Doing Business In A Four-Bucks-For-A-Gallon-A-Gas World
Bailey Webb
June 1, 2008
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I
t’s bad enough trying to fill up your own car, as gas prices continue to climb – five
cents this week, 10 the next. So imagine if you had to fill up hundreds or thousands of cars,
trucks and/or airplanes – we’re talking ones that get less than 10 MPG and travel hundreds of
thousands of miles each year.
Now, throw in the economic downturn, which is killing your customer base – we’re talking companies cutting back on everything. While oil producers explore the planet’s most remote regions and depths – braving political instability and rising exploration and drilling costs – major oil fields in Alaska, Siberia and the Gulf of Mexico are experiencing production declines.
This year, the average price per barrel of oil has increased more than 20 percent, from around $90 a barrel in January to more than $120 – and climbing – today. In mid June 2007, the average price of a barrel of oil was $66.18. Five years ago the average price was $26.34 per barrel, according to the U.S. Department of Energy.
What’s a company to do? Following is how three Atlanta transportation and logistics companies are coping with the crisis.
Benton Express
Quite simply, “fuel is a terrible situation,” says Chip Matthews, president of trucking firm Benton Express Inc. “We’re getting hit on fuel and the economy.”
Benton Express traces its origins to the 1930s when Lex and B.D. Benton started a movie distribution business, picking up and delivering films to theaters in and around Georgia and north Florida. Since the trucking industry deregulated in 1980, Benton Express has grown into a less-than-truckload (LTL) carrier with 320 trucks and approximately 700 trailers operating from 22 locations in the Southeast, as well as an air-freight subsidiary operating out of Jacksonville, Fla., that runs 17 trucks.
As an LTL carrier, Benton typically uses one trailer to transport individual pallets for a variety of customers, perhaps making a run to Miami where the pallets are unloaded at the company’s south Florida facility and then delivered to individual customers, which further increases fuel usage.
Across the trucking industry,
both LTL and truckload carriers have adopted fuel surcharges, generally using a U.S. Department of
Energy formula to devise the extra payment. In mid-spring, as the average diesel fuel price hovered
around $4 per gallon, the charge totaled 30.1 percent of revenue, adding $37.63 to the cost of
shipping one pallet, Matthews says.
In March, the fuel surcharge accounted for 16 percent of Benton Express’ total revenue, but the company and other trucking firms still face shrinking margins. Combined with higher fuel prices, Benton’s average order has decreased from 1,600 to 1,400 pounds.
Adding to its fuel and transportation costs, Benton provides its sales and management force with company automobiles and provides for gas as well. LTL carriers also are facing a class-action lawsuit accusing them of colluding on fuel surcharges, another headache Matthews and others in the industry could not discuss due to pending litigation. Benton still is profitable, but it’s not getting any easier.
“Carriers’ margins have absolutely tanked,” Matthews says. “A lot of trucking companies, though not all, are losing money.”
While alternative fuels such as biodiesel and ethanol are not yet cost effective for the trucking industry – and may never be – Benton Express and its trucking industry peers have a few cost-cutting methods to alleviate the situation.
The bigger haulers tend to buy long-term contracts for fuel, which can pare costs, and for its part, Benton Express pays for tankers to come to its terminals and fuel its fleet, lessening environmental and insurance liabilities that come with in- or above-ground tanks.
Industry conventional wisdom dictates that for every mile per hour a truck slows its cruising speed, it gains 0.1 miles per gallon in fuel efficiency. Drivers may not like decreasing cruising speeds, because time is money, but in many cases, they don’t have a choice.
Trucks manufactured after the mid 1990s have built-in electronic controls.
Owners like Benton can set performance parameters for a truck’s top pedal and cruising speed, idle time and acceleration. Among the 30 parameters it sets, Benton has cut the top pedal speed marginally and made a more substantial cut on cruising speed, and the company is testing some trucks in its fleet with a cruising speed four miles per hour slower than the company’s fleet average. With average gas mileage of about six miles per gallon and trucks covering about 140,000 miles per year, the savings add up.
Still, the worst-case scenario suggests fuel prices could hit $6 per gallon, a point that will not only cripple the trucking industry but pose dire consequences for an already shaky macro economy.
“I hope [the price increase] is gradual and consistent because I can keep up with that,” says Matthews, who expresses serious concerns for the overall economy should diesel hit $6 per gallon.
AirTran
Just as airlines seemed to regain their footing post-9/11, skyrocketing fuel prices hammered the industry and played a key role in bankruptcies at smaller carriers such as Aloha Airlines and ATA. The issue also was an important factor in the recently proposed $17.7 billion merger of Delta and Northwest, which if confirmed, creates the world’s largest airline in terms of traffic.
Over the past decade, the average price of jet fuel has jumped from around 50 cents per gallon to about $3.10, and every dollar-per-gallon increase in jet fuel’s cost equals a $10 million impact to AirTran’s bottom line, says Kevin Healy, Air Tran’s senior VP of planning and marketing. Last year, AirTran burned through approximately 400 million gallons of jet fuel, and fuel costs now account for 45 percent of the airline’s expenses.
