TBA Energy Articles
We have published several hundred articles involving the transport and energy sectors. We are making some of them available online, segregated by topic and date (most recent first). Feel free to review our hits and misses in the detail – and we welcome the opportunity to help you with any of these topics in your business.
BioButanol Is Another Good Option To Replace Ethanol
Author: Jay Thompson First Published: August 2, 2006
Butanol has been around for over a century, its use as a fuel was negatively affected years ago by low oil prices. The cost picture has always been a tougher one than gasoline, ethanol, etc. primarily due to feedstock and process costs. The BP-Dupont focus is interesting. While it is initially addressing sugar beets, the larger opportunity may be in process efficiency (i.e. better chemical reactors), which could carry over into all feedstocks, butanol, ethanol and biodiesel production.
In most industries, there are options. Our power grid can be fueled by coal, nuclear, wind, water, oil, etc. In transport we have been understandably singlesourced due to costs and in part limited by distribution network compatibility. While there is dramatic growth today in ethanol capacity in the US, there may be other good options. While it would be helpful to be a chemist to understand all of the terminology, the key areas of opportunity with butanol have to do with catalysts and the chemical processes. When one looks at butanol today, it is a petrochemical based product used mostly in industry, and is a different process than the bioapproach.
The overall US butanol market is about 200MMgpy at a market price of $2.75-$2.80 per gallon. When looking at the process using corn, it has resulted in 60% butanol, 30% acetone and 10% ethanol at relatively poor yields. We know current ethanol price comparisons and can look at acetone wholesale pricing at over $3.50 per gallon and $13.50 per gallon for us at Lowe’s. We are hearing of new chemical (catalyst) processes that can potentially take butanol yields way up displacing others alcohols, in addition to producing considerable hydrogen (a great energy source for other uses). There are no major bio-butanol plants today, so comparisons are more theoretical than actual. Ethanol plants may be able to be converted, but there are considerations regarding fermentation and handling byproducts.
There are definitely pluses to butanol over ethanol, including higher BTU content, higher octane rating, older gas engines can run on higher levels, it can act as oxygenate, it can be transported through current pipelines and others positives. It can also help with the cold weather characteristics of biodiesel as an additive. The negatives involve questions on higher production plant costs, unproven high-rate fermentation processes and a question regarding any issues with a potential for butanol finding its way into water supplies – e.g. how biodegradable is it.
Some believe that butanol can be produced very price-competitively. One can also look at “almost free” food byproducts in the US such as cheese whey and others as process chemicals and see similarities to the approach in the UK. One can then address different feedstocks and energy contents – and see the synergies with the options of ethanol, gasoline and biodiesel. Technology still seems to be the driver and BP / Dupont must think along those lines. Others are likely to follow – way before the train leaves the station.
Fuel Cost Business Models are Different For Players (and so is analysis and results)
Author: Jay Thompson First Published: July 19, 2006
With fuel prices at record levels, there is an interesting statistic that isn’t following convention – bankruptcies. The main reasons are higher freight rates and fuel surcharges for both large and small fleets. While larger fleets have more sophisticated fuel surcharge programs implemented, smaller fleets still get it in some form, along with experiencing better utilization due to freight availability. 3PL’s, logistics-focused companies and brokers / Internet freight entities (and fleets with such) operate with a different business model. It’s very good for them today and not as good for those hauling their freight (who get squeezed). Tour bus operators have operational cost categories similar to trucking, but a business model that has been traditionally able to handle moderate fuel price swings, but that has changed.
Trucking profitability has always been tight, traditionally averaging low single digits. A quick look at the numbers shows that fuel surcharge is widespread in the industry this time around; otherwise companies would be long gone. Average fuel cost where surcharge kicks in = $1.20 per gallon. With current fuel prices averaging $2.90 per gallon, the amount to offset is about $1.70 per gallon. To get to a Truckload (TL) rate per mile (or percentage), $1.70 per gallon divided by 5 miles per gallon = $0.34 per mile (or over 25% of average base revenue). Per unit LTL base rates are over double that of TL, so the average surcharge percentage should be less than half of TL. Regardless, no trucking company has the profitability from their base rates to handle the current price surge without some rate relief.
