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Issues Roundtable

MT: There is certainly a whole list of issues that can be discussed whenever one brings shippers and carriers together but I would like to start by looking at your individual situations. For your orga...

MT:There is certainly a whole list of issues that can be discussed whenever one brings shippers and carriers together but I would like to start by looking at your individual situations. For your organization what do you see as the top issue going into 2008?

Johnston: Very definitely the weakening of the US dollar and the strengthening of our dollar has decimated manufacturing and shipping southbound so there is a huge imbalance of demand relative to capacity.

Ballantyne: The members of the Canadian Industrial Transportation Association are pretty varied. Some of them are thriving with a high Canadian dollar and some of them are suffering from it. The capacity-infrastructure issue is something we are all going to have to face up to over the next few years, even if there has been some softening of the trucking market over the past few months.

DiTecco: We are a regional carrier, hauling in Ontario and Quebec so the Canadian dollar is an issue. I think the concern is that our customers and our customers’ customers are suffering, therefore demand is down.

Smith: We are also more regional in nature. From the warehousing operations we have, the dollar is probably beneficial to us but where the dollar impacts us even without crossing the border is that we are seeing some traditional cross border carriers pushing into other areas of the market place. What’s also on our radar for next year is the health of some of the shippers and being a little more careful and cautious about receivables and the quality of the revenue.

Jensen: Certainly capacity is an issue which is driven by the Canadian dollar and the US dollar exchange rate and the fluctuations in the currencies. The shortage of equipment in the central states coming back into Canada because of the lack of exports of dry goods going down is also an issue. We’re also experiencing this in Alberta where we’ve got so much volume going in to northern Alberta and next to nothing coming out. So capacity I see as the issue having the greatest impact going into 2008.

Munro: We are a domestic carrier so we haven’t been affected by the Canada-US dollar and balance issues but my concern is the economy for 2008. As just pointed out, the other issue is with Alberta and the cost push and lack of labor out there. A rising tide lifts all ships and we have benefitted from the boost in the economy and now the economy seems to be headed the other way so it could be a tough couple of years ahead. With a slower economy there will be more competition and more excess capacity.

MT:The American Trucking Associations chief economist Bob Costello is actually thinking there is a 40% chance of recession in the US next year. I’ve heard other economists who were even less optimistic about next year. But I would like to look at the positive end of things. We know the North American economy is slowing down, when do you think things will pick back up and what signals will you be looking for?

Jensen: I agree that the US economy is not going to grow in 2008; it’s going to be pretty stagnant. But we can’t be trying to export products from Canada to the US when our dollar is at a value higher than theirs, so hopefully there will be a correction and hopefully sooner rather than later.

Johnston: The US and Canadian dollars need to stabilize. I think the Canadian dollar right now is over its strength. I don’t think that any investor is confident in investing in the US infrastructure so they come to Canada to invest and it bolsters our dollar. There is also a US election coming up in November of 2008 and I think the impact of that will take time to work its way through. And there is George Bush announcing the seeking out of alternative fuel sources, which has impacted the canola and corn sector which cascades over into the livestock sector and you get this ripple effect. Some of these things that have taken place all at the same time need to work their way out over the next 18 to 24 months.

Ballantyne: I would echo those comments. Until the US election is over I think there will be some uncertainty. Also the housing situation in the US and the impact it has had on housing in the US is a factor and will affect Canadian lumber to some extent. And this whole business about the volatility of fuel is another issue that has now been around for a while but I don’t know when that’s likely to settle down. As long as that volatility is there that will add to uncertainty. I would think we are looking at a period of uncertainty of at least a year.

DiTecco: I’m going to choose to believe the economist I heard from the Royal Bank at the Toronto Trucking Association’s economic overview. He’s suggesting that we are reading a lot of headlines. Economists like to look at the fundamentals and he says the fundamentals of the US economy are not that bad. If they have a recession it’s going to be a technical recession – two quarters and that will be the end of it. Certainly as far as Ontario is concerned, when the Japanese auto plants come on stream in 2009 they will boost the manufacturing sector. He believes the dollar, based on fundamentals, is overpriced and we should expect it back to around 95 cents by around June or end of 2008.

Smith: I think there is a bit of a sky is falling mentality right now and in some cases the weakening of the US dollar will certainly help precipitate some of the manufacturing industry within the US in terms of exports. We are certainly seeing that with more opportunities of US companies finding the Canadian marketplace attractive. I think the Canadian economy, although imbalanced, still has significant strength. My feeling is that if there is a downturn it would be a relatively short term one.

MT:So the message there is that although the ceiling may be a little lower than what we’ve become accustomed to the last few years, the sky is not falling. Let’s talk about the west for a minute. What’s your view of the strength of the Western economy?

