After two years of thriving freight volumes and improving operating ratios, the nation's carriers head into 2001 on more uncertain terms. While it's by no means a doom and gloom situation, it's the "m...
November 1, 2000
Julia Kuzeljevich and Lou Smyrlis
After two years of thriving freight volumes and improving operating ratios, the nation’s carriers head into 2001 on more uncertain terms. While it’s by no means a doom and gloom situation, it’s the “maybes” and “could be’s” concerning key factors such as the performance of the domestic economy and the crossborder market as well the severity of increasing operational costs that are most disconcerting for the industry at year’s end.
In his outlook 2001 report, David Bradley, president of the Ontario Trucking Association and head of the Canadian Trucking Alliance summed up the unknowns: “…The economic indicators are somewhat confusing these days. Is there a general slowing underway? Will we see the proverbial soft landing in the U.S.? Are inventories building? Where will the price of fuel be by summer, by this time next year? What impact will this have on inflation? How will this impact upon freight rates? Only when these questions are answered will we get an accurate picture of how 2001 will turn out.”
Let’s begin with the economy. The consensus is that it will continue to grow in 2001 – just not at the rate we’ve grown accustomed to the last two years. Some analysts say the Canadian economy, currently on its longest growth spurt in history, is in for a slowdown as central banks try to ward off possible inflationary pressures. The Toronto Dominion Bank is forecasting slower growth for both exports and imports, a concern considering more than 40 per cent of for-hire carrier revenues come from crossborder freight hauls.
“If we could get three per cent growth for the next few years we’d have little to complain about,” says Peter Drake, vice president and deputy chief economist for the TD Bank Financial Group. Economic growth in Canada and the U.S. is pegged for about 3.5 per cent next year and 3.0 percent in 2002, down from nearly five per cent estimated for this year. And the transportation sector, which, like real estate, is one of the first indicators of slowdown or growth, can expect a little less healthy outlook for 2001. Carriers in British Columbia, however, can expect an upturn in their fortunes. Drake says that British Columbia, more exposed to the Asian markets, which are now coming out of a slump, will be one of the few provinces to experience growth in 2001 compared to 2000.
But economists differ on the severity of the inflation threat and how far banks will go to fight it. Drake says even though energy price spikes are still a major inflationary threat, these spikes have been more or less contained. “What’s remarkable is that the core inflation rates have not fed through to 1970’s levels of inflation. To some extent, this is because we have learned about energy efficiency, and the energy intensity of the U.S. economy has declined, with much of the growth coming from high-tech. So if you believe that energy will stay high, you have to ask how high would central banks have to raise interest rates to combat inflation?” says Drake. He adds that the interest rate is a logistical issue that can be controlled, and the lag time to an increase in rates can be long. “We think for now the tightening is over and that the central bank may even ease the (prime lending) rate,” he says. However, he warns that there is still a risk that high energy prices could spill over into other parts of the economy.
Other economic outlooks predict a totally different scenario. In a recently released report, the Bank of Montreal suggests interest rates would likely head higher despite some evidence of growth slowing south of the border. “We disagree with the consensus view that rate hikes are over. We think the U.S. Federal Reserve will have to raise short-term rates by a full percentage point over the next 12 to 18 months to keep inflation under control,” says Tim O’Neill, Bank of Montreal’s chief economist. The bank’s report, the International Economic Review, also rejects the idea that high oil prices will cool the economy enough to stall interest rates, because the world oil market is now heading into oversupply, which should start sending the price of a barrel of crude downwards (the Bank predicts a drop from the current U.S. $34 a barrel to U.S. $25 by next year).
Nevertheless, motor carriers, for whom high energy prices alone wreak havoc, are said to be in for some short term pain early next year as their costs increase just as freight volumes start to flatten, according to market researcher Martin Labbe. He spoke recently to fleet managers attending a seminar on trucking trends at the Ontario Trucking Association’s annual convention.
“Fuel, wages, insurance – those three items will cause carrier costs to increase by nine per cent or more next year. Sixty per cent of carrier operating costs will face increases in excess of 15 per cent next year,” Labbe said.
Fuel prices will take the biggest bite out of the bottom line but wages and insurance will also hit carriers hard. The need to retain drivers in a tight labor market will drive wage increases up another 10 per cent while insurance rates in Canada will rise seven per cent. (He predicted a 20 per cent increase in insurance rates for U.S. carriers over the next three years).
Meanwhile, says Labbe, the robust freight volumes the industry has been enjoying may dissipate as consumers try to cope with fuel expenses that he predicts will be 30-40 per cent higher than last year’s. Possible rising interest rates may also cool consumer confidence. Labbe pointed to the already slowing demand in the U.S. for automobiles, a key concern for Canadian carriers transporting domestically produced cars south of the border.