Big guys aren’t immune to problems either. Since deregulation, over 60% of the large carriers have gone out of business (after the 3 year flush) for similar reasons as smaller operators. In addition, analysis show that most of the majors well in the black today do not do traditional operations, but are doing a mix of logistics, on highway, Intermodal and brokering (just look at the top 25 or so fleet lists). There have been modest increases in base freight rates and aggressive fuel surcharges added on, but a look into the detailed numbers show “trucking-operations” for these companies are less profitable than brokerages, those with Independent Contractors and ones utilizing rail.
Fuel costs are an emotional issue on both a professional and personal basis. Fuel surcharge costs are not calculated consistently, not explained well, some rates are exorbitant, etc. Additionally, a close look at public fleet data (and shipper / cosignee surveys) shows that fuel surcharge is being collected, sometimes at unbelievable rates, not passed on through their brokerages and other interesting things. Of concern is there will be a day of reckoning with trucking company profitability being hit when surcharge diminishes or gets rolled into rates, in addition to discontent among shippers toward carriers and brokers due to this.
Brokers are becoming more a factor, due to positive profitability as seen at those with brokerages / agents. Landstar, CH Robinson, Expeditors and similar businesses are good examples, but other majors are getting more active in the same. Because of record amounts of available freight, ease of entry and the Internet, there are also record numbers of companies becoming brokers (those with and without trucks). That is not necessarily a good thing, as it drives rates down to the entity doing the work, makes analysis tougher of those brokering, creates double / triple brokered freight, full rate disclosure disappears, the blame-game (it’s the other guy) flourishes and much more. In addition, very few brokers quote any surcharge numbers to carriers for a variety of (bad) reasons. Most shippers will pay extra for increased fuel costs, if properly explained (a huge opportunity).
Separately over the last year, tour bus operators have been discussing how to consistently address fuel costs. Their operations are similar to local / regional trucking businesses, where calculated fuel costs per person (per pound when comparing to local freight) have not been that noticeable until recently. They have lodging / entertainment packages that makes up a large part of their customer pricing that they have leveraged and – similar to airlines – they have longer lead-times for selling tours without knowledge of exact fuel prices for the time of the excursion. Successful ones are taking a stab at implementing nominal surcharges.
Like most issues, the devil is in the details. Looking at recent press releases regarding profitability, then digging into the numbers and comparing them to survey information from smaller operators, show why some do better than others. Those with good truck operating numbers today will do well down the road, while those making more on brokering / fuel surcharge are having some question their business model and true focus – and true long-term profitability.
Fuel Prices Drain Some Truckers (but Fill-up Others)
Author: Jay Thompson
First Published: June 6, 2006
When fuel prices spike, it is not only oil pumping countries and big oil that profit, but also many transport companies and freight brokers. Many profit more with fuel surcharge implemented than without – both from their rates and from brokering out freight to others.
Fuel discount programs are available from a variety of sources for anyone today and we can go on-line to the major retail fuel suppliers and shop current prices (even for our autos). There are both pricing and operational savings being addressed by all sizes of operators.
An on-going industry issue is how much of surcharge actually does go to the person paying for the fuel and hauling the freight. Negotiating, billing and collecting fuel surcharge is a tougher road for smaller operators, but not for reasons than one may expect.
The vast majority of trucking companies are small fleets / Independent Contractors. When one looks further into the numbers, over 80% of Independent Contractors are leased to fleets. They are paid by the fleet either on a percentage or rate per mile basis with fuel surcharge (hopefully) added on. The largest fleets continue to struggle with their Independent Contractor programs for a variety of reasons, but keep trying.
Less than 5% of owner-operators with their own operating authority have their own clients and they generally do pretty well. The remaining 10%+ primarily use brokered freight including that from fleet brokerages. As one goes up from one-truck operations, there are more shipper-direct relationships, but still a significant amount of broker freight. The number of brokers has exploded over the last number of years – and is a separate subject.
