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What is Total Cost Per Mile for truckload carriers?

Chris Henry FreightWaves 2020 01 13

Chris Henry runs fleet profitability benchmarking and analytics for FreightWaves and facilitates the TCA’s TPP program. If you are interested in benchmarking your fleet’s performance with the best operators, join TCA’s TPP.

The data presented in this article come from analytics of over 230 truckload for-hire fleets, representing more than 70,000 trucks. 

A wise trucker once said, “The only way to make money in trucking is to not spend it.” Truer words have never been spoken. This business is a game of razor-thin margins, and an infinite (and growing) number of risks and curveballs. This article is the first of two that will: 1) breakdown the cost components of operating a truck (and a trucking company); and 2) establish a financial framework for improved margins and bottom lines.

It’s very difficult for trucking companies to achieve higher than average rates per mile, per hour and per week. Due to low barriers to market entry, fleets and operators of all sizes are able to add capacity very easily to the market. As a result, shippers benefit from these hyper-competitive effects with rates that don’t typically capture the expense realities of trucking. 

Total operating expenses in trucking (excluding very specialized operating models), range from extremes of $1.16 to $3.05 per mile when you simply take the best and worst from each of the categories below. Realistically, no trucking company could achieve an average total operating cost per total mile of $1.16, nor would they survive at $3.05 per mile. However, this article will illustrate the wide variances, and opportunity costs that operators realize on a day-to-day basis.

As the main pricing mechanism for trucking is the mile, it is important that industry participants understand their expenses relative to the miles generated by their trucks in a given week or month. Doing so provides an easier methodology to match  operating expenses with pricing decisions. 

Total operating cost per mile summary table

According to the Truckload Carrier Association’s TPP fleet data (available to TPP members and SONAR subscribers), a for-hire truckload carrier will average between 1,700-1,900 miles per truck per week throughout the year, except for December. 

Average operating expenses for a carrier on a per mile basis: 

Source: Truckload Carriers Association TPP Program for all carriers in the program. Data is available in SONAR. 

Driver compensation ($0.48-$0.83 per mile)

A disclaimer – for independent contractors (ICs), driving labor does not equal ‘profit.’ The most successful ICs pay themselves a market wage in addition to projected profit. Whether the amount is actually ‘paid out’ as wages is another issue unique to the personal tax situation, and state/provincial residency of each IC.  Driving labor expense is the single largest expense for trucking companies. Depending on the geographic region, operating mode and length of haul, the combination of driving compensation, benefits and payroll taxes ranges from 28% to 50% of revenue. Industry averages for total driving labor expense per mile range from $0.49 to $0.83 ($0.67 per mile on average). This amount includes base wages, incentive compensation, per diem, accessorial pay, workers comp, health insurance and retirement benefits.

Fuel ($0.40-$0.55 per mile)

Fuel represents the second-largest variable operating expense for any company or owner-operator. However, the difference between a top and bottom performer in trucking is directly correlated to the ‘net fuel expense’ calculation. Net fuel expense is simply the sum of gross fuel receipts, including taxes and additives minus fuel surcharge generated for the same time period. Top-performing trucking companies and ICs focus on some of these items and practices to reduce the gross fuel spend:

1. Reducing speed and idle time, and maintaining proper shifting patterns
2. Implementing fuel-saving technologies, equipment and practices (e.g. APUs, truck and trailer fairings, etc.)
3. Reduce empty miles (unless it is more advantageous from a margin/yield perspective)
4. Maximize ‘in network’ fuel spend. This one occurs when economies of scale really take hold, as fuel discounts are directly related to the volume of fuel purchased – the more fuel purchased, the lower the net fuel per gallon/litre.

Typically, gross fuel expense averages between $0.40-$0.55 per mile. However, when you factor in fuel surcharge and some or all the practices above, the net fuel spend can be dramatically less. Some trucking companies go further than most, utilizing financial instruments to ‘hedge’ their fuel expense from changes in the cost of diesel.

