Fuel Management No Longer Top Cost of Operations

Hurricane Season and Cost of Labor Challenge Fleets

With the economy at an all-time high, you would expect the outlook for business of all types to be optimistic; they are, but it is complicated. While goods and services are in high demand and fuel is at a relatively low cost, there are two things that are impacting the productivity of the trucking industry – fuel management (especially during hurricane season), and the cost of labor during a recruiting crisis.

Compensation recently surpassed the fuel cost as the number one largest expense in the trucking industry. Fuel management may not necessarily be any less of a priority but a focus on efficiencies in operations because of higher labor costs has forced a shift in strategies for fleet management. Many fleets are switching from a “hourly/overtime” compensation model to an “activities performed” model with higher wages in order to maintain quality customer service and productivity. Private fleet veteran John Hinton explains that the change is largely due to operating efficiency, not compensation.

“What they’re trying to do is change the drivers’ work habits. When they’re paid by the hour, they have little incentive to maximize productivity.” — John Hinton, Fleet Veteran

What the shift indicates is that drivers who increase productivity will also increase earnings. That is not to say that all fleets are employing this model. Some are choosing hours and overtime while others are offering salary plus commissions. They are making these choices based on which model they think will attract and maintain drivers. But that does not mean that productivity and efficiencies are forgotten. The benefits that drivers are offered go a long way in keeping them content. Tools and systems that make the job easier for them are often the same tools and systems that make the company more efficient and productive. Companies like EFS are leading the charge in helping to increase the bottom line by implementing more efficient tools. In particular, fleet and fuel cards are having a significant impact on profitability and bolstering fuel management while providing the drivers a benefit that adds to the compensation.

The Cost of a Hurricane

Along with the current concern with drive recruitment and retention, is the weather. It is that time of year where devastating hurricanes are ravaging the southern regions of the United States. The aftermath of Hurricane Florence has demonstrated the critical impact on trucking and it is only the beginning of a season that could potentially bring even more devastation.  Fuel management may not necessarily be any less of a priority but a focus on efficiencies in operations because of higher labor costs has forced a shift in strategies for fleet management.

Just like with Maria, Irma and Harvey, trucks are in high demand to help get the states most impacted back up and running. They are being used to restock food supply, medical supplies and building materials. However, conditions are far from normal and making deliveries to the hardest hit areas can be dangerous and very slow due to road conditions, re-routing and other factors. While the deliveries are in high demand, the return loads are non-existent due to low or no inventory in those areas. There are also fuel management challenges. While these trucks may have to wait multiple days to get unloaded, they are also finding it difficult and sometimes impossible to get adequate fuel for the returns. And when the fuel is available, the cost has increased due to demand.

Because of these factors, the industry will most likely see increased rate for shipping. When Hurricane Harvey hit last year, rates increased considerably as follows:

• Van – $1.90 per mile, an increase of 12 cents
• Flatbed – $2.20 per mile, an increase of 2 cents
• Reefer – $2.10 per mile, an increase of 3 cents

It is not all good for the fleet companies though because while the rates may have increased, so too has the cost of operations during a hurricane. These costs do not include the added necessity for vehicle safety accessories or the downtime incurred while trucks are waiting to unload. With severe weather and flooding to contend with during critical deliveries, and the waits that are incurred, the higher rates are only helping to stabilize profitability – not increase it. Fleet cards are only a benefit if the fuel locations are open and operating.

Beyond the Hurricane — Back to Everyday

Business challenges for the trucking industry go beyond the hurricanes prevalent also in day-to-day operations. Fleet managers are constantly monitoring concerns and pressures that can affect the bottom line in a negative way on any given day, and it includes traffic congestion and hours of drive time. The congestion and road decay that almost every state in the country has had to tolerate means increased hours of travel time and delays. Those factors can hinder or even stop delivery making a huge impact on profitability.

