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Future uncertain?

The long-term outlook for transportation, and trucking in particular, is strong with growth forecasted to outpace that of the overall Canadian economy, according to Mike McCracken, CEO of Informetrica...

The long-term outlook for transportation, and trucking in particular, is strong with growth forecasted to outpace that of the overall Canadian economy, according to Mike McCracken, CEO of Informetrica Research.

While McCracken expects the total economy to show average growth of 2.7% to 2015, he believes transportation will grow 3.2% with trucking itself growing at a 3.8% clip.

McCracken’s forecast and analysis of the issues expected to have an impact on the Canadian economy and the transportation sector specifically were made at the Chartered Institute of Logistics and Transportation ‘s Outlook 2006 Conference, held recently in Ottawa. Motortruck and sister publication Canadian Transportation & Logistics were the media sponsors for the event, attended by shippers, carriers, industry analysts, lobbyists and a large contingent of government representatives.

McCracken’s forecast, although calling for considerably slowed growth for trucking compared to the 7.7% growth clip it enjoyed between 1993 and 2001 (in its initial post-deregulation days of the early 90s), still expects trucking to grow faster than rail but slower than air and marine freight. McCracken forecasts total freight growth till 2015 to be just over 40% relative to 2005 with rail seeing less than 30% growth and trucking a bit over 45%.

Such forecasts, however, must be considered as conditional on a certain set of assumptions, McCracken warned, adding that there are always uncertainties – energy pricing, wars, pandemics, for example.

“You need to consider 4 to 5 different scenarios and ask yourself do your plans and acquisition strategies work under all scenarios or do they only work under one scenario?” he advised.

The Canadian economy, and trucking in particular, is highly reliant on trade, mainly with the US, which absorbs about 85% of our exports. In fact, trade in goods as a share of GDP has ranged between 72% and 62% over the past five years, up considerably from the lower than 50% levels during the pre-free trade years in the 1980s. In comparison, for the US, trade in goods as a share of GDP is just at about 20% and hasn’t shown much variation in years. In other words, while the US, which can rely on a much larger domestic market, is “involved” in international trade, Canada, with its much smaller domestic market and declining population growth, is “committed”.

“What’s the difference between ‘involved’ and ‘committed’ you may ask? “If you had a breakfast of ham and eggs this morning, you could say the chicken was ‘involved’ but the pig was ‘committed’,”McCracken joked.

Committed as Canada is to international trade, it is particularly susceptible to long-term international issues such as growing or weakening protectionist policies, exchange rates and border closures. And trucking is one of the more trade reliant sectors with close to 40% of revenues linked to transborder hauls for carriers earning over $1 million annually. (Many carriers involved in transborder hauls have reported depressed volumes in the first quarter as Canadian manufacturers struggle with the rise of the Canadian dollar.)

The future trend of energy pricing is also certain to have a continuing impact on all transportation modes. The impact could be felt both directly through higher fuel costs and indirectly through a shrinking client base in the case of clients who can not handle the combination of rising energy costs in their manufacturing operations and fuel surcharges on their transportation budget.

“It can really come down to how healthy your customer is,” David Bradley, head of the Canadian Trucking Alliance and also a speaker at the Outlook Conference, pointed out. He added that the fuel price spikes of the last few months would have been enough to put many trucking companies out of business but most are weathering the storm this time around, largely thanks to fuel surcharges.

Oil prices in both nominal and real terms have risen considerably over the past five years and even surpassed the levels set back in the early 80s. Will substantial declines follow the spikes as they did in the 80s or are high oil prices the new normal? And will prices for other commodities, such as base and precious metals, move in lock step with oil pricing or set their own levels? The outcome will have a considerable impact on fuel and equipment costs.

Joseph Giglio, meanwhile, also argued that insufficient transportation growth can also hamper economic growth, pointing out that insufficient capacity leads to higher prices, congestion and inefficient supply chain practices. Higher costs and inefficiencies in transportation systems can also be caused by an insufficient transportation infrastructure, a long-term problem on both sides of the border. While Canada’s infrastructure funding gap (the accumulated annual deficit between the amount needed to properly maintain or replace existing infrastructure as well as support growth, and the money that is actually being spent) is estimated to be somewhere between $50 billion and $125 billion, Giglio said US transit and railways are currently suffering a US $1.9 trillion gap.

