Record oil prices force transport rethink

By Nick Carey - Analysis

CHICAGO (Reuters) - Record oil prices are forcing many transportation companies to rethink how they buy and use fuel as it becomes an ever-larger part of their cost base.

"Not too many years ago, if you'd asked an executive at a transport company what their fuel management strategy was, the answer would have been 'I don't know,'" said Rich Cilento, chief executive of FuelQuest, which operates a system for transport companies to manage fuel purchases, logistics and inventory.

"Now fuel has such an influence on a business, analysts and shareholders demand a sophisticated fuel strategy," he said.

FuelQuest's customers -- including package delivery company United Parcel Service Inc (UPS.N), railroad Burlington Northern Santa Fe Corp (BNI.N) (BNSF), wholesale store operator Costco Wholesale Corp (COST.O), trucking company YRC Worldwide Inc (YRCW.O) and Saudi Arabian Airlines SAUD.UL -- use it to source more than 13 billion gallons of fuel annually.

"Transport companies are creating fuel management teams, centralizing procurement and buying wholesale," Cilento said.

This reflects the fact that it has been quite a year for oil. The price per barrel hit a record $111 on Thursday following a rally that added more than 25 percent to the price tag in a little more than a month. Prices have risen about 90 percent since mid-March 2007, a stinging slap in the wallet for consumers, shippers and their customers alike.

Most transport companies manage to pass on some or most of their fuel costs to customers through surcharges. These kick in after a time lag, so publicly-traded transport companies tend to see earnings hurt when prices rise rapidly, with a lift for profits after prices recede.

Among the hardest hit by the rising oil prices are truck companies. Some executives say that once diesel hits $3 per gallon it becomes their single biggest cost. Prices are now close to $4 and truck operators are hurting.

"We currently expect high diesel prices coupled with tractor licensing and prepayments (for items such as insurance policies and tolls) to be a catalyst for truck capacity to exit the market during the first half of 2008," Wachovia analyst Justin Yagerman wrote in a March 11 research note.

LESS IS MORE

But while rocketing fuel costs hurt trucking companies in particular, other, less-fuel-hungry modes of transport are seen benefiting from their pain.

"Higher fuel prices affect truckers' ability to compete with other modes, namely rails, which are more fuel efficient," Lee Klaskow, an analyst at Longbow Research, wrote in a March 11 note. "Trains can move one ton of freight approximately 423 miles on a gallon of diesel fuel, which is almost three times more than the 140 miles trucks can operate."

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) has an 18 percent stakes in BNSF and Buffett himself told shareholders in May 2007 the railroads' competitive prospects have improved.

"The railroads are no longer an afterthought," said Rodney Kreunen, Wisconsin's state rail commissioner. "People are looking at what Buffett is doing and saying 'Hey, why aren't I doing that?'"

Across the transport sector, cutting fuel consumption is now very much the thing to do.