MT: One of the main victims of the current recession appears to be the owner/operator. We are down to 35,000 owner/operators in Canada, perhaps less. Is it your opinion that it is going to be difficul...
MT: One of the main victims of the current recession appears to be the owner/operator. We are down to 35,000 owner/operators in Canada, perhaps less. Is it your opinion that it is going to be difficult to attract them back to the industry?
Gagnon: I believe so. They will be doing other things. They’ve maybe lost their truck. A lot of them are losing their truck because they can’t get enough work and they are not going to find it easy to get credit. That easiness of credit is gone.
MT: What does that mean for Canadian trucking companies? Owner/operators are so prevalent in the Canadian marketplace. There was a study done about a decade ago comparing best practices among leading Canadian fleets and their US counterparts. One of the major differences the study found was the much greater reliance of Canadian fleets on owner/operators. Basically, Canadian fleets were found to be three times more likely than their US counterparts to employ owner/operators. Being smaller, Canadian fleets find it easier to grow by using owner/operators in new lanes. But if owner/operators are leaving the market and not coming back, how does that affect the future growth plans of Canadian carriers?
Munro: I believe that ultimately it’s all supply and demand based. I believe they will come back at some point, although they will be coming back at a lot higher rates than they’ve been used to operating at in the past. We are going to see pressure on owner/ operator costs. Even though we are in a downturn, if you don’t pay people what they need to survive, they are going to leave. Ultimately, more capacity will exit the market, quite a bit as a result of bankruptcies, consolidation and mergers. But the key thing is to keep the good owner/operators going during these difficult times and if we don’t, as you pointed out Lou, they will exit the market and we will be faced with far higher costs in the long run. We know what their costs are and we need to be fair with them. We can’t just be pushing issues over to them or we will be back to things that are not as efficient. But sometimes there just isn’t enough work. So it’s sometimes better to cut some of them back and just keep the remaining ones operating and busy rather than have a situation where everyone is cut back and suffering and can’t make a dollar at what they do.
MT: Traditionally, during a recovery, we see the medium-sized and small fleets growing, from 10-truck to 30-truck operations, from 50-truck to 70-truck operations, for example. According to the comments made earlier, this panel believes that credit is going to remain tight and owner/operators are going to be harder to come by. Does that then create a situation that is ripe for consolidation activity?
Tanguay: I think we will see more consolidation, but the ones that have made it through this tough time are going to look at their succession plans and their long-term strategies. We are not seeing a lot of mergers and acquisitions right now, but I compare it to retirement investments -whatever we had put away, everybody took at least a 20% hit and it happened so fast. The same thing is happening with these small private companies. Things were going great and then the recession hit and balance sheets were being weakened and the trucks were not worth what they once were. A lot of these small carriers are family operations, they’re lifestyle operations, and they have a lot of blood, sweat and tears, maybe one or two generations in. They have a perception of what they are worth and a buyer comes in and explains to them mathematically what he thinks the company is worth and the two numbers don’t jive. I think some of these operators are going to spend the next couple of years rebuilding their companies, rebuilding their balance sheets with the intent to sell because they don’t want to go through this once again. On the upturn, you will see more mergers and acquisitions.
MT: If we look at Class 8 truck sales in Canada, at the height of the market we sold about 39,000 trucks. Last year, we were down to 24,500. I’ve spoken to a few manufacturers and they believe Canadian Class 8 truck sales this year will be as low as 16,000. We have not seen those kinds of figures since the early ’90s, when Mexico, one year, actually sold more Class 8 trucks than Canada did. One of the issues about buying new iron right now is do you need it, considering the capacity situation? Another issue is price, with the cost of new engines adding $10,000 or so to the price and the exchange rate adding more on top. Is anybody prebuying this year? And, considering that OEMs may be Hungry To Make A Deal, Is It A Wise Time To Buy?
Gagnon: We are not planning to buy new tractors in 2010. We do have tractors coming due in 2010 but we have already decided we are going to keep those tractors for an extra one or two years. Five years ago, the OEM would take the tractor back and give us a new truck. This time, it’s not going to happen; you will be responsible for selling the trucks you have if you want new ones and that’s a stumbling block for what we want to do. It’s the same with trailers. I would like to buy new trailers, but if I can not sell the trailers I have, I cannot buy new ones. If we have them in our books valued at $10,000, we will get offers for something like $4,000. You might as well fix them up and keep them. We won’t be buying trailers either until the situation improves and we don’t lose as much in the transaction.
Tanguay: Our strategy is very similar. We’ve always run a very quality-based safety program and we are really big on preventive maintenance. So in a time like this, preventive maintenance really pays off. We’ve changed our preventive maintenance model to what the OEMs suggest, we keep the oil change intervals short and keep the truck regularly over the pits so there is always a mechanic viewing the trucks. That has allowed us to run the trucks longer than normal. Plus since we are not hitting the miles we used to, it is allowing the life of the truck to extend beyond a year or more. I believe carriers agree the pre-buy of 2007 did contribute to the capacity glut in the marketplace and they are being very cautious to ensure that does not happen again.
