Freight buyers have reduced purchases of truck and rail delivery services, so they're angry that carriers are succeeding at passing along higher diesel fuel costs in the form of surcharges.

Over the past 18 months, Purchasing's price trend diffusion indicator for transportation services has averaged 83% as most buyers (between 50%-70% of the survey sample each month) have reported rising costs. And complaints about higher shipping rates come from a broad cross-section of buyers—ranging from primary metals producers to automotive parts makers, from makers of paints and coatings to manufacturers of consumer products.

Some of the biggest buyers of rail and trucking services say carriers are playing with fire since purchasers will have long memories when logistics services contracts come up for renewal. But Wall Street disagrees, noting that while carriers have been struggling with double-digit diesel cost increases, rail rates (without surcharges) have gained only 1% so far this year and truck rates are up just 3% on average. "It's the right time for these guys to push rate hikes through," says transportation analyst Jason Seidl at ING Barings in New York. "Improvements in service justify the price increases."

Major trucking companies have seen slowdowns in tonnage and shipment levels since mid-2000, and all operating segments—truckload, less-than-truckload (LTL), intermodal and courier services—have been affected. Industry insiders say a pickup in truck freight bookings awaits an upturn in manufacturing, which waits for a rise in business investment, which waits for improved corporate earnings and profits.

Still, truckers boosted rates 5% last year and have added another 3% so far this year. Almost half of the eight-point rise can be attributed to diesel fuel surcharges. Since late-1999, trucking firms have been assessing a variable rate fuel surcharge whenever the national average price for diesel exceeds $1.10/gallon.

Bill Zollars, chief executive of Yellow Corp., Overland Park, Kan., notes that "a firm pricing environment" exists in trucking. However, the latest general rate hikes have not been as successful as trucking firms had hoped because the market has become extremely competitive with such big players as Yellow Freight System, Consolidated Freightways and ABF Freight System jockeying for business with numerous other truckload carriers, LTL motor carriers, small-package carriers, private carriage, freight forwarders, railroads and airlines.

A marketing executive at ABF Freight System's parent, Arkansas Best Corp. in Fort Smith, Ark., remarks that "Freight hauling competition is still based primarily on personal relationships, price and service." While most of the principal motor carriers use generally similar tariffs to rate interstate shipments, he notes that "Competition for freight revenue has resulted in discounting, which effectively reduces prices paid by shippers."

Economist Frantz Price at DRI-WEFA in Eddystone, Pa., forecasts a 3.5% average increase in truck freight rates for 2001. He thinks third-quarter trucking costs may fall slightly (or at least remain stable) as diesel prices edge down and shipping levels go through their annual summer dip. In fourth quarter, however, the analyst expects a modest rally in trucking rates as both cargo business and diesel demand hit seasonal surges.

Railroad business in first half 2001 was off slightly from year ago due mostly to a drop in intermodal trailer and container volume. But despite lower bookings, the railroads saw first-quarter revenues and earnings improve due to higher shipping rates. They're linking their latest rate increases to claims of improved service, although these claims are under some debate in the market.

Price of DRI-WEFA thinks the railroads may not get all they want, but will achieve enough of an increase to boost full-year rail freight rates by 2.3%-2.5%.

Rail executives justify the price hikes, saying they are still 25% below cost of intermodal services and 50%-60% cheaper for commodity product shipments.

However, big manufacturers who use rail services say any service improvements must be taken in context of the extremely poor service levels that followed the 1999 series of railroad mergers. They say that while rail prices remain slightly lower than truck rates, they are still too high given that trucks are faster and more flexible in terms of scheduling.

Airfreight rates have risen sharply in the past 18 months—partly because of high jet-fuel costs and partly due to strong buying of air cargo services. Business has grown even though air cargo is fragmented among various freight forwarders and air carriers. The world air cargo business—led by FedEx Corp. of the U.S.—has grown at a 6.5% annual rate for the past several years. As airfreight purchasing has continued to grow, rates have exploded—rising 12% last year and some 11% so far this year.

United Air Lines of Chicago and American Airlines of Dallas have joined with other investors to form an unusual joint-venture transportation firm designed to carry goods and packages weighing more than 70 pounds. The venture, Integres Global Logistics Inc., a competitor to FedEx, represents the latest effort by other companies to capture a larger share of the lucrative air cargo market.

However, the global economic slowdown seems to have stalled both expansions. Analysts now expect 2001 airfreight business growth to lag the 2000 pace, staying flat at current levels through year-end. "Deteriorating economic conditions and rapid decline in high-tech and other durable goods industries have increasingly affected domestic and international express-air volumes," says Alan B. Graf, Jr., executive vice president and chief financial officer of Memphis-based FedEx. "We expect economic softness to continue through calendar 2001." Similarly, Seattle-based Airborne Inc. now expects that slow shipments volume growth throughout 2001 will offset its earlier rate hikes.

Buyers, apparently, won't get away from higher rates, though. Jet fuel use has risen 5% so far this year and the average per-gallon price is up 3%-4%. Aircraft fuel costs for the air cargo industry jumped from an average 55¢/gallon in 1998-1999 to 78¢ last year to almost 81¢ so far this year. Aircraft fuel usage is expected at more than 20 billion gallons this year, so a 10% increase in per-gallon fuel prices will result in a $4-billion increase in jet fuel costs. That will come from higher rates in 2001.