“You just look at everything differently,” says Healy, regarding the rapid fuel cost increases. “Everything you do is affected. You take a good, hard look at what you’re doing and whether or not it makes sense.”
When jet fuel prices started the precipitous ascent about two years ago, AirTran began reducing throttle, working to expand 10 percent per year vs. the previous forecast for 20 percent annual growth. The company opened seven new routes in 2007, but plans to open three this year, with San Juan, Puerto Rico; Burlington, Vt.; and San Antonio, the new destinations.
In order to pick up revenue in the face of rising fuel costs, AirTran has begun charging for reserved seating where it formerly just assigned seats at boarding. The airline also began charging a $10 fee for a second, checked-in bag, which is below the industry norm of $25 per second bag.
“There’s a certain amount you can do with trying to offset through fare increases and surcharges, but you can only go so far,” Healy says.
AirTran also relies on savvy financial maneuvering and fleet management to allay fuel costs. The company hedges 45 percent of its annual fuel costs, locking in futures contracts guaranteeing that the airline will pay within a certain range – not above one set price or below another – for a gallon of jet fuel.
It’s a tricky process because oil and fuel haven’t necessarily traded based on fundamentals lately, but it’s been a safe bet over the past two years that the price would rise. That’s left Healy locking in on agreements that might have seemed absurd even a few weeks prior. “You enter into an agreement and take some risk that it won’t fall precipitously,” he says.
AirTran has youth and beauty to its advantage as well. Its fleet of 137 airplanes averages three years old, with Boeing 737s equipped with winglets, wing-tip extensions that reduce lift-induced drag and provide extra lift, thus increasing fuel economy. Engines also are cleaned and tuned with more frequency to improve efficiency.
New 737s are made with more composite materials, reducing weight and, subsequently, fuel costs. Next year, Boeing begins delivering the first 787 Dreamliners, with new wings, engines and composite materials to reduce weight and increase fuel efficiency. Still, it’s an incredibly slow process to develop, test and deliver a new aircraft.
UPS
UPS is another fuel-intensive business that’s kept its eye on petrol prices even before the current crisis. With 95,000 vehicles transporting and delivering 16 million packages or documents daily, fuel efficiency has always been a priority.
In some cases, reducing fuel consumption is as easy as limiting left-hand turns. Using its proprietary Package Flow Technology route planning and logistics’ systems, UPS cut approximately 30 million miles off its delivery routs, saving about 3 million gallons of gas and reducing emissions of carbon dioxide by 32,000 metric tons, or the equivalent of removing 5,300 passenger cars from the roads for a year, according to the company. The company traditionally buys diesel and gas through bulk contracts and operates its own fueling facilities as well.
Additionally, UPS operates the largest fleet of privately owned alternative-fueled vehicle in its industry. Of its 1,600 vehicles that use compress natural gas, liquefied natural gas, electric or hybrid power, 42 operate in metro Atlanta.
“It definitely saves a lot on oil and natural gas,” says company spokesperson Karen Cole.
Like many others, UPS also pegs a fuel surcharge to the U.S. Department of Energy On-Highway Fuel Prices Index and keeps the surcharge completely transparent and not built in to shipping rates, Cole says.
Through its UPS Logistics subsidiary, the company is helping other industries improve fuel efficiency. Firms in the beverage; food service; dairy; paper; wine and spirits; and fuel, oil and propane industries use UPS Logistics’ Roadnet network optimization software to streamline delivery routes and customer service.
A Not-So-Fun Fact
In late April, Forbes.com named the worst cities in America for commuters, with Atlanta grabbing top honors. The ATL beat out other top contenders such as Orlando, Detroit, Birmingham, Raleigh, N.C., Houston and Los Angeles.
Here’s what Forbes.com had to say: “Here, in the fastest-growing city in America, more people flood the roadways than the infrastructure can handle. Commuters spend 60 hours a year stuck in traffic, second only to those in Los Angeles. If that weren’t bad enough, Atlanta is so spread out that only 29 percent of drivers get to and from work in less than 20 minutes, the third-worst rate in the country, and 13 percent spend more than an hour getting to work, the fourth-worst rate in the country. The local train system doesn’t service the entire city, and thus fails to relieve the pressure.”
The Diesel
Factor
Rising fuel prices are driving up construction costs, forcing universities and developers to plan ahead and take steps aimed at saving money. The Associated General Contractors of America announced that the Producer Price Index – a measure of the price that producers charge for a product – of construction materials increased by 2.1 percent during March. A major factor – the rising cost of diesel fuel, which is critical in transportation of heavy loads, steel manufacturing and heavy-machinery operation.
Watering Down The Little Guy
In a recent nationwide survey of more than 1,000 small-business owners by Discover, 75 percent said rising gas prices were cutting into profits. Gas prices make up a larger portion of expenses for smaller businesses, according to the business credit card’s division.
According to the National Federation of Independent Business, a Washington-based lobby group, more small-business owners reported weaker earnings in March, despite raising prices to keep pace with higher operating and material costs. “Widespread price increases could not counter pressures from higher costs and weaker sales,” the group reported.
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