Attending Scotia Capital’s transportation and logistics night this week I picked up on a valuable piece of insight I think all motor carrier executives, and the shippers who deal with them, will want to consider.
The night featured a Jays game watched from Scotia Capital’s private box at Rogers Centre overseeing first base but in reality it was a great excuse to bring together a menagerie of transportation industry leaders for a few hours. Scotia Capital proved to be a most attentive host keeping us all well fed with plenty of good stuff to quench our thirst too.
The guests I had a chance to chat with included motor carrier execs such as Dan Einwechter of Challenger, Doug Harrison of Calyx, Nasser Syed of Apple Express and Brent Jones of Wilson Transportation as well as Pat Loduca of Upper Lakes Group and John Kim, the new CFO of Cargojet.
Talk naturally turned to the state of the Canadian transportation industry and I must admit I watched but a few minutes of the game the conversation being as interesting as it was. But it was Elian Terner, director of investment banking at Scotia Capital, who I thought provided the most thought provoking insight.
For a couple of years now motor carrier executives have been hoping the excess capacity in their industry would be removed when the financial institutions finally decided to shut down the many trucking companies basically operating from week to week – the “zombie truckers” as they’ve come to be called. The line of reasoning was that soon as the recession was over and the equipment owned by these carriers hanging on by their fingernails was worth something again, we would see the banks getting a lot more aggressive in calling their loans. In other words the banks would play a major role in consolidating the industry.
This view had a great number of adherents and I must admit to being one of them. But there are two problems with it:
First is the sheer scale of the capacity that needs fixing. The number of small carriers in Canada increased by about 25% during the pre-recession years; there are about 2,000 small carriers that would need to shut their doors before we could return to the capacity levels Canada experienced at the start of this millennium. And that’s not counting all the capacity added on by medium sized and large carriers. They did not grow much in number but they did increase the size of their fleets.
The second problem with this line of reasoning is quite simple. If this is what’s going to happen, why hasn’t it started happening yet? The recession is over, we are several months into a fragile recovery and certain sectors are already showing strong growth.
Scotia Capital’s Terner believes we haven’t seen the banks play a major role in consolidating the industry because they don’t want to. They’re not in the business of trying to sell off equipment and terminals; if these companies can squeeze by, they just may very well let them.
As Terner emphasized, if motor carriers feel the need to consolidate their industry to cure the excess capacity woes that have placed such downward pressure on pricing the last two years, they’re going to have to take care of it themselves.
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