Freight rates, driven by myriad determining factors including capacity limitations and driver shortages, increased fuel costs and insurance, as well as border crossing complications and road infrastructure woes, will continue to climb upwards in the coming year.

Despite a number or unknown variables, i.e., the performance of the economy in general, currency exchange rates and the possibility of interest rates beginning to spiral, most industry analysts predict growth in the trucking sector in 2006.

“I don’t think there is going to be any erosion. Everybody wants to ship by the highway and trucks aren’t going to go away,” says Allan N. Robison, CEO of Reimer Express Lines.

“Years ago shippers could change carriers every day,” he says. “To maintain their present capacity shippers need to work with the carriers so both of them can make a dollar and get the product to market.”

Capacity concerns have led to a greater understanding among shippers about the importance of trucking in the supply chain. “We’re probably going to see bigger rate increases because there’s not a lot of leverage on our side,” says Ginnie Venslovaitis, transportation manager for Unilever Canada. “Carriers need to invest to keep drivers, the government is imposing environmental constraints on them, and they’re under a lot of pressure.”

Ken Roy, branch manager of ABF’s Toronto terminal, thinks that freight rates will rise 4.5%-6% next year. “In the past few years, following Yellow Freight’s example, carriers started to back up their increases. Increases that were due to be taken in January would be taken in October the previous year, and then in August the next year, and then June. Over the course of a few years you back up a full year,” he says. “We took our last increase in May of this year and we’ll probably take another one in April or May next year.”

According to Robert Ballantyne, president of the Canadian Industrial Transportation Association, most shippers understand the need for increased rates. “Any time freight rates increase shippers feel pain,” he says. “But there is some realization that carrier costs have been going up as well.

“However, carriers have imposed fuel and security surcharges and these are looked at suspiciously,” he says. “Hopefully when fuel costs stabilize – whenever that will be – the surcharge will be rolled into the freight rates.”

Fuel surcharges were first applied six years ago as a temporary measure, but Larry Jensen, manager of Canadian carrier procurement for Ryder Logistics, believes they may be permanent. “At Ryder and with other carriers, fuel surcharges are handled on a weekly emergency accessorial schedule. Emergency fuel surcharges are here to stay, and ensure that carriers are compensated fairly for uncontrollable expenses.”

Fuel surcharge rates, calculated weekly, may vary significantly. For example, shipments going to the US via ABF are surcharged at a rate set every Wednesday according to the national fuel index supplied by the US government. This week (Nov. 14) ABF’s customers paid an extra 17.4 % on every shipment, while last week they were paying 22.8%.

Unilever adjusts its surcharge rate monthly. Like many other shippers, Venslovaitis uses the Freight Carrier Association tables as a guideline to set the rate. “Some months you win and some you lose.” Even so, she adds, “there are different rates for different carriers for different purposes. You have to haggle and negotiate.”

Daniel Gabbard, director of logistics for Maple Leaf Foods, purchases $200 million of transportation services a year and 75% of that goes to outside carriers. His office carefully scrutinizes fuel surcharges.

“We monitor it fairly aggressively. We have tolerances that we require our carries to stay within and if they go above we arrange a meeting to find out why,” he says. “We absolutely believe there’s a reason for surcharges. But if left unchecked there’s an opportunity of enhancing the margin by some truckers.”

Scott Johnston, chief operating officer and president of Yanke Group, takes another perspective. “Fuel prices will never return to pre-September 2000 levels,” he says. “It will probably take long term stability to establish a new benchmark. Shippers are reluctant at this point of time to build it into their rates.”

Moreover Yanke charges ancillary fees for other expenses incurred on a customer’s behalf. “We charge a fee for every border crossing, a fee if it takes longer than one hour, a clearance fee on every international shipment, and an inspection fee if Customs wants to inspect the goods,” says Johnston.

“Assessorial management is something that carriers have spent a great deal of time developing the systems to monitor and capture the detentions and expenses,” he says. “Just about everybody has built it into their remunerations.”