Johnston: I think the West is suffering somewhat of a dichotomy between the energy sector and the pulp and paper sector. The pulp and paper sector in northwestern Ontario, northern Saskatchewan and Alberta and British Columbia has been virtually decimated by the drop of the US dollar. Any exports currently taking place have moved to the cheapest mode, which is boxcar , if the mill is still open at all. The energy sector is so strong that they are basically absorbing all of the available labor and resources in the marketplace. Alberta is a huge consumer market right now. I know retail outlets that surpassed their annual budget by the month of May. There is little manufacturing in Alberta and everything that comes out of Alberta comes out in a pipe. So there is a huge imbalance and it’s having a ripple effect on headhaul rates and capacity out of the US getting to Alberta. If you’re going into Alberta you are likely going to have to reposition yourself all the way back to the US Midwest and unless you can bolster that and see the return on the headhaul you can’t afford to do it.

Smith: You have to consider the pace of the change. Hopefully there will be a settling. If people can get their head around the Canadian dollar being valued a (US) $1.10, then a 95-cent dollar won’t look as bad.

MT:You touched on the subject of rates and I want to explore that issue next. Larry you mentioned the fact there is not as much freight moving southbound and that is obviously placing some pressure on rates. Our research is showing that the upward pressure on truck rates we experienced in recent years has definitely dissipated. Is there a smart way for both carriers and shippers to handle the current situation?

Munro: That’s a difficult question
to answer because a lot of it is market driven. I’m a little bit pessimistic about the economy. I think it would be nice if carriers and shippers could work cooperatively to deal with improving efficiencies rather than to drive down rates to below cost, which is what happens typically in such situations. When times get tough it seems it’s every man for himself and shippers look to wherever they can get rate relief because they are under cost pressure themselves within their own organization. So I don’t know that there is an easy answer to this. From a carrier perspective, it’s keeping our commitments to a minimum during the tough times and not getting tied in to imbalances trying to manage around those rather than reducing rates to the point where it’s unprofitable.

MT: The conversation the last few years has been around the shipper-carrier relationship becoming more integrated and sophisticated and therefore shippers relying on their carriers a lot more than in the past to provide a wide suite of quality services and therefore being careful not to base everything on price. Doug brings up a good point. When things get tight, does all that go out the window or have shipper-carrier relationships come to a point where both sides are willing to look at the issue in a more intelligent manner?

DiTecco: The carriers that are sitting at this table are not the low-price suppliers. We provide service and each company here is known in its market place for providing service and quality. We aren’t competing down at the bottom of the market place. Our customers are all well known in Canada and we’ve had them as customers for many years. They appreciate and they demand great service and together we have been able to provide that. So are you going to get a big rate increase? No, but I think with our customers when we negotiate we look out for each other because if we are not in business they don’t have the service. And if they are not competitive then we won’t have their business. Depending on where you are positioned as a carrier and the customers you deal with, you will be able to come to something that is tolerable. It also depends on the length of contract you will be trying to negotiate.

MT:Are we back to looking at one-year contracts or is there still willingness to work out longer deals? Larry, Ryder buys a lot of transportation, how does that look on your end?

Jensen: Everything we do we try to do it as a long-term partnership. Every new customer implementation where we are doing carrier management is a two-year agreement. The intention is that the rates go in place and we hold them for the two-year period. There is a 60-day escape clause. In the event that the world changes, for example with exchange rates, the carrier has the opportunity to communicate that to us so that we can roll up our sleeves and together we can find a solution. If we can, we take the increase and roll it on to the balance of the two years. If we can’t , because we don’t think it’s fair, then we part ways and go back to the marketplace. We need to work in long-term relationships with our carriers, we’ve got to work with the best-in-class providers, and to help them balance their imbalances in lanes.

Johnston: Our traffic department has never been busier responding to RFPs. Contracts in a lot of cases don’t seem to be worth the paper they are written on. No sooner do you sign it than you find there is rate action taking place and you are back revisiting the customer. Probably in 85% of the RFPs that we’ve responded to the incumbent carrier that had the business resecures the business but what the shipper has been able to do is rationalize the rates to a market level. From a carrier’s standpoint I don’t know why anyone would sign an agreement based on the volatility of currency and crude. US receivables when you cash them in at a Canadian bank aren’t worth what they were worth three months ago. I don’t know why you would go beyond one year and in a lot of cases a lot of the rates we are putting in place are for three or six months. Speaking back to the Alberta situation, if you don’t reposition back to Wisconsin then you feel that any revenue replacing empty miles is better revenue than nothing. We are seeing dry van rates out of Alberta and Saskatchewan at the 85-cent level. But when a carrier’s full truckload direct expense without fuel is about $1.10-$1.14, one cannot sustain moving a fleet at 85 cents or 95 cents in Alberta. Out of principle many carriers choose not to. Before succumbing to those rate levels you might as well run empty and force the market to where it needs to be to sustain the supply chain that everybody is going to rely on unless they are going to turn out the lights and move out of Alberta.

MT:Yanke is one of the carriers that offers several modal options. Do you see this as an opportunity to move more freight intermodally because you can do it at a lower rate?