Munro: I look at it from the perspective that if we have older trucks that need to be replaced, where the maintenance is going to start getting out of whack, then this is the time to replace them. But I think this economic situation is a long way from ending and I’m not inclined to be buying anything at the moment unless it’s essential.
MT: One of the most interesting trends we’ve found in our research is the changes in growth between transborder and domestic freight. Of course, we all know that transborder freight has been hurt the last couple of years but, in fact, we have been following a trend since 2002 which has shown domestic freight growing three times faster than transborder freight. Serge, I know you are focusing more of your business on domestic freight, do you see this trend continuing after the economic recovery?
Gagnon: Our domestic business right now has not been impacted by the recession, I must say. With our openings in Vancouver and Calgary, our business is 50% domestic and going the way that domestic will be an in creasingly bigger part of our business. We have basically retail clients in our domestic business and business is still fairly good. While some clients business is down 1% or 2%, with some clients it’s up. If you are hauling basic foods, for example, business is growing for bulk stores.
MT: Doug, what does this mean to you from a competitive standpoint? Are we going to see more carriers trying to move into national domestic and regional lanes as their other business starts to hurt? Are we going to see more regional players grow into super-regionals, like Pitt-Ohio in the US, covering a larger part of the domestic market?
Munro: Yes, I think it will be exactly like you said. There will be a general changeover to more regional types of carriers. Business gravitates to where successful business is, so to the extent that the Canadian domestic market is growing, or at least shrinking less than the rest, there is that movement. And, as you say, as regional players get into the market, they will try to bolster the lanes they are servicing or add on to them to sell their clients into more services.
Tanguay: As more 3PLs become players in the purchasing department of the shipper, I think we are going to be very challenged to use the relationship to really sit down across the desk and share costs. We do that now: we show customers what it costs to serve a lane. When you are dealing directly one-on-one with a shipper, they understand it, they want to see you healthy, they want the long-term relationship. But once the 3PL gets in between, it’s going to be harder to have those conversations. The 3PL model is not what we have built our company on over the past 60 years. We did business with one shipper for three generations on a handshake, not one piece of paper was signed. I think we are going to be really challenged over the next few years. There are almost going to be two lists of customers. I know which customers are going to get our capacity and which ones are not going to get our capacity. I do believe capacity will be tight. When supply and demand is going to be in our favour there is going to be aggressive action. I think there is going to be the attitude that the industry has been kicked pretty hard and we are bruised and cut pretty bad and I know quite a few carriers are looking forward to the recovery.
MT: We all measure our success in different ways and that may have changed the last couple of years. Looking ahead to whenever the recovery comes, how will you be measuring your success?
Gagnon: Our success is the bottom line. That’s what I look at every week, every day. The bottom line will help us look after our people and the equipment we will need to purchase. Everyone is delaying the inevitable -we need new equipment. We run eight P&Ls every day in our company.
Munro: It really comes down to trying to attain and maintain profitable growth that is steady, not too extreme up or down in volume. It’s hard to make money when you have extremes in volume. I want profitable growth and low costs, not getting into expenditures beyond our ability to pay. We try to deal with customers that have invested in that type of philosophy. We have to be able to educate our customers on why rates are the way they are because I think part of the problem when I look at rates is that customers look at them just like numbers on a page. They just see a $1,000 rate and a $900 rate and just go to the $900 rate. They have to be educated to understand why these rates are the way they are and it involves a higher relationship with that. When they understand that, they will be less likely to jump based on price. It’s not all about dollars; it’s about service. We are not a commodity and we have to educate them about that so they understand what value we have to offer and what they are getting for their money. That way when we get into the price pressure situations we are able to stay firm on our pricing. If we can’t do that, it undermines the whole basis of why we are in business.
MT: Julie, perhaps one of the things that trucking companies are guilty of is basing too much of their perception of success on the number of trucks they own. Are those days gone for good?
Tanguay: I would like to say yes, but then that means that the word ‘greed’ has to leave the dictionary and I just don’t know that mankind is built to survive without greed. I would like to say that we are going to be smarter and wiser and that possibly we won’t get ourselves in this much trouble again as an industry. But I think that we are very resilient and we will forget some of these tough lessons in a few years and the temptation will be to grow the fleets again. I know in our company that will not be our goal. Success to me will be when I see our people smiling again. Because when you see your people smiling, you know they are getting a good paycheque and when they are getting a good paycheque it means they are getting good miles, which means we are treating our customers right and they want us to haul for them. When the morale and your people are being looked after, then you know your customers are being looked after and the rest just falls into place.
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