“You are not going to fill that gap with debt financing,” he said, adding that the “air is already leaking out” of the Highway Trust Fund in the US. He estimated the Fund has lost up to 1/3 of its purchasing power – there has been no movement to create additional revenues by raising fuel taxes at the state level and 30 states have not increased their fuel taxes in 30 years. There are also many states which no longer direct fuel taxes towards road work.

Giglio said private-public partnerships and toll roads are emerging as a new model but wondered if this approach is so good, why there aren’t more such deals being completed.

How these transactions fit into the overall government strategic plan for infrastructure may be a harder question to answer than it would seem, he said, because “strategic planning in Washington these days is likely done at the eleventh hour.”

Giglio said the most effective way to improve transportation efficiency is through technology and envisaged wider acceptance of current technologies that improve vehicle safety and traffic fluidity through improved communication structures between the road and the vehicle and from vehicle to vehicle.

Infrastructure woes, of course, have long been a major beef of Canadian motor carriers. But there’s a variety of other issues that can get in the way of future growth for trucking. These include:

1. Salaries and wages

Comprising up to 50% of operating costs in long-haul TL trucking, salary and wage costs were up 8% on average last year and 5-6% in previous years.

Drivers may receive a pay package that is above the national average but they have to work a lot more hours in comparison to earn it, with much time wasted sitting at the border or at customer pick up and delivery points.

“They want to be paid for all their time and why shouldn’t they,” Bradley said.

2. Driver shortage

For an industry where it’s commonly said that “he who has the drivers wins”, there are not many carriers that are winning on the recruitment front. Canadian trucking reached an ominous mark in 2004 when for the first time the number of drivers over age 55 exceeded those under 30, creating a future scenario of growing retirements outpacing new entrants to the industry to make the driver shortage even worse.

3. Border legislation

There has been no slowdown in the pace of new border legislation, Bradley said, adding that in many instances, US Customs and Border Protection doesn’t “have a clue about what they’re doing but have more money to spend than drunken sailors.”

He said the much-anticipated ACE program, although a step in the right direction, is something which both the industry and the border agency is not realistically yet ready for. He also said the FAST program has lost focus and is moving towards a “let’s check everyone and everything all of the time” approach.

“The only reason we are not hearing more complaints is because traffic at central Canadian crossings is down,” Bradley said. “But there’s not much we can do as long as the US government’s paranoia continues to persist.”

4. Environmental legislation

The diesel engines required to meet the US Environmental Protection Agency’s new emission standards in 2007 will be considerably lighter on the environment but cost about $7,500 more, according to Alasdair McNellan, general manager, Cummins Canada. And the next emissions reduction in 2010 will prove an even bigger hurdle for engine makers.

“2007 was not a big deal. 2010 is a very big deal. There are alternatives but they are coming along slowly,” McNellan said.

Bradley questioned why there are not government incentives for fleets that want to purchase more environmentally-friendly equipment.

“The more you invest in safety and the environment, the more tax you pay it seems. We are seeing a huge pre-buy binge,” Bradley said. (Our own Transportation Media Research surveys indicate 38% of for-hire fleets plan to pre-buy engines this year to get around the emissions deadline.

“If the environment is the real issue, the government should be finding ways to accelerate investment,” Bradley said.

Growth of Transportation

(Gross Domestic Product at Basic Prices — $1997 Mns)

Average Annual Rates of Growth

1983-01 1993-01 2002-05 2006-15 2015-25
Total 3.1 3.5 2.9 2.7 1.7
Transportation 2.9 4.0 2.7 3.2 1.8
Air 1.7 0.8 0.8 4.7 1.0
Rail 3.4 5.2 3.0 2.4 1.3
Marine 4.8 9.1 5.8 5.4 3.5
Truck 6.1 7.7 3.7 3.8 2.9

Editorial director Lou Smyrlis has 16 years of experience covering transportation and logistics issues. Winner of several writing awards, he has pioneered several research studies and is a frequent speaker at industry events.

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