Increases in fuel, driver wages, equipment and insurance are driving up costs.
Last year was one bad year. And 2022 is presenting additional layers of disruption to freight markets with China’s COVID-related lockdowns; Russia’s invasion of Ukraine; exceptional increases in fuel prices; heightened competition for talent; and inflation and recession worries that are hitting companies and multiple geographies at different locations at different times.
Although the impact of the pandemic may be waning, companies are not yet back to normal as many had hoped. Like a number of industries, trucking, including refrigerated transportation, is seeing tremendous cost increases.
Multiplying Issues
Inflation is a key culprit. Many factors are pushing up costs: the high price of fuel, labor, capacity constraints and problems with ports. “Increased costs are effecting the supply chain on many levels,” says Todd Lanter, Director, Transportation Network Integration, Lineage Logistics. “Fuel, specifically, has an immediate impact on transportation costs that permeates the entire supply chain.” The largest expense for refrigerated trucking is driver wages, fuel and equipment – not to mention liability insurance. “In all those cases, costs are up significantly,” says Bob Costello, Chief Economist and Senior Vice President, International Trade Policy & Cross-Border Operations, American Trucking Associations (ATA). The current inflation rate of around 8% in North America is particularly impacting transportation costs. “We have never done business in such a high inflation environment in the past 20 years,” says Lamiaa Mohamed, P.Log, Director of Transportation and Logistics at Canada-based Congebec. “Some customers are acknowledging that fuel consumption is most of their transport budget.” According to ATA, the cost of diesel fuel has come down recently but is still up roughly 50% from a year earlier.
“Fuel spend is always a big one for transport companies,” says Don Durm, Vice President, Customer Solutions, PLM Fleet. Pandemic and post-pandemic stresses are also impacting costs particularly with demand for new delivery channels, such as home delivery and e-commerce. “E-commerce establishments, that are paying premium prices, will at times use refrigerated fleets to ship dry goods due to [equipment] shortages,” explains Mohamed. “This negatively affects the availability of refrigerated fleets when they are needed for frozen goods.” Meanwhile, supply chain disruptions continue to plague surface cold chain transport. Durm notes material and component delays with transport assets can result in extended build times of more than 12 months. Further, costs can vary significantly from time of ordering to actual delivery due to commodity prices at the time of manufacturing. And this is before factoring in increased fuel costs. Consequently, he notes, cold chain transport companies must not only anticipate and forecast business needs and costs beyond the current fiscal year; they must be flexible about additional costs that might impact their profit and loss. “The sticker shock for both the vendor and the customer is present when a company puts an order in for a quoted price, then 14 months later are presented with a 10% to 15% increase to build the same refrigerated transport asset,” Durm says. “No one is happy.” Manufacturers are also making the hard choice of turning down a new customer acquisition because their manufacturing lines are filled for the year on their commitments to build for current customers.
“Bottomline, if you don’t already have a relationship, you are not getting on the list,” Durm says. With this stress on extended build times, cold chain transport assets time in service may be extended beyond the current business strategy. “This will add additional expense due to increased maintenance and down time that will also need to be accounted for in distribution,” Durm adds. Then there are costs associated with the trucking fleet itself and the lifecycle of managing that fleet. Today, equipment costs are much higher. “Recently, used truck prices were increasing at an 80% year-over-year pace,” Costello reports. “That has come down recently but prices are still historically high.” New truck and trailer prices are also up significantly. “The most difficult aspect of new trucks and trailers is availability, which is limited due to the nagging chip shortage,” Costello says. Mohamed agrees. “Ordering new trucks and trailers requires more time in order to enable carriers to upgrade their fleets as fast as desired,” she points out. Chip and labor shortages, adds Durm, have also increased waiting times for service to respond to breakdowns and repairs. “Liability insurance also continues to increase as the industry witnesses runaway jury awards even in cases where the driver wasn’t faulted in the accident,” comments Costello. In this environment, owner operators have only two options “They will either be forced to sign on with larger carriers that continue to underpay them or leave the industry as a whole, thus negatively affecting us,” Mohamed says. “Lots of small businesses – carriers and/ or customers – are deeply suffering and not able to survive these times. Either demographic can’t pay their invoices on time, leading them to declare bankruptcy to cut their losses.”
Labor Woes
Driver shortages have been a critical issue, pre- and post-pandemic. The ATA estimates that in 2021, the truck driver shortage in the United States hit a historic high of just over 80,000 drivers and could surpass 160,000 by 2030. “It’s an issue of supply and demand,” says Lanter. “The job market is tight. People are looking around. Companies are trying to hire more to keep things going and balance the necessity of being on site and flexible with work from home.” ATA estimates that driver wages are increasing at a 10% to 11% rate year-overyear. This also means truck driver wages are keeping up with or surpassing inflation.
But many drivers are aging. ATA reports the average age is 49. On top of that, the industry is not attracting younger people. “Some carriers are offering very generous onboarding offers to entice drivers to join,” comments Mohamed. “The cost of getting an A1 License as well is at an all-time high of around $15,000, which does not encourage drivers to invest in starting their venture.” One of the issues is a driver must be 21 to obtain a commercial driver’s license for Interstate driving. “By that time, they might have already obtained a profession,” Durm says.
Additional Factors
Other factors related to increased transportation costs are delays and traffic congestion. This includes container backlogs and seaport congestion. “The pandemic has caused imbalances in ocean lanes,” Lanter says. “Seaports are still working through a lot of that with container availability, appointments both for picking up loaded containers and/or returning empties. There’s always been room for improvement, but as volumes over the pandemic shot up, the inefficiencies were exacerbated.” The shortage of containers has been a problem that has contributed to higher costs. “Companies are paying for [truckers to make] round trips to secure containers,” Mohamed says. “It’s getting out of hand and leaving some shelves empty and customers unsatisfied in many cases.” Vendors also are charging excessive fines for shipments that arrive late, which is hurting the market as well. To help, Costello suggests that truck transportation buyers turn drivers around at their facilities as quickly as possible. “This will help with productivity and ultimately limit the impact of cost increases,” he says. And let’s not forget the overriding issues of rising interest rates and the volatile stock market, which is causing businesses to rethink growth plans. But the most long-term impact of inflation on transportation could be on infrastructure projects across the United States. “Inflation is driving up costs so much that state and local officials are planning to, or considering, postponing infrastructure projects, scaling back others and reprioritizing their immediate needs,” Durm says.
Environmental issues and sustainability are also becoming critical to transportation. “Increasing fuel prices makes the argument for exploring alternative energy options, be that compressed gas, electric or battery powered,” Lanter says. “It is always worth a review, but also brings costs more into focus. Our industry is worried about sustainability, period. It is not a new topic.”
Final Words
One factor is for certain: these are unprecedented times. “The sooner the supply chain gets back to normal the better it will be for everyone,” Costello points out. Multiple issues continue to compound situations with no obvious solutions. “This is where collaboration and partnerships will be very strong factors to help pass through this storm,” Mohamed concludes. Technology is also an answer. “By utilizing technology, companies can provide real-time visibility of assets and know how to redirect them,” Durm says. In short, the cold chain will remain strong. “The fact is, people must eat,” says Durm. “It may be that what and where they eat may change. And, in hard times, they may even eat more. We are really trying to navigate the ‘next normal’ into the future to build supply chain resilience.”
KAREN E. THUERMER is a freelance writer based in Alexandria, Virginia, who specializes in economic and logistics issues. EMAIL: kthuermer@aol.com
Source: Cold Facts September/October 2022 issue