According to Statistics Canada’s monthly survey of the manufacturing sector, the trend in manufacturers’ shipments, which has been on the rise since the summer of 1998, is already showing signs of decelerating. It was up only 0.1 per cent in September, the last month for which results have been tabulated, compared to the 1.1 growth in shipments posted at the same time in 1999. The government agency’s quarterly Business Conditions Survey is also finding decreasing optimism among manufacturers about their production prospects. The October survey, which is based on replies from about 4,000 manufacturers, found that while manufacturers in general remain positive about their production prospects for the coming months their optimism is on the decline. Only 20 per cent of manufacturers polled for the October survey were expecting to increase production. In comparison, 39 per cent had plans to increase production last January, 33 per cent last April, and 25 per cent last July.
And so, as Motortruck was preparing this report on next year’s prospects for motor carriers across the country, expectations were by no means uniformly bleak, but some provinces were already seeing evidence of a slowdown.
In the Atlantic provinces, the feared decline in freight volumes is, according to Atlantic Provinces Trucking Association president Ralph Boyd, already an issue. “We’re seeing, for varying reasons, a reduction in requests for carriage,” he says. In Prince Edward Island, the health of a potato crop is under question, and this is reducing movement of produce to the eastern seaboard. “There’s an embargo placed on the product because of possible disease. We’re also seeing lumber sales falling off, as well as anything related (to the forest industries). It has been a wet fall, and some exports are not moving,” says Boyd.
He says that there seems to be a general quieting in the trucking business, which is somewhat unusual heading up to the Christmas season.
“There doesn’t seem to be that rush, perhaps indicating that the consumer is maybe becoming a little more conservative. Also, we’re operating on very thin margins. The increases we are seeing are not coming from a freight rate increase. They are just not a reality, because there is the perception of an oversupply of carriage,” he says.
The Atlantic provinces are usually hit with higher fuel costs than the rest of the country, as their fuel is priced according to rack pricing on the U.S. eastern seaboar
d. And the weather situation is another unpredictable factor making for low consumer confidence. The harsh winter contributed to last year’s short supply of home heating fuels. “We just woke up to five to six inches of snow (at press time), and we’re heading into weather unknowns. I can tell you that the issue of supply has been of concern to us because of undersupply. If we get a harsh northeast winter, the home heating market could send diesel up,” says Boyd.
In Quebec, says Claude Pigeon, executive vice president of the Quebec Trucking Association, they are also already starting to see a slight slowdown of goods exported. “But I emphasise that it has been slight. The transportation sector is a good first indicator of a slowdown in the economy,” he says.
And in Ontario Bradley expects Chrysler’s and Ford’s plans to run down their inventories to have trick-down effect on freight volumes.
For Labbe there’s no question the North American economy is heading into a downward turn. The question is how long will it last? He predicts the economy will revive by the middle of the second quarter.
“It’s not a point of doom and gloom. It’s a case of which freight do you accept,” says Labbe, urging carriers to rid themselves of unprofitable accounts.
The forecast of reduced freight volumes does not apply across the country. Western truckers remain upbeat about their business prospects for 2001.
“We don’t anticipate a reduction in freight volumes over the short term, although historically, after Christmas, they do drop,” says Jim Friesen, general manager of the Saskatchewan Trucking Association. “I don’t think we want to be seen as pessimistic about the future. We see a steady, continuing growth in Saskatchewan for the trucking industry, along with the historic peaks and troughs,” he says.
It’s the same story in neighboring Manitoba. “We haven’t seen any slowdowns of freight yet. In fact, we’re up to over 1000 trucks a day at the Emerson crossing into the U.S.,” says Bob Dolyniuk, general manager of the Manitoba Trucking Association. He says he doesn’t expect to see much of a slowdown as a good 75 per cent of Manitoba trade is exported to the U.S. In the western provinces, a strong north-south traffic flow is not expected to subside, especially as we are not heading into recession, just a growth cooldown.
“If I look at it on a provincial basis, it’s consumer-driven. As long as consumers are buying, we should be okay. Our buying patterns should not change. Unemployment in Manitoba is at a low,” says Dolyniuk.
And in British Columbia, where the economy would appear to be coming out of a slump, it’s not expected that shrinking freight volumes will become an issue. “We’re coming out of the doldrums of regulation, and high taxes, and we’re just beginning to experience growth approaching what the rest of Canada was doing (in the last few years). So I think if anything there will be more freight generated in B.C.,” says Paul Landry, CEO of the British Columbia Trucking Association. Landry says that although B.C.’s growth can partly be attributed to the Asian markets’ gradual recovery, many of the problems were B.C.-made.
“After years of depressed economic performance I think there’s pent-up demand. There are new demands for natural resources, and significant oil and gas contributions to growth. Small business and corporate taxes are coming down, and the cross-border market continues to grow at very healthy volumes,” he says.