Along with decaying road conditions and heavy concentration of trucking activity, many states and city governments are implementing aggressive fees, tolls, and taxes on the trucking industry. While an increase in the cost of fuel can impact efficient fuel management, a fee-increase of just 10% to use highways, tunnels and bridges can have a monumental effect on the profitability of a company. Any further increase in this category can put a company out of business. Along with these fees and taxes there are several related factors that can impact a company’s cost of operations. These factors include:

• Increased law enforcement where municipalities are assessing higher fines for traffic violations or using increased inspections to levy fines even for minor infractions.
• In urban centers, abusive parking fees and fines for loading and unloading are getting to be an appealing revenue stream for municipalities. Truckers, who get hit with a $100 summons, or perhaps even several in a day, find their profits in jeopardy. Some truckers have resorted to using two drivers to avoid receipt of tickets. Of course, then paying for two drivers where only one is necessary becomes expensive.
• Municipalities are raising the costs for licensing, certifications and the production of documents within their respective motor vehicle departments.
• A consequence of the latest increased number of trucks on highways is a serious national shortage of authorized rest stops. Truckers should expect to wind up paying more for rest-stop use.
• There has been a general increase in vehicular accidents and the corresponding liabilities within the past year. Truckers probably should expect a new round of insurance premium increases in the range of 3% to 6%.

While an increase in the cost of fuel can impact efficient fuel management, a fee increase of just 10% to use highways, tunnels and bridges can have a monumental effect on the profitability of a company.

High Cost of Insurance in Trucking

The cost of insurance is certainly a factor not only during hurricane season, but all year round. In 2017 several truck insurers had their financial strength rating downgraded while many other insurance companies exited the trucking marketplace all together. This year USI (insurance services) reports that trucking companies with average accounts could be expected to experience a 5% to 10% in rate increases while below average performance could mean even more significant surges.

Insurance requirements as a minimum

1. Liability Insurance – Covers any damage to other parties involved in an incident. Primary liability coverage (which is protection for the public) is required by FMCSA to obtain your own authority. FMCSA only requires $750,000 primary liability coverage, but most shippers/brokers require $1,000,000.

2. Physical Damage Insurance – Covers any damage to equipment from various causes. Physical damage coverage is not required by law – however, it is key to have since it covers the investment you have made in your truck. In addition, it covers a variety of incidents, such as collision, fire, theft, vandalism, and weather (hail or wind). One important thing to understand regarding a damage policy is that it doesn’t pay more than the present book value of your equipment at the time of the accident. Besides the cost for damage insurance (touched on later), another important number to watch out for is the deductible, which is what the policy holder agrees to pay before insurance kicks in. $1000 is a typical deductible amount for commercial vehicles.

3. Cargo Insurance– Covers the cost involved to damaged or stolen goods that are hauled in your trailer. The federal government requires only $5,000 is cargo coverage, but this is an unrealistic amount. Most shippers and brokers require that carriers hold a requisite minimum $100,000 cargo coverage. This is standard practice in the produce transportation industry. In addition, specialty produce (for example, cherries) may require a higher cargo coverage amount.

4. Reefer Insurance – This coverage is crucial to have in the produce transportation industry. It covers damage done to cargo inside your trailer by reefer motor failure. One critical thing to remember if you have this insurance is that the reefer unit must be properly maintained, and records of maintenance kept, for the coverage to be effective.

5. Bobtail insurance – This is a liability insurance that covers you when you are driving your tractor without the trailer, regardless of whether you are under dispatch. While not mandatory, it is highly recommended for owner operators who take their tractors home when not on the road. Owner operators working under their own authority

The cost of operations in the trucking industry requires constant monitoring from many different directions, from fuel management and driver behavior, to municipality expenditures and weather conditions. Fleet managers across the nation are looking to powerful tools from companies like EFS, in an effort to streamline everyday business. Fuel cards have become a staple in an effort to see and control the spend. Partners like Mastercard are also helping to extend the company dollar by providing benefits on a fleet card like the Mastercard Fleet Card that can be applied to fuel management practices but also to non-fuel expenses. With good strategies in place and the ability to leverage relationships with reliable partners, companies can address the challenges and maximize the successes in order to build their bottom line and grow their businesses.

Resources:

https://www.wsj.com/articles/hurricanes-disrupt-freight-sector-send-rates-soaring-1504735610

https://www.truckinginfo.com/152915/pay-it-how-it-plays  

https://www.odysseylogistics.com/2018-trucking-trends/

https://www.truckinginfo.com/305031/fleet-advantage-shows-increased-cost-savings-from-upgrading-to-newer-trucks 

https://www.fleetowner.com/fuel_economy/fuel-economy-0701

 https://www.ttnews.com/articles/opinion-small-trucking-businesses-face-challenges