Johnston: What we see is a complete shift from a modal standpoint. In North America the Baby Boomers are at the peak of their earning potential. At the same time we are very materialistic and we’ve chosen to unquestionably give our kids everything that they have ever dreamed of. The big box stores see that opportunity and in order to capitalize on it seek out the cheapest cost of labor and lowest-cost of landed product and, unfortunately, Canadians in order to buy that are willing to do so at the expense of their neighbors’ employment. We see more and more goods coming from the Pacific Rim. The cost competitiveness as opposed to buying those goods from Pennsylvania or Ohio is that the transportation segment has to be at a very low cost. We see our intermodal business growing, we see pick and pack distribution and fulfillment in Vancouver growing and there is no doubt much of the manufacturing in southern Ontario and in the US has either moved to Mexico or to China. The Chinese one-child family law is going to create some problems within about 10 years, however, and I think you will see labor and manufacturing shift from China to India.

MT:Bob, some of the largest shippers in Canada are part of your organization. I know that from 2003 to about 2006 they were concerned about where rates were going. I’m assuming they are not as concerned right now but long term where do you think rates will be going?

Ballantyne: You’re right, they have been concerned but as everybody noted things have softened and they don’t see the same price pressures over the next 12 months or so. But, just going back to the whole issue of shipper-carrier relationships, what we try to get across to our members is that you don’t do yourself any favors if your suppliers are losing money. We try to encourage them to take a longer term view in dealing with carriers in all modes. I suspect one of the problems logistics people face is that senior management in most companies that buy transportation services haven’t had that logistics experience as they have moved up the management chain and they don’t really quite understand the implications of putting too much price pressure on their carriers. The smart ones, as you mentioned, understand that it isn’t just price it’s price and service. So if you are a shipper, the people you are selling to are looking for reliability of delivery. There has been a lot of pressure on reliability of service. Smart shippers are going to understand that they want their carriers to remain viable so they can continue to have that reliability.

MT:Bob makes an interesting point about shippers perhaps not always understanding the pressure they are placing on their carriers by pushing for low rates. Can we make the argument the other way as well: That some carriers by not understanding exactly how different rate levels affect their own profitability, perhaps because they are not tracking it well enough, are putting pressure not only on themselves by l
ow-balling rates but also on the industry overall?

Smith: I think trucking by nature always has had fairly low barriers to entry and there have been commodity providers that don’t know the implications of their pricing and that creates a buyer beware situation. I think the purchasing model sometimes is difficult because it often is not an enterprise function that considers the whole business. You have someone in a corner office that is judged by how low they can get the rates and often at risk to the business. Just a few years ago there were shippers talking about securing quality capacity. You see a little bit of that also when there is a downturn and there is uncertainty in the marketplace about which carriers will make it. Smart buyers are wanting to make sure they maintain a quality relationship. If you are going to get delisted over saving $10 on a load you may want to think twice about that.

MT:Capacity right now, obviously, isn’t the concern it was a few years ago but how far away are we from capacity becoming a problem once again? I’ve read about US carriers already laying off owner/operators. When the economy picks back up how quickly are they going to be able to bring people back in? Are we setting ourselves up for yet another capacity crunch like we saw by the end of 2003?

Jensen: It is a concern to me as a buyer of transportation and I do have capacity problems today on certain lanes and I see it getting worse. We have more and more drivers at the 55 to 60 year-old range retiring in Canada as well as in the US. But I have also seen some pretty creative and innovative Canadian carriers who work with US domestic carriers to reposition loads. The US carrier may not be interested in running into Canada but may be interested in running some of his imbalance loads up closer to the border and work with the Canadian carrier to bring it into Canada. So they are taking advantage of the downturn of the economy in the US and matching it up with northbound needs for a win-win situation.

Johnston: It’s somewhat like poking a bear with a stick. For a domestic US carrier looking at the limitations of ACE, FAST and trying to get their operators approved to come into Canada, we now have a strong dollar relative to them sourcing traffic in Canada in Canadian dollars and seeing the upside at a US bank. The other is the proximity of the major centres of Canada; they are all basically within one hour of the US border. So when we talk about capacity and the lack of southbound freight availability, a Canadian carrier can hardly run 50% empty miles to go source US northbound traffic. But the US carrier coming into Toronto, Calgary, Vancouver has the ability to basically run one hour and then participate in domestic US transportation. Whilst we’ve tried to bolster the US northbound rates once you have to get beyond the $1.70 a mile, all of a sudden the large US TL carrier says how much did you say? And they start to think we can go to Canada for that and they get a 10-cent upswing on the Canadian dollar they didn’t have six months ago. My concern is that the US carriers have an unfair advantage based on the proximity of domestic US business being only one hour from any major centre in Canada.

NEXT ISSUE: See your next issue of Motortruck Fleet Executive for the conclusion of our Issues Roundtable. See also the Web TV section on for video coverage of the roundtable.

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