And Johnston is straightforward about recouping these fees. “If you don’t accept our arguments relative to increases, i.e. insurance costs, wage increases for our labor force, fuel pricing, etc. and if you don’t pay 100% of surcharge, we move our capacity somewhere else.”

So anxious are some shippers to assure capacity that Johnston recently had a customer tear up a three-year contract in the third year and ask for a new five-year deal – at an increase of 10%! “Some shippers are recognizing the limitations of capacity,” he adds.

Vitran Express Canada is looking at ways to recover detention time spent waiting at a customer’s dock. “Just increasing the rate is not enough,” says president of Canadian operations, Tony Trichilo. “We’re planning on introducing an appointment fee. What happens is a lot of receivers can’t accept the freight as fast as it’s shipped forcing carriers to hold onto the shipments.

“It might be only two skids but that might include cross-docking and putting them on a different trailer. We’re in the LTL business not warehousing. It’s a luxury to tie up an extra trailer,’ he says. “The fee will be based on the size of the shipment but it will include my cost for double-handling the shipment.”

Paul Levelton of KPMG’s Vancouver office suggests some other factors contributing to the upward momentum of freight rates. “In Vancouver and in the province of BC, we’ve had two decades of not investing in road infrastructure. It’s a problem that’s just being addressed in the last couple of years. The last major bridge was the Golden Ears bridge which was built in 1985,” he says.

Levelton says traffic congestion is causing concern in the trucking community. “It contributes to slower delivery times and restricts the times of day truckers can move around certain areas.”

As well, a rise in interest rates my affect the trucking sector, although they are not expected to reach double figures. “Depending on where interest rates are going, a hike could affect a company’s ability to buy new equipment,” says Levelton.

US hours of service regulations are another variable that will most certainly impact negatively on a carrier’s bottom line. The problem is that teams are now required to sit one driver behind the wheel for 10 hours causing undue fatigue for drivers used to switching every 5 hours. “Some of my drivers have told me they don’t want to run the States because of this,” says Yanke’s Johnston.

Carriers are also nervous about new engines set to be introduced in 2007. According to Johnston, the new motors will be heavier, more expensive and less fuel-efficient. He believes some companies will be pre-buying trucks in 2006. “Some carriers who’ve seen this coming will have been able to shorten up their amortization schedules,” he says. “But at the same time you don’t want to buy equipment that you can’t staff.”

Consolidation is another industry trend that is shaping the future of road transport. While income trusts like Contrans and Transforce continue to buy up smaller operations, privately held companies are also looking to expand. Last year Yanke acquired Aero Delivery Ltd., a food warehousing distributor, and started Cool Blue Express, a refrigerated division of Yanke.

Sam Barone, vice president of Intervistas Consulting of Ottawa, Ont., sees the trend to consolidation continuing. “Companies like Transforce have made it a policy to buy good value companies and increase market coverage either geographically or by sector coverage. Some shippers feel better with large network carriers like Trimac or Reimer.”

Barone predicts growth in the trucking sector of 3% to 4% in 2006, unless there is a major economic downturn. “I expect trade to be strong with the US in the north-south lanes. And then there are the emerging markets of China and India,” he says. (Inbound shipments from Asia being dropped off at the Port of Vancouver for distribution through the rest of Canada have helped raise west-to-east rates in recent years. Carriers are also doing a great deal of work with transshipments to the US market as shippers opt to unload in Vancouver to avoid more congested US West Coast ports.)

Border crossing procedures will continue to evolve in complexity and competition for drivers will get tougher, according to Barone. And fuel pricing will continue to be a major issue. “As fuel becomes tighter strategies like spec’ing, maintenance, driver performance and speed management will become more important,” he adds.

“You’re seeing a shift to value-added pricing. The days when big shippers used to penalize carriers will play itself out the other way. In a tight capacity situation a carrier will not sit a revenue-generating asset. And those carriers without strong fundamentals will exit the industry.”

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