March 17, 2008 / 11:47 AM / in 10 years

Record oil prices force transport rethink

By Nick Carey - Analysis

<p>A worker fills a gas tank at a gasoline station in Bulacan, north of Manila March 17, 2008. REUTERS/Cheryl Ravelo</p>

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.


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.

Just this week Con-way Freight, the less-than-truckload (LTL) unit of Con-way Inc CNW.N, said it was cutting the maximum speed on its trucks to 62 miles per hour from 65 miles, saving 3.2 million gallons of fuel annually. LTL operators consolidate smaller loads into a single truck.

Privately owned truck firm Schneider National Inc cut its fleet speed to 63 miles in 1994. Don Osterberg, vice president for driver safety and training, said every mile speed is reduced shaves 2.2 percent off fuel costs.

“We have been contemplating whether or not to change our speed stance further,” Osterberg said.

Giant package delivery companies UPS and its main rival FedEx Corp (FDX.N) also tout ongoing projects to cut fuel use.

FedEx says it has saved 5.5. million gallons a year by using aircraft engines less while on the ground, and its air fleet expansion plans include buying aircraft that use less fuel but offer greater capacity.

Both UPS and FedEx are expanding their use of more fuel-efficient vehicles.

“We also use dispatch planning that not only enhances efficiency but decreases the amount of miles traveled,” said Dave Barnes, chief investment officer for UPS.

UPS said this program helped save 3 million gallons of fuel in 2007. The company also uses a fuel-efficient landing system for its planes that saves 1 million gallons annually.

Bob Stoffel, UPS’ senior vice president for engineering, strategy and supply chain, said that high fuel costs have also led to a change in customer behavior.

“Customers are using the reliability and visibility that technology provides to take redundancies out of the supply chain,” Stoffel said. “Faced with increased transportation expense, they’re looking carefully at whether products of different importance, say high fashion and T-shirts, and whether they need to be shipped at the same speed.”

“Oil prices have had an impact on that process,” he added.

Reporting by Nick Carey, editing by Gerald E. McCormick

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