High End Stability

Well my week got away from me and I didn’t get a blog posted the last few days. So finally here’s the rest of the story on the relative stability in high end business like refrigerated grocery items and medicines, discussion on the continued impact of high fuel prices as well as 2008 forecast:

“That kind of high-end business and other freight requiring reefer trailers or containers has been able, for the most part, to avoid the wrath of a slowing economy that has dragged down the trucking industry for two years.

For the trucking industry, the refrigerated transport business that serves as an example of how a sharp focus on a market with special needs can insulate carriers from the struggles of cyclical businesses. The reefer trade, carrier executives say, appears to be one area where demand hasn't diminished and where fears of a larger economic simply have not been overheated.
For the trucking industry, the refrigerated transport business that serves as an example of how a sharp focus on a market with special needs can insulate carriers from the struggles of cyclical businesses. The reefer trade, carrier executives say, appears to be one area where demand hasn't diminished and where fears of a larger economic simply have not been overheated.

Generally, the early weeks of 2008 have brought some hopeful signs for the trucking industry. After 17 year-over-year declines in the past 22 months, the American Trucking Associations' seasonally adjusted truck tonnage index increased for two consecutive months in November and December 2007, rising 1.3 percent and 3.4 percent respectively.

But most trucking analysts hesitate to place too much weight too early on such positive developments.

"Despite the pick-up in tonnage during December, our sense is that freight will likely remain lackluster through at least (the first half) of 2008 and truck tonnage readings will remain volatile in the near-term due to easy year-over-year comparisons," said Justin Yagerman of Wachovia Securities. "Our sense is that the supply-demand equation will likely improve as capacity is reduced."

Freight brokers estimate both reefer and dry van rates will hold steady at two-year lows over the next half year even while industry experts predict the economy could slow even more.

"Even though there's still high pressure on rates, there's a group of shippers out there that I think understand this business is cyclical, and there's no long-term solution to the driver shortage issue and (high) fuel prices," said Jim Ward, president and CEO of D.M Bowman, a Williamsport, Md. truck broker.

"They realize that when there's a downturn like this there's stress on carriers and there's fewer trucks available, but that it will eventually swing back the other way. So they've been reasonable with the carriers."

It's not that the reefer market is immune to changes in the trucking industry brought on by slower demand and a sluggish economy. In fact, because so much of the reefer market deals in time-sensitive perishable goods, there's more pressure to adjust when market conditions change.

That's particularly true when it comes to backhaul and fuel. If a reefer carrier gets locked into backhauling car parts back to California, for example, a revamping of operations is likely in order when auto sales dip.

"When that happens, they will have a more difficult time repositioning equipment where it needs to be and not disrupt their normal traffic flows," said Mark Petersen, general manager of transportation in the produce division of C.H. Robinson.
"It's important to get the repo loads back into the location where the perishable product is, otherwise the price (you're able to charge) will change."

Also, because the refrigeration units themselves burn fuel as well as the fuel required to move the truck, fuel costs take an even bigger chunk out of the total cost to move reefer freight.

"If you're running reefer all the way, and with fuel as high as it is, in any lane you'd probably see fuel surcharges a few ticks higher," said Ron Zaykowski, manager of warehousing and logistics for The Topps Company, the bubble gum and baseball card manufacturer.

Zaykowski, who's more interested in keeping his product at a constant humidity versus a precise temperature as it moves in both truckload and LTL shipments throughout the country, said fuel charges generally make up the difference.

"We do have fuel surcharges that our providers adhere to. And the carriers price fuel with what they expect usage to be. We haven't seen a big jump," he said.

To deal with high fuel costs, LTI Trucking has invested in technology that monitors if a truck is running out of its scheduled route, which can be a huge fuel waster.

"It costs $8,000 to $10,000 per truck, and we've done it simply due to the cost of fuel," said Civello, president of the company. He's also invested in auxiliary power units for his truck cabs that save about 2,000 gallons of diesel fuel per year per truck.

Despite the economic doom predicted by some, the reefer market continues to grow. John Langeveld, general manager of Manasquan, N.J.-based JNJ Global Logistics, an independent agent for Landstar Global Logistics, says he's looking to expand his reefer business by shipping nursery products from the West Coast into the Northeast.

San Francisco-based Textainer Group Holdings, an intermodal container lessor, recently sought to consolidate its market share with an order of 800 40 ft. high-cube reefer containers.

"The company feels it could place at least $30 million worth of reefer containers into leases during 2008, which could increase the company's capex by roughly 10 percent above our estimates," said Wachovia's Yagerman.

Such moves may help keep those companies' reefer business on sound financial footing even if the economy has yet to be at the end of its rope.

"We haven't seen the increase in freight that you'd think there be if there's a later uptick in the economy," Ward said. "Time will tell whether the economic stimulus package will have impact on freight tonnage and demand. It was a challenging 2007, and my guess 2008 will be equally as challenging.

"Those that survive will do well."

Thank you, Greg Williams
Director, Financial Analysis and Business Development
Exel Transportation Services, Inc. for this excellent article.

Moving forward,

Jeff Roach,
www.brooketraining.com