Equipment financing expense ($0.00-$0.40 per mile)

To be a trucker, you need a truck. Being mechanically inclined provides a distinct advantage for independent contractors and fleets alike. Being able to properly maintain equipment allows ICs and trucking companies to extend the average age of their trucks, and thereby reduce the large expense related to financing both trucks and trailers. In recent years, tax law changes have permitted accelerated capital equipment depreciation rates, meaning if a trucking company still owes money on its trucks and trailers, it is likely able to net more dollars after tax than before these changes. In recent years, fleets have reduced the average age of trucks to 2.3 years (on average). This trend is based on a growing school of thought that younger equipment reduces total tractor lifecycle expense (although this may be debatable based on original equipment manufacturer, specifications and operating conditions). In addition to traditional note financing, fleets and ICs alike have standard lease options available to them, along with Fair Market and Full-Service leases (the former taking care of the majority of maintenance expenses for a premium charge). As a percentage of revenue, due to the wide variety of financing strategies implemented by fleets and ICs, the cost of financing trucks and trailers ranges from 0%-30%.

Maintenance ($0.09-$0.40 per mile)

Based on my observations of over 200 trucking companies throughout North America, maintenance represents the largest margin opportunity for most companies. To be clear, maintenance expenses should capture all labor, parts, tires, supplies, oil, lube and fixed overhead (e.g. tools, shop rent, utilities, etc.). The difference between the top performers on maintenance and the bottom performers range from a low of $0.09 per mile to over $0.40 per mile! You read that right, that’s a $0.29 swing from top to bottom – think of the money going out the door! For many smaller fleets, especially those that do not use traditional accrual accounting, I suggest capturing the total maintenance spend over the past six months and keep rolling that average forward as each month unfolds. This reduces swings in large repairs from month to month and provides a clear picture of your maintenance expense.

Insurance ($0.06-$0.18 per mile)

Insurance, for the purposes of this article and exercise, is the total cost of liability, physical damage and cargo insurance premiums and deductibles, plus the expense of any other accident-related damages. The latter item is one which sometimes gets ignored or is inappropriately categorized as a maintenance expense. In recent years the cost of insurance has been dramatically affected by the growing trend of nuclear verdicts in multiple jurisdictions and continued general accident repair expenses. This trend has led more companies and single truck operators to shoulder more of the burden of insurance themselves through higher deductibles and captive insurance arrangements. Increasing the deductible per incident (retention) also raises the risk of financial harm in the event of an accident. As such, a prudent operator should invest any insurance expense savings in practices and technologies to reduce the probability of accidents in the future, such as in-cab event recorders, collision mitigation tech and enhanced entry-level driver driving.

Variable driving expenses ($0.01-$0.09 per mile)

This category is the most nuanced of the expense categories, and the last of the ‘variable’ operating expenses. This group captures all the permits, tolls, fines, along with motels, lumper fees and driver orientation/screening and recruiting expenses (which can be significant depending on the size of operator/company). As such, it is a bit of a ‘catchall’ for those items that don’t fit cleanly into one of the other large buckets. Top performers keep an eye on the above items to ensure that they aren’t a symptom of inefficient dispatch (layovers), unsafe practices (fines), poor routing decisions (tolls) and bad culture (increased turnover).

Non-driver wages & benefits ($0.06-$0.30 per mile)

This is an area in which independent contractors have an advantage, as they handle all sales, administrative and operating activities themselves. However, they are very susceptible to spot market changes, and the reliance on brokers or load boards for freight. For those that seek to grow their fleet, you need to start hiring people for sales, dispatch, finance and safety roles. Depending on the operating mode (trailer type) and length of haul, a trucking company will have three to six drivers for every one non-driver. For smaller fleets, the expense of non-driving positions represents as much as 15% of revenue. As a company grows, and implements software and standard processes, the cost of non-driving activities can be reduced significantly (by 4-7% of revenue).

Fixed overhead ($0.06-$0.30 per mile)

The last of all operating expense categories is fixed overhead expense. This category will capture all rent, office supplies, software, utilities and communications expenses (among many other possible expenses). Generally speaking, from a percentage of revenue perspective, the cost associated with this category should closely approximate the cost of non-driver wages and benefits.

Summary

You cannot simply take the sum of the lowest values and highest values for each of the above categories to establish total operating expense per mile range for trucking. This industry has an endless number of modes and operating models, not to mention people and aptitudes. Being a top performer in one category doesn’t necessarily equate to top performance in multiple categories. However, understanding the numbers and their place in your margin equation can be the difference between survival and realizing the American (and Canadian) dream. 

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