Fuel Prices and Transportation Costs are Surging: What Should Businesses Expect?
Rising food commodity prices and oil prices are further stressing consumers and companies. It is easy to become mired in a wait and see approach and feel out of control when managing the financial performance impacts.
Lenders are concerned about income statement performance, debt service capabilities, and leverage and debt service covenant compliance.
Businesses are worried about increasing costs in nearly every line item of the income statement.
This article examines the impact of trucking costs on the financial performance of a business.
How can a business evaluate the amount of impact trucking costs will have on performance?
Trucking Costs Per Mile:
The National Private Truck Council produces an estimate of the trucking cost per mile on an annual basis. For 2021 the cost per mile was reported to be $2.92.
Fuel Costs: Key factors in the cost per mile are the fuel costs and driver costs. The price of diesel fuel, comparing February of 2021 to February of 2022, has increased 41.4%.
These increases do not consider the recent impact of the Ukraine / Russia conflict. According to the American Automobile Association (“AAA”), the retail cost of diesel today, March 15, 2022 ranges from $6.277 in California to $4.651 in Colorado. The US Energy Information Administration (“EIA”) reported the average cost of diesel as of March 14, 2022 at $5.25 per gallon, which is an 84.2% increase over February 2021.
Driver wages have continued to increase. The American Truckers Association estimates there is an 80,000 driver shortage. All drivers are in short supply and labor costs have been climbing. The National Private Truck Council’s benchmarking survey reported average labor increases from $69,754 in 2020 to $75,796 in 2021, which is an 8.7% increase.
Matt Hart, Executive Director of the Illinois Trucking Association, estimates that the trucker shortage will continue and could exceed 160,000 by 2030. Specialty transport drivers and long-haul drivers continue to present staffing challenges. Industry experts consider wage increases to be a continuing requirement if the industry hopes to recruit and retain drivers.
Updated Estimate of Cost Per Mile:
In the next table, the 2021 costs per mile are updated to include the 84.2% increase in fuel costs and the 8.7% increase in labor costs. This shows the per mile costs, the costs of transporting goods, has increased 13.8% from 2021 levels.
In addition to fuel and labor, overall costs have increased as reported by the Consumer Price Index (“CPI”) and the Producer Price Index (“PPI”). The February PPI was released on March 15, 2022 and showed on overall PPI of 10%. The total less foods, energy and trade was reported at 6.6%.
Updated Cost Per Mile with Overall Inflation Included:
Considering a 6.6% increase in all categories other than fuel and labor increased the cost per mile from the $2.92 in 2021 to $3.42 estimated as of March 15, 2022, which is a 17.0% increase in trucking costs.
What should a business do with this information?
Using this information, companies that are forecasting financial performance in 2022 should be anticipating increased costs in line items that include the transportation costs of moving goods to and from the company. Identifying those line items and anticipating a 17.0% cost increase for trucking would be an appropriate starting point for planning and analysis.
This estimated cost increase may be the tip of the iceberg. Companies are experiencing difficulty scheduling loads with drivers, and having the drivers show up when expected. This issue is further driving prices up and companies pay what is needed to ensure goods are moved on time.
DAT Trendlines ™ reports overall spot load cost increases February 2021 to February 2022 of 24%, with van spot rates at a 28.5% increase, flatbed spot rates at a 23.8% increase, and reefer spot rates at a 30.7% increase.
Companies are reporting transportation rates doubling year over year, with uncertain availability of trucks when they are needed.
What should companies do now?
Companies will need to evaluate the ability to pass along cost increases to existing customers. Additionally, companies may want to evaluate their supplier and customer contracts to consider which party pays for the transportation costs during any contract revision discussions or in any new contracts.
These costs are not going to reduce quickly, if at all, and businesses need to adapt to this new expense structure. Loan covenant defaults and waiver requests for fixed charge coverage ratios, EBITDA performance levels and other financial covenants should be anticipated. Borrowers will need to reforecast 2022 and 2023 performance to anticipate the impacts and negotiate achievable loan covenants.
The working capital impacts of the transportation cost increases and problems with scheduling are impacting inventory levels and sales and delivery schedules. Lines of credit are being stressed by the working capital impacts. Companies experience cash flow shortfalls when inventory is not converted to accounts receivable when planned, and then the payment of those receivables is delayed with the delivery delay. Inventory levels are more choppy as both the receipt of goods and the sale of goods are impacted by the increased costs and delivery and pick up scheduling.
Businesses need to reforecast their cash flow and working capital needs anticipating the need for increased levels of inventory and accounts receivable, and the need for more flexibility in the line of credit structure in terms of overall size and asset category caps and relationships.
The economic environment of inflation, labor shortages, transportation and supply chain issues, commodity price fluctuations, and political uncertainty will continue through 2022. This requires a level of planning and analysis that has not been needed in decades.