As Loonie soars to new heights, the trucking industry scrambles to adapt

by Julia Kuzeljevich

TORONTO, Ont. – It’s not often that the Canadian dollar reigns supreme, but for the first time in 31 years, not only has it matched the US dollar but, at press time, had risen to seven cents above it.

Trucking in a high dollar world is a two-sided coin, if you’re referring to the Loonie, that is.

It may be great for cross-border travel, but then there’s the negative impact the high dollar has had on Canadian exports and specifically on manufacturers. Combine that with weaker US consumer demand because of mortgage debts affecting their buying power.

The by-product of all this, of course, is excess truckload capacity southbound. In other words, a lot of work is drying up, and the situation is expected to continue well into 2008.

For some companies, the high dollar has put downward pressure on rates, and a corresponding change to how their owner/operators are being compensated.

In one case reported to Truck News, owner/operators with Celadon Canada met with management on Oct. 30 to discuss rate cuts.

“They’ve been asked to reduce their rate per mile by five cents and their fuel surcharge by three cents,” said Harold Heffernan, vice-president, general manager with Celadon Canada, who told Truck News that the exchange rate has definitely had a significant impact on business.

“In any group environment like that you don’t know if you’ve satisfied each individual but I can guarantee that everybody left the meeting with respect for each group’s opinion,” said Heffernan of the meeting with owner/operators.

“All the carriers can relate to this. It changes the supply and demand curve. The exchange rate can have pressure to reduce or raise rates. Since the value of the Canadian dollar has risen, manufacturing has lost something to the extent of 500,000 jobs in Ontario alone, so while the truck count has remained the same, less freight is crossing the border, putting downward pressure on customer rates,” he said.

Heffernan said that owner/operators’ rates have been aligned to the exchange rate so that they will go up as the dollar drops.

“I know rates have been dropping and it’s a concern to owner/operators. It’s finally trickling down to them,” said Joanne Ritchie, executive director, Owner Operators’ Business Association of Canada, who added that she has not yet seen concessions on a large scale.

“If owner/operators are well aware of their costs, though, they’ll know how low they can go and whether or not they can accept the freight. My fear though is that some owner/operators are going to just take it even if their costs are higher than that,” she added.

While freight volumes may be dropping, for those still running loads into the US, a high Canadian dollar has been advantageous.

“Exchange rate fluctuations are always good for one guy, bad for another. For actually running the truck, it has become a nice thing. If you’re busy, where you’re still driving as much as you possibly can, travel costs, such as bridge and toll costs, just got less expensive,” said Scott Taylor, vice-president of operations, TFS Group of Companies.

“For an owner/operator working for a big carrier, going down to the (United) States now has become a lot cheaper, whether for buying their meals on the road or for necessary maintenance, and when they’re buying fuel,” he added.

And the strong Canadian dollar has translated into some good deals for those who may be in the market for new equipment.

“Since everything is invoiced in US dollars, each one cent difference drops the price by a percentage point,” said Barry Dzikowski, of Kenworth Truck Centres, in Mississauga, Ontario.

He told Truck News that while there’s been some price quoting going out, many fleets and owner/operators are also hanging back on purchases for now.

But according to Dmitry Kushnir, CFA, RBC Capital Markets, some trucking trusts have still been able to generate meaningful results in a harder business climate by focusing on revenue growth and operational efficiency.

Among these, noted Kushnir are ATS Andlauer Income Fund, with its niche focus on retail and pharmaceutical sectors, as well as its specialized temperature-controlled transportation services. Trimac Income Fund’s focus on bulk transportation has partially protected it from the weaknesses stemming from the manufacturing sector.

TransForce Income Fund, said Kushnir, has protected margins by scaling down capacity and re-allocating drivers to more profitable segments.

Contrans Income Fund, meanwhile has focused on reducing empty miles driven in its dry van segment.

“Opportunities do exist in the industry as a result of efficient execution, specialized services, as well as higher barriers to entry in certain niche segments. Those companies that can withstand the current environment are also likely to outperform during the other end of the business cycle,” said Kushnir, who authored a recent report on Transports and the Dollar: Adapting to the weak greenback.

According to some economists, the manufacturing situation is not as bleak as it seems, in a relative sense.

Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, said Canadian exports to the US have actually held up remarkably well, relative to the last few years.

“Nominal merchandise exports to the US excluding energy, are at about the same level today as they were five years ago – despite the Loonie being 50% higher against the US dollar,” he said.

Hodgson told Truck News that in cases where manufacturing is more integrated, costs can actually fall, for a couple of reasons.

“Part of the big run-up in the 1990s saw firms position their supply chains on both sides of the border. Foreign content of manufacturing products has gone way up, as high as 60% for some products like automotive, and there has been a sharp reduction in costs (as a result),” he said.

What this means is that the soaring loonie may mean less Canadian dollar revenue from exports, but it also means lower costs for imported inputs used by manufacturers and exporters.

As a result, said Hodgson, “we think Canada is going to come through this okay because of continued strong consumer demand within Canada. We’ve been able to maintain a lot of exports to the US because lots of businesses have a natural hedge, and as such are able to rebase their pricing,” he said.

Hodgson forecasted a slight recovery overall for exports in 2008, stressing however that even Canadian firms that are deeply integrated into the North American market need to worry about their international competitiveness.

Truck freight carriers, meanwhile, may not see the industry rebound until late 2008, or early into 2009, following a manufacturing recovery.

How can the trucking industry cope with exchange rate issues in the future and the resulting instability with regard to capacity?

“Some people have tried to be more generalist, and not specialize in one industry, then you don’t win or lose, some have tried to expand their service offerings to other offshoot jobs required along the way. That’s why you see a lot of trucking companies in logistics and providing custom border support,” said Taylor.

He said that while the Canadian dollar will likely remain high against the US dollar, at least for the next six to nine months, owner/operators would do well to prepare for the dollar swinging back the other way.

“People have to make sure they don’t lock themselves into something that’s going to cost them money later, whether it’s avoiding longer term contracts on services or on new equipment with payment flows based on exchange rates staying where they are. Because as soon as it drops 10%, they make the contract that looks good today look terrible tomorrow,” he said.

“It happened years ago today the other way,” added Taylor. “When (the Canadian dollar) was down at 60 cents people were charging the low rates and making all this money on exchange rates. Those are the people that ended up closing the
ir doors over the last 10 years as the exchange rate continued to climb. They were making a hidden 40 cents and then it disappeared and they were stuck.”

In the long term though, other factors will continue to play a role in how much effect an exchange rate fluctuation will have on the Canadian economy.

Hodgson said that fixing the border infrastructure is the obvious place to start.

He also recommended that Canada needs a Free Trade Agreement II which would do for services exports what the original Free Trade Agreement did for manufacturing, i.e., make it more integrated.

“Meanwhile, Canadian governments must seriously tackle the vast web of regulatory barriers that balkanize the Canadian economy, and reduce barriers to competition in specific sectors,” said Hodgson.

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