The less-than-truckload (LTL) industry, like other industries in the broader transportation and logistics sector, has continued to transform itself into a total solutions provider in order to meet increased customer demands, whose requirements call for much more than simply moving freight from Point A to Point B.

And, it's paid off. The industry is poised to experience some healthy growth rates this year, but there are some caveats. For starters, while the cost of a barrel of oil started the year at around $32.50, it broke through the record-high $50 mark in early October.

"Fuel is a real concern," acknowledges Bryan M. Millican, Executive Vice President, Sales and Marketing, for Con-Way Transportation Services. On average, diesel fuel is currently about 60.9 cents higher than a year ago. And with the trucking industry burning through 650 million gallons per week, that means an additional $25 million in added fuel costs.

At the end of the day, it's the shipper who will feel the first-hand effects of higher rates and fuel surcharges. But what really worries Millican is the larger impact, in other words the dampening effect, the record-high oil prices might have on the economy, and the demand for transportation services in particular.

In addition to fuel, the industry has also been hit with other costs. "Tolls are up over 60 percent over the past few years," notes Patrick L. Reed, Executive Vice President and COO of FedEx Freight. For example, the Missouri Department of Transportation is currently considering turning Interstate 70, which runs from Maryland to Utah, into a toll road at five specific locations between St. Louis and Kansas City. The tolls would amount to $45 round-trip for commercial vehicles. Interstate 70 is four lanes through much of the state, but the tolls would raise enough funds to expand it to six lanes statewide. To top it off, "Insurance after 9/11 has also been an issue for both carriers and shippers," he says.

Another cost, which was somewhat unanticipated, has been the new engines mandated by the federal government. "The inefficiency of these engines was a surprise," says Reed. As it turns out, "The fuel economy on the new engines is lower," confirms Con-Way's Millican. The new engines are supposed to average around 6 to 6.5 miles per gallon, whereas the older model engines got about 7 miles per gallon. "The new engines actually consume more fuel, but give you less fuel economy," because of the pollution control features, he says. At around $10,000, they also cost more. The costs associated with the more environmentally friendly engines are only going to increase, considering the next round of stricter emissions are set to become effective in 2007.

Hopefully, the fuel efficiency of the new engines will improve. Freightliner LLC, one of the largest engine makers, has been testing various combinations of engines and vehicles to come up with the right mix before moving into mass production. At the same time, the operations manager of truckload carrier Triple S Trucking reports that a $16,900 investment earlier in the year towards more fuel efficient engines would eventually turn into a $77,300 savings by the end of 2005.

The labor factor

Without a doubt, labor has been one of the biggest issues for the industry, both in the form of driver shortages as well as higher wages and benefits.

Health care costs are rising in the double-digit range, says Millican. "Compound that with the scarcity of employees, and you have to make it an attractive package to get people to stay in this industry." In fact, the LTL industry is not alone in battling rising health care costs. GM's Chairman and CEO, Rick Wagoner, singled out the rise in U.S. health care costs for undermining the company's North American 3Q net income results. General Motors estimates that health care costs could exceed $5.1 billion for the year. "These continuing large increases in health care costs put GM, and many other U.S. businesses, at a significant disadvantage," said Wagoner. GM has successfully kept its health care costs below the national average, which falls between 11 and 15 percent. However, the company has seen its costs expand from around 8.5 percent earlier in the year into the double digits.

In the meantime, the problem surrounding driver shortages isn't entirely new, says Jeff Sobecki, Vice President of Sales and Marketing for Watkins Motor Lines. Yet, "it will worsen as the economy gets better, and it will also affect rates." Not only are there fewer drivers, the ones behind the wheel are older. "The average age of our line-haul driver is 50 years old. We're not seeing a lot of younger people come into the industry, into the driving ranks. It's a difficult job, especially the over-the-road jobs. You're gone from home a lot," says Sobecki, who adds that although drivers can make a good living, "we've got to try and make it more attractive." He says one way is to offer "more 'creature comforts' at relays and line-haul stations. Private telephones, Internet access, laundry facilities-these things make it easier for drivers." Wages also need to be raised, according to Sobecki and other executives, including Gerald L. Detter, President and CEO of Con-Way Transportation Services, who stated recently that jobs in the trucking industry aren't as attractive to blue-collar workers nowadays. Detter believes that overall compensation must increase by at least 25 percent to maintain acceptable levels of service. "Our standards...will continue to be lowered until we make sure these jobs offer attractive wages and benefits," said Detter. "They're hard jobs. We share the highways with an irate general public that makes the job harder all the time."

The seriousness of driver shortages is even worse in the truckload industry, says Craig Fuller, Vice President and General Manager of Xpress Direct, a division of U.S. Xpress Enterprises. "Truck-load is experiencing greater than 100 percent turnover. LTL companies enjoy low double digit or single digit turnover."

If these pressures weren't enough, there's also a growing capacity crunch. "Capacity is in short supply in the LTL market, or at least getting there," notes Sobecki, who says it's not as bad as in the truckload industry. He says his company has been getting more requests from shippers who can't get freight moved by truckload carriers. "We're declining a lot [of the truckload business] because we're trying to protect the LTL that we haul. They're running out of capacity and the rails are busy too. The truckload guys I've talked to say they've got five loads for every tractor."

FedEx Freight has been developing its internal resources to address driver shortages for a while, and isn't hurting as bad as other companies, says Reed. Three years ago the company began training employees who were working on the loading docks to become drivers. "We put them through a very long and extensive education course and we built our own team. I don't know of too many other companies who have done that," he says.

What shippers are asking for, and what they're getting

Any way you cut it, shippers are going to be paying higher rates. What they're getting, though, are trucking companies who are playing a significant part in keeping their supply chains running. "Customers continue to raise the bar on what they expect, including more dependability and reliability," says Bill Zollars, Chairman, President, and CEO of Yellow Roadway Corporation.

Technology is the tool of choice for meeting the new demands. "Technology is a must in running a fast-cycle logistics operation," remarked Douglas G. Duncan, President and CEO of FedEx Freight in an interview earlier this year. "It's a lot more about taking total cost out rather than just the transportation cost. People are taking inventory cost out, and that's what we think is the growth market. Technology is hugely important in running a next- and second-day network where windows are small."

Watkins Motor Lines' Sobecki concurs. "There's a lot of pressure on the carriers to make sure they meet requested delivery windows. A lot of the large retailers are telling their vendors [the truckers' customers], 'I want you to deliver it on this date, at this time,' or they face penalties." Watkins offers a service that guarantees delivery within 30 minutes on either side of the exact delivery time the customer requests.

FedEx Freight is continuing its investment in such technology as hand-held devices carried by the company's drivers as well as dock computers. According to Reed, "Our customer advisory boards tell us they want better visibility, and we've been working on that in our system."

Radio frequency identification (RFID) is another technology that carriers are focusing on, "and Wal-Mart continues to drive it," notes Bill Zollars.

Regarding technology investments, James L. Welch, President and CEO of Yellow Transportation, stated, "We're an 80 year old company, and we've changed more in the last three years than we did in the previous 77. What we're trying to do is bundle our services together to lower overall costs in the supply chain that may help our profitability in transportation."

Naturally, the increased demands on shippers are being passed along to the carriers. "Customers don't just want a trucking company anymore," says Reed. "They want a solutions provider."