Fall is the time of year for number crunching and forecasting. Here's something to chew on: Carriers may finally be able to work a decent rate increase into their forecasts for the new year and have a...
Fall is the time of year for number crunching and forecasting. Here’s something to chew on: Carriers may finally be able to work a decent rate increase into their forecasts for the new year and have a reasonable hope of actually seeing it stick.
Why the optimism? Because the only thing likely to make shippers willing to go along with higher freight rates started taking place this summer. I’ve been speaking with many buyers of transportation services of late – shippers, freight forwarders, and non-asset based third- party logistics providers. They’ve all said the same thing: In May, June and July, for the first time in recent memory, there was actually a shortage of capacity in the industry. Shippers were having a difficult time moving their products and, let’s face it, that’s the only real reason most shippers would consider accepting a higher freight rate after a decade of declining rates. August was pretty well normal but if September and October show a continuation of this trend, then motor carriers may have the upper hand in rate negotiations.
How did an industry that has grown tremendously since deregulation (too many trucks chasing too little freight is a description that’s not too far off) suddenly find itself in a position where demand for its services is outpacing supply?
A number of market factors, some not widely known, are at play. To start, the trucking industry after a decade of growth, shrunk rather dramatically following the diesel price hikes of 1999 and 2000. Small for-hire carriers (those earning less than $1M in annual revenues) make up almost 68% of the Canadian market but they were pummelled by the sharp increase in diesel prices and the ensuing slowdown of freight volumes. By 2000, in the midst of the worst of the diesel price hikes, their numbers thinned by a remarkable 25% — from 8,156 firms to 6,000. Small carriers in the Maritimes, Quebec and Ontario were particularly hard hit. Ontario’s share of the total Canadian small carrier population declined by 8% in one year, according to Statistics Canada records. Owner-operators were also hard hit. The number of owner-operators working in the industry dropped from more than 41,000 to less than 37,200, a 10% drop. That’s the smallest number of owner-operators our industry has seen since 1991.
The failure of so many players points to several challenges all carriers – big and small – -have to contend with. We all know about rising equipment costs, human resource costs, training costs and insurance costs. But until the diesel price hikes and slowdown in the economy motor carriers had been able to more or less absorb those costs by increasing their revenues. Growth in trucking business has far outpaced all other transportation modes. In fact, revenues for the industry have more than doubled from the past decade. But carriers have had to sweat every additional dollar. From 1996 to 2000, during the largest economic expansion in Canada’s history, carriers were able to increase their rates a mere 1.3%, Transport Canada records indicate. And that figure is actually misleading. Looked at in real terms overall trucking prices declined by 0.5% since 1996.
Also hurting the industry is the fact that many of the gains in productivity made in earlier years have been exhausted. In total, trucking productivity increased just 1.6% from 1996 to 2000. In comparison, rail increased its total efficiency by 4.4% in that time span.
Add to that the fact that three industries key to trucking – manufacturing, wholesale and retail – reported increases of up to 145% in bankruptcy liablities last year, leaving many carriers holding the bag, and is the end result of a severe reduction in the players serving the market any surprise?
There is a positive in this, however. A consolidation of the market should drive out the weakest players, who tend to low ball pricing any way, and the shortage in capacity may lead carriers to realize their first significant rate increase in years.