Motor carriers are going to have to fix the capacity mess on their own

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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With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics.

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  • Dear Lou:
    Thank-you for sharing your recollections from your meeting with Elian Turner of Scotia Capital and other prominent transportation professionals at a recent Blue Jays Game.
    I can not disagree with Mr. Tern in his concluding comments. “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 are going to have to take care of it themselves”.
    Gee thanks Scotia Capital (and I assume Scotia Bank)?
    Scotia Capital is not going to facilitate potential consolidations in this market sector. Further definition, they are not going to appropriate any more capital to this market sector. Am I wrong?
    In other words, “go fight it out for yourselves”.
    Mark Borkowski, pres.
    Mercantile Mergers & Acquisitions Corporation
    I King Street West, Suite 714
    Toronto, Ontario
    M5H 1A1
    (416) 368-8466 ext. 232
    The industry should be doing a massive consolidation. Lots of small operators, need to be rolled into well capitalized larger companies that are poised for growth. Some are public and others private. Some privately, publicly and private equity owned.

  • Waiting for everyone else to go out of business is a bad plan that has not worked ever.

  • I am confused by the comments above. Lou is talking about getting rid of the excess capacity in the industry by pulling the rug from under the “zombie truckers” who are hanging on week to week by their fingernails. The next post has Mark talking about the banks not wanting to provide capital to have the big companies poised for growth gobble up the little guys. If the big guys gobble up the little ones, the experienced drivers will quit instead of jumping through all the hoops and B.S. at the well capitalized companies. Soon, the customers are disappointed with the lack of experience, so they will look elsewhere, which opens the door for those seasoned drivers to start up on their own. Now the big companies with all their educated numbers people will have to get the work back, but they can’t provide the service level that the customer is accustomed to because of their lack of experience, so they will drop the rate to starve out those pesky O/O’s who are hanging by a thread, living week to week and it starts all over again. When will these big companies realize that buying out or starving out the little guy will never work? The best thing they could do is learn from these old hands and work with them. The bigger the company, the less experience the drivers will have. If you worked with these old guys, you would retain their knowledge and be better off trying to please the customer. If you sqeeze them out, that will only be temporary until your customer starts seeing new faces in every truck and then they will either find your old guys or vise versa. (Don’t believe it? Why do you think everyone who sells out to some big outfit has to sign a ‘no compete clause’ for a few years?) Now you have not cut down the capacity, but instead, increased it!

  • Gentlemen:
    I respect the comments that were made.
    Here is a reality that transportation executives and owners seem to forget. In the last three or four years, North America sent its value added manufacturing job, those that required skilled or professional expertise. The jobs went away, so did the equipment. Some of these companies stayed alive by “distributing” products made offshore. Most went away.
    The Transport industry is different. The manufacturing jobs and equipment went offshore and went away. At the moment, transportation equipment is parked in countless yards. There is incredible overcapacity and cut throat rates.
    If you do not believe in strategic mergers and or acquisitions to build value in your business, or as succession exist, then at least consider forming some strategic alliances with other carriers. More co-operation amongst the industry will keep it alive and someday grow it back to its former glory.
    I BELIEVE in what Roy Craigen said, “Waiting for everyone else to go out of business is a bad plan that has not worked ever”. He is right.
    Mark Borkowski