules;
* Allows states to toll portions of the interstate highway system;
* Eliminates the Single State Registration System; and
* Mandates that intermodal equipment owners take responsibility for the maintenance and care of that equipment.
Funding for U.S. highways, transportation projects and transit systems comes from an 18.4 cents-per-gallon federal tax on gasoline as well as other transportation-related fees such as a tax on truck tires.
Commercial tire biz
The commercial tire industry certainly benefited from the robust economy in 2005, but it also was dogged by high raw material costs and disruptions from Hurricanes Katrina and Rita.
For commercial truck tire sales, it was the best of times. Shipments in the U.S. to truck and trailer makers increased about 10 percent in 2005 to 6.3 million units, while replacement shipments are expected to hit 17 million units—an increase of about 4.5 percent.
Most tire companies controlled their costs, increased productivity, raised prices and improved their product and price mix to improve their bottom lines. Retreaders had a solid year as well with about 17 million retreaded tires sold in the U.S., an increase of 1.5 percent over last year.
Continuing price hikes
While it was a good year for sales, with the escalating price of oil as well as of natural rubber, raw material costs continued to dog tire makers. The devastation of the hurricanes exasperated this situation, as several raw material suppliers' production facilities were damaged.
Indeed, the real and continuing costs of the hurricanes likely will come in the form of higher raw material and energy costs as well as higher transportation costs that will affect all tire companies significantly.
Tire prices have continued to climb all year due to the increases in petroleum prices that have driven up the cost of synthetic rubber and carbon black along with natural gas. Natural rubber and other raw material costs have increased as well due to high global demand. As a result, all commercial truck tire manufacturers have raised prices two to three times this year—and the year's not over yet.
What's different about these price hikes is that they are sticking. Tire dealers are passing along the higher prices because they have to maintain their already thin profit margins.
And with original equipment sales at near record highs and replacement sales strong, tire shortages are inevitable this coming year.
Fleets understand that when the cost of petroleum goes up, tire prices have to go up as well. Combine this with a shortage of available replacement tires and you have fleets that are grateful for getting the tires they need to keep their trucks rolling.
To deal with the tire shortage, tire dealers increased their inventory of tires on hand when tires were available. Many took on new tire lines including Chinese or other off-shore offerings they hadn't considered before in order to keep truck fleets rolling. Those with retreading facilities stepped up retread production and increased their output of stock caps and casings to fill customer tire demands, which in turn created a casing shortage.
There were plenty of other activities that made headlines this year. Goodyear's Wingfoot Commercial Tire Systems L.L.C. subsidiary signed an agreement with Pilot Travel Centers to operate eight Pilot Truck Care Centers located in five states. The Wingfoot-operated centers provide new tires, retreads, limited mechanical service, preventive maintenance and roadside assistance.
BFS narrowly averted a strike at its Warren County, Tenn., truck and bus tire plant in August when a new contract with the United Steelworkers Local 1155 was approved after it was initially turned down by the members. The tire maker reached contract agreements affecting more than 5,000 workers at seven other company tire and rubber plants in July.
Michelin expanded output of X-One wide-base truck tires by adding a dedicated production line for them at its Spartanburg, S.C., plant. Further, it invested in molds to increase capacity for precured tread rubber for these so-called “super singles” tires.
Goodyear launched its DuraSeal technology, with built-in tire sealant that repairs crown area punctures instantly in G287 MSA and G288 MSA waste and construction truck tires.
Like new truck tires, the retreading area of the market was not immune to price increases either this year. Michelin, Goodyear and Bandag Inc. raised tread rubber prices 6-7 percent on most of their retreading materials and repairs in the spring.
Marangoni Tread North America Inc. and Michelin Retread Technologies Inc. (MRTI) worked on ex-panding their tread rubber production capacity. Marangoni doubled production of Ringtread circular tread rubber at its Madison, Tenn., plant while MRTI brought a second precured line at its Covington, Ga., tread rubber plant on line, doubling its annual capacity to 2 million treads.
In new developments, Bandag launched a line of precure retreading materials called Continuum for the off-the-road tire market. The Continuum line includes two tread designs and is targeted to construction and material handling equipment.
A new technology that may be emerging was announced by Amerityre Corp., which said it has begun development of a polyurethane tire compound and manufacturing process for retreading medium commercial truck tires with a polyurethane elastomer tread compound.
The Tire Industry Association (TIA) also made a few noteworthy contributions this year. It held its first Commercial Tire Executive Industry Summit, introduced its Tire Pressure Monitoring System (TPMS) Training Program for passenger and light truck tire technicians, and announced three new health benefit programs for members.
Two are health benefit plans and the third is a workers' compensation in-surance plan. All three are designed to reduce TIA member insurance and health care costs.
At the year's beginning, TIA also announced a new name for its proposed tire industry checkoff program. It is now called the Tire Initiative for Research, Education, and Safety (TIRES). In May the U.S. Supreme Court upheld the constitutionality of the beef industry's checkoff fund.
That decision laid to rest the legal concerns that had been raised concerning checkoff funds.
As you remember 2005—with all its challenges, disasters, and increased costs that accompanied record sales, philanthropic deeds and technological innovations—it may not be the stuff that makes a great novel. But it certainly did keep us enthralled and captivated.