Following is an examination of other key issues sure to impact the industry in 2001:
FUEL: Whether they are operating in a climate of steady, growing, or lower freight volumes, trucking companies across Canada are being encouraged by their associations to keep the implementation of surcharges on the front burner in order to offset losses.
“An essential key to survival during this period (of high fuel prices) will be the continued and sustained application of fuel surcharges, combined with long overdue adjustments in freight rates. The time has never been better for a significant change in the rate structure of the industry, which has been basically static since the late 1980s,” says Bradley. “There is no breathing space for most carriers to absorb further cost increases of any kind. And, the trucking industry has sucked just about every drop of efficiency and productivity it can out of its operations.” In British Columbia, although almost all of the BCTA’s members have implemented surcharges and are collecting something from shippers, Landry says the rates are not high enough.
“Our single most important issue is rising diesel prices. They are hurting a lot of our members,” says Landry adding that some of the forest industry carriers may fall by the wayside, as fuel prices remain high. “It’s not a landslide yet but a trickle that could become substantial. One shipper (in this industry) actually told a carrier to decrease rates,” he says. As a result, one of the BCTA’s main priorities for the coming year is to encourage shippers to understand the need for compensatory rates on the part of carriers.
Dolyniuk expects the fallout from high fuel prices in Manitoba to hit in the springtime, as more and more trucking companies can’t afford to stay in business. In Saskatchewan Friesen says that in general merchandising, the vast majority of his association members have been successful in recouping any losses due to higher fuel costs by implementing surcharges “but in gravel hauling and agriculture, they’ve been a little less successful.”
MERGERS: Dolyniuk says that more and more companies in Manitoba are forming strategic alliances to protect themselves against possible bad spells, and offset high fuel and maintenance costs. “Certainly, there have been some acquisitions. But there are also more companies who are perhaps focusing on geographic or commodity-based niches and partnerships,” he says.
In the Atlantic provinces, says Boyd, there have also been some major historic names, old family businesses, selling off, and also much partnering, which he says is wise business, if that’s what’s required. “We’ll also see our round of mergers in the coming months. But I’m also finding a lot more companies, and even modes, working together in strategic alliances. This is a time when we’re going to see the evolution of true partnerships between the modes. And trucking has (got the advantage of being) the only one that can direct deliver,” he says.
LABOR: Even if the economy slows down to three per cent growth or so, the job market is expected to remain tight, and this doesn’t bode well for trucking, which even in bad economic times is not a coveted industry for job seekers. Maple Leaf in Brandon, Man., for example, has just announced that they want to re-open their contract to renegotiate higher wages for workers, according to Dolyniuk, offering more competition for carriers that draw from the same labor pool.
“This will be the largest challenge our industry will be facing…The longer term trend in Canada is towards a shrinking of the labor force. We’ll need to become more aggressive in the recruitment area. But there is no silver bullet for this,” says Bradley. Meanwhile, some provinces are trying to meet the manpower challenge by looking to non-traditional sources for people to put behind the wheel.
“The STA has a driver training school, and we’re making ongoing efforts to recruit and retrain drivers. We’ve recognised that the lifestyle of the long haul trucker is not conducive to many people’s idea of a family life. So we’re trying to import qualified foreign truck drivers but the companies trying to do this are encountering limited or no cooperation at the provincial or federal level,” complains Friesen.
And in Quebec, it’s not so much competing industries as it is a persistent bad image of the trucking industry to start with that’s causing problems, according to Pigeon. “We have problems attracting candidates to the industry. The general public has a very bad perception of trucking,” he says. Contributing to this problem is a serious lack of police presence on Quebec roads, and officers dedicated to enforce
ment. “We have a problem of effecting control on the roads, especially for trucks, and there is a lack of will on truckers’ part to correct the (reputation) problem,” says Pigeon. He says this is one of the QTA’s major priorities for the coming year. “We want enforcement officers to do their job with the delinquents, and to start heavily enforcing Bill 430, (passed in 1998), which will level the playing field and sanction those who don’t comply.” There is also a problem of low morale among the truckers who were on a month-long illegal strike at the Port of Montreal and the Montreal yards of Canadian National and Canadian Pacific.
About 900 independent truckers, seeking better pay and working conditions through a common contract with the companies they work for, were angry at their employers’ refusal to recognise the Confederation of National Trade Unions as their labor federation. Although 66 per cent of those fighting to unionise agreed to a deal to end the illegal strike, Pigeon says that unresolved issues such as payment for loading and waiting times have yet to be resolved. But he says that in the near future, the QTA hopes to get more labor issues out on the table to be resolved before they come to a crisis point.
“The Ministry of Transport introduced the idea of a forum which will start at the beginning of 2001, for the trucking industry, including associations, owner-operators and government to convene on issues,” says Pigeon.