Shippers had better watch out-this year's rate hikes in the trucking industry are likely to be among the biggest in years. Estimates have ranged anywhere from 3 to 4 percent to as high as the low teens, with the largest increases expected in the truckload sector, less so in the LTL sector.

Rising fuel costs are obviously the main driver as oil prices continue to climb to record-highs. "Regardless of what business you're in, when your costs go up you're going to try and pass those on," says Chip Overbey, vice president of marketing and national accounts for Old Dominion. "You're never going to be able to fully pass everything on, though." It's not just diesel fuel that's affected, he adds. "There's also propane, gas in company vehicles, oil, hoses, tires, belts...we're all going to start feeling the ripple effect."

Indeed, the price of diesel was $1.64 per gallon during the first week of April last year, but climbed to $2.30 per gallon during the first week of April this year.

China's phenomenal growth is part of the problem, say analysts. During 2004, the country's consumption was about 1 million barrels per day. This year it's likely to double to 2 million barrels per day.

And, the outlook is uncertain to say the least. Between now and 2020, world oil consumption will rise by about 60 percent, with transportation accounting as the fastest growing oil-consuming sector.

Doug Duncan, president and CEO of FedEx Freight is also worried about the large-scale impact of higher oil prices. "From a macroeconomic perspective, we're very concerned with the high oil and energy prices and what it may do to the overall economy and the customers we serve. We're very fortunate to have the fuel surcharge so much of it gets passed on to the customer, but we certainly don't take that for granted."

While truckers and shippers alike think the price of fuel is something out of their control, Duncan believes there's plenty that can be done to keep operating costs from spiraling upward. "For starters, we're working to use technology to automate a lot of our pick-up and delivery dispatching and we're looking at ways to maximize efficiency and run fewer miles with the same amount of freight to cut down on fuel consumption. These types of efforts are huge and they're becoming more important by the day."

FedEx Freight was also one of the first companies to implement the new, cleaner-burning engines required by the federal Environmental Protection Agency, he says. "A lot of our competitors avoided those engines, but we didn't. We used our normal replacement cycle and have been working with the engine manufacturers in finding different setups, different gear ratios, and different attitudes to get the fuel mileage back up to where it can be a positive rather than a negative." Others in the industry report that the new engines' fuel economy is reduced and they're less reliable, which translates to higher maintenance costs.

Duncan notes that FedEx Freight has also been "pretty vocal in the marketplace to try and get the government to free up some of the advantages that can be gained with higher-productivity vehicles. For example, we run triple trailers in many of the Western states, which allows us to handle more freight with fewer tractors and less fuel consumption. A number of years ago there was a freeze on the expansion of triple trailer operations. But, there are still lots of places in the country where we can operate triples or other higher-productivity vehicles, like those with heavier weights, that can help mitigate higher costs while also helping the environment."

Other factors are driving up costs

Aside from rising fuel and equipment costs, trucking firms are also dealing with new federal regulations and other pressures. The new hazardous-materials regulations require drivers to get background checks and become certified before they're able to haul hazmat shipments. According to Edward Moritz, vice president of marketing for Con-Way Transportation Services, "It's a regulatory cost that going to have to be shared with our customers. It's $95 per driver, and that's the advertised cost from the consultant that's been hired by the Transportation Safety Administration. That fee is being borne by us at Con-Way for our drivers and the reason is simple: we have drivers who are in operations and we don't know the ones that are going to be driving hazmat from day to day. We don't assign drivers to a particular trailer. We have to have complete flexibility to make the system work." Moritz says that Con-Way will make sure every one of its drivers will be hazmat certified and that the company will end up paying about $1.3 million for the on-going certifications.

And, while driver shortages are affecting the truckload sector more than LTL, industry executives believe that the problem may become more apparent for LTL companies because of the new hazmat rules. Specifically, it's estimated that up to 20 percent of the approximately 2.7 million drivers, or 540,000 truckers, who currently possess the hazmat endorsement may decide not to renew while the background checks may deter new drivers from applying.

Not only are the fees for hazmat certification pricey, "there are a limited number of places in each state where you can get fingerprinted," explains Jeff Sobecki, executive vice president, sales and marketing, for Watkins Motor Lines. "As a carrier, if your driver's in Mobile, for instance, and the location for fingerprinting is 200 miles away, it's going to cost a lot just for the driver's time and expense to get certified. We support the new hazmat rules, but if the fingerprinting could be done locally that would certainly help," he says.

Sobecki points to other costs that are impacting the industry. Insurance costs are one example, and it extends to medical, liability, and property insurance. Health care costs and workers' compensation costs are rising in the double digits. Furthermore, "Despite our industry leading safety and training programs designed to emphasize reduction in incidents and accidents, the volatile insurance market post-9/11 and lack of effective tort reform influenced a 40 percent increase in our liability insurance costs," he remarks. "Property insurance is also at risk of rising at a similar rate due to policy changes prompted by wind storms, earthquakes, hurricanes, and other natural disasters."

"Traffic congestion has reached an all-time high in many key markets around the country. The issue is getting national press, and the cities in question are going beyond the usual New York City, Los Angeles, and Chicago to include cities like Phoenix, Denver, and Portland," says Sobecki. "States all over the nation are also raising tolls on toll roads, which are adding to our costs. In 2004, Watkins paid over $2.5 million in tolls-a 26 percent increase over 2003 with even greater expenses expected for 2005."

Will industry consolidation give shippers what they want?

Although there's plenty of change occurring in the marketplace for carriers and shippers alike, one thing's for certain-industry consolidation isn't likely to cool down anytime soon. In late February, giant LTL carrier Yellow Roadway Corp. announced it had agreed to buy rival USF Corp. The acquisition is likely to be completed sometime this summer. It's the second major acquisition for Yellow in recent years and follows the acquisition of Roadway in 2003.

Industry consolidation really started with deregulation in the early 1980s, says Con-Way's Edward Moritz. "It's what customers are looking for, namely larger networks, more complete services." On-going consolidation probably won't affect the larger carriers who already have an extensive array or products and services needed to meet customers' demands, but smaller carriers are going to be hurt. The only thing they can do is continue to cut their rates, which is really a slow death, say experts.

"What's required nowadays is a networked carrier that can deliver next- and second-day all over the country," explains FedEx Freight's Duncan. Companies have begun executing fast-cycle logistics and they can't afford to do it with hundred of carriers. They need a few carriers that have broad capabilities that can live up to the promises and commitment that they've acquired."

These same customers require a high degree of certainty from their carriers, he says. "That means they want it delivered when you said it would be delivered and they want it in the same condition as when it was picked up so they can put it right on the store shelf or use it one the production line. As soon as you give them that, then they want you to speed it up. They want you to take the 3-day point and change it to a 2-day point and take 2-day points and change them to next-day points. It's all about supply chain management, and if you look at it from that perspective it's pretty easy to see what the customer wants from us. We're but one important cog in their overall supply chain that they have to manage. What the customer will want tomorrow, however, will be different. We can't get complacent about what we're doing."