Trucking business failures follow a chain of issues, with high fuel costs often being the tip-over point. For smaller operations, it is primarily due to the lack of basic business skills and that growth costs cash. The normal chain includes spending cash to get going (3 months insurance, licensing, etc.), flowing operational costs (fuel, etc.), timely billing, and getting paid for work performed. Major show-stopping red flags appear in the form of quarterly fuel reports payments, tax & maintenance escrows, IRS filing issues and operational cost management (fuel being the biggest). Business failures follow national trends with a 2-3 quarter lag after fuel spikes (and economic slowdowns) and depleting backup cash, loans or maxing out credit cards. Bankruptcy numbers are hard to correlate, as those general trends continue upward.
New authority filings remain at high levels and do correlate with insurance industry data – required to activate / maintain DOT operating authority. It shows over a quarter of new authority’s are revoked after the three-month down-payment is made and over half after the first year. The business issue chain can also affect the big guys as seen with Consolidated Freightways. On the heels of the fuel price surge, but after almost 2 years of operational losses, they ran out of loans and the insurance bond folks pulled the plug.
Over the last 25 years since deregulation, there have been five oil price spikes including the one we are experiencing today. The one in the early 80’s was accompanied with the rapid growth of “new” fleets, which really cleaned out a bunch of old-time well-known fleets. The next spike occurred in conjunction with Gulf War 1, followed by one in the mid ‘90’s at the time of the Asian boom (then bust) and again around the time of Gulf War 2. Three were accompanied with economic recessions (not in ’96 or today).
The post-’00 issues as quoted by Todd Spencer was a confluence of issues, more recently called “The Perfect Storm” – including high fuel prices, rising labor / insurance costs, a glut of used equipment / depressed values, a slowing economy, Y2K conversion screw-ups and the “Dot-com” bust. The financing industry was very pregnant in this process by funding primarily Independent Contractors via the “fog-the-mirror” test, putting tens of thousands of Independent Contractors into business, resulting in tremendous problems for Associates, Mercedes Credit, Orix, Green Tree and others. This was what drove most of the repo numbers from 2000-2002 regarding small operators. Financiers have become more prudent since (although still financing Contractors at very substantial numbers), with small fleet failures actually presenting a bigger problem (because of number of units).
A notable number of their membership (30%) were not seeing adequate fuel surcharge to “offset” costs, but when reading on: “The money is actually pocketed by an intermediary or maybe the trucking company collects it and doesn’t actually pass it on to the person who is actually paying for the fuel. That’s very common.” Intermediary means Logistics Company or Broker. Trucking company means fleet who lease the 80% of Independent Contractors.
The whole fuel surcharge issue is a political (emotional & governmental) hot issue. Most agree that it should be paid by the shipper and fees should go to the ones paying for the fuel, but that is where the what-ifs begin. There are approaches that contend that “we will pass on what we get” or “it is in the rate” or “take it without surcharge or leave it” or numerous other approaches. Fleets clearly recognize the issues and are tweaking their contractor contracts. Some brokers are very fair, but most are not.
A contentious issue is when truckers are paid on a percentage of the freight bill and fuel surcharges are high. That fuel surcharge percentage differential puts more money into the fleets or brokers coffers. Also, if “what is paid” is passed through, it becomes clouded as fuel surcharges are often discounted to the shipper. Recent attempts to reactivate “full-pass-through” Federal legislation for fuel surcharge with a formula tied to EIA numbers (similar to one that sunsetted with the ICC) have failed. Going into the math of what fuel does to the top line is pretty clear – and keeping a percentage, most or all of it really pushes up trucking company and broker profitability. Shippers and smaller carriers are getting smarter, and the Internet is a big help.
To summarize, are Independent Contractors in trouble? Only those at fleets with bad programs, those who don’t understand basic business and ones who are not tipped over by not getting “full & fair” fuel surcharge. Driver converts continue to grow the numbers.
Are small fleets in trouble? Not for those who develop and run their businesses and don’t work with bad brokers. Even today, opportunities are appearing for the smaller folks with the likes of Walmart, etc.
Are major fleets in trouble? Absolutely not, they continue to try to do a better job in growing their businesses, fleet size, keeping their 80% of the Independent Contractor segment, and doing the same with their brokerage users. The question is what will happen when the economy cools, fuel prices go down and the marketplace adjusts. The Feds comments are being felt in some sectors and I think we know that answer.