Fleets bullish at Bear Stearns conference

NEW YORK, NY -- Despite steep increases in fuel costs, continuing driver shortages and indications of softening freight demand, executives from both truckload and less-than-truckload carriers told a gathering of financial analysts yesterday that they see no signs of a slowdown in the industry's strong economic performance.

"The industry's financial strength is the best it's been in years," Old Dominion Freight Lines president & COO David Congdon said at the Bear Stearns Transport Conference.

With "significant barriers to entry" making it difficult, "if not impossible," for new competitors in either TL or LTL markets, Congdon said that continued consolidation among major carriers would keep freight capacity tight and leave those fleets "ready to withstand any (economic) downturn."

After two years of significant rate growth, the truckload carriers at the event all indicated that they expected to see contract rates to increase again this year, although as U.S. Xpress co-chairman Patrick Quinn put it, "we expect rate growth in 2006 to be more modest." The consensus among the TL carrier executives put rate increases in the 3% to 4% range for this year's contracts, with spot rates perhaps softening a bit more.

Moderating insurance costs and steady labor rates after two years of increases in driver pay should offset any slackening in rate growth, Quinn added.

"Exceptional (freight tonnage) growth in 2004 and 2005" allowed LTL carriers to be "more aggressive on pricing and to get those increases to stick," said Douglas Stotlar, president & CEO of Con-Way. With demand remaining strong in the LTL market, "we are continuing to get price increases when renegotiating rates now," added Rick Gaetz, president & CEO of the trans-border LTL carrier Vitran Corp.

In addition to rate hikes, disciplined focus on "revenue quality," as J.B. Hunt president and CEO Kirk Thompson called it, or what Old Dominion's Congdon termed "account profitability" has also helped larger fleets steadily improve operating ratios.

Most increases in fuel costs are being recovered by fuel surcharges, the carrier executives told conference attendees, isolating at least the larger for-hire fleets from the recent sharp run-up in diesel prices. While shippers are paying higher surcharges in 2006, Celadon chairman & CEO Stephen Russell said growth in surcharges "does factor into rate increases."

Idling and deadhead miles were cited by most of the fleet executives at the Bear Stearns conference as areas needing attention in their efforts to further limit exposure to high fuel costs. "Fuel surcharges are working for us, but we still have to pay for (the fuel consumed by) idling and empty miles, and we can't forget that in rate negotiations," said Quinn.

On the driver shortage among TL fleets, all reported efforts to bring down turnover percentages from the triple digits common in 2004 and 2005. In some cases, large operations like U.S. Xpress and Covenant have reorganized into smaller operating groups to help foster more personal relationships with drivers. Recent pay increases and younger tractor fleets are also being used to address the problem, "but the continuing decrease in quantity and quality continues to be the number one issue for truckload operations," says Thompson.

The new hours-of-service regulations are also having a greater impact on driver pay and utilization than expected, according to a number of the fleet executives at the conference. Not only are driver teams finding the new split-sleeper-berth rules impractical, but short hauls picked up late in the day and temporary lulls in freight volume are also creating problems, they reported.

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