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Rates: Pricing Pressures

Freight recession is an ugly term, but the Canadian trucking industry is struggling with a very sharp downturn in business. And the outlook continues to look gloomy, at least for the first half of 200...

Freight recession is an ugly term, but the Canadian trucking industry is struggling with a very sharp downturn in business. And the outlook continues to look gloomy, at least for the first half of 2008.

Canadian carriers moving freight along north-south lanes were already off-balance because of the trickle-down effect resulting from the downturn in US housing starts, down 40% from 2006. The uncertainty was compounded by the recent sub-prime mortgage scandal and its repercussions which continue to send shivers through the US economy. But the major problem is the violent upsurge of the Canadian dollar.

As of this writing, the Loonie is sitting at $1.07 and has appreciated 25% in the last 12 months over the US greenback. Some analysts suggest that it should level off at $1.10 in the coming months, and others think it will settle back to a 90 cent level, but who can tell? Some pundits had predicted parity with the US currency in 2008, but nobody saw this coming.

The malaise surrounding the falling US dollar is directly responsible for the dearth of Canadian manufacturing and consumer goods heading into the US. Until two years ago, international carriers could count on readily available loads heading into the US and a backhaul waiting nearby to bring their units home again. Today, Canada-bound loads are still obtainable but the problem is getting equipment in place to service the American shippers. This has created a shift in the established revenue stream as backhauls have become front hauls, resulting in a highly competitive atmosphere with Canadian carriers slashing rates to get equipment into the US.

“I’m seeing that the rates are holding but if anything they’re going to drop,” says Norm Mackie, vice president of operations for Mackie Moving Systems of Oshawa, Ont. “We have clients, mostly automotive, who pay in US dollars. If the Canadian dollar stays where it is, going forward, we’ll have to keep them on the high side. But there’s a threshold you can get to where the American carriers jump in who are just as competitive.”

Daniel Pascau, assistant fleet manager of Normandin Transit of Napierville, Que., provides another example where the high Canadian dollar has cost jobs in trucking and manufacturing. “In the past furniture used to cost less up here including the price of transport. Now it’s cheaper to make it in the US.”

As an LTL carrier located just north of the Quebec-US border, Normandin Transit seems well situated to move goods between the two trading partners. But Pascau cites increasing pressure from desperate trucking companies. “I’ve lost customers because they’re no longer interested in service, just price. They (other carriers) are undercutting to keep themselves going, but they can’t go any lower. We’re trying to stay competitive but you can’t send out a truck that doesn’t make any money.”

Stan Dunford, chair and CEO of Contrans Income Fund in Woodstock, Ont., is pessimistic about the coming year. “I don’t expect 2008 to be any better than 2007 and this year has been quite a struggle,” he says. “If you talk to an economist, they’ll tell you the economy is on fire and unemployment is as low as ever. But I don’t have a customer that isn’t hurting. Thank goodness only 20% of our customers pay in American dollars.”

According to Dunford, “Seventy five percent of Canadian trucking is van load trucking and that’s where the blood bath is going to be. If you’re hauling all-automotive, you’re dying.”

At least fuel surcharges are now an accepted part of doing business and few customers squabble over having to pay them. However, accessorial charges, like waiting time, loading, demurrage and customs clearance fees, could be more contentious when volumes are thin. Some clients may balk at paying these fees when they can find a discount carrier willing to waive them.

However, shippers negotiating freight contracts can take heart in the fact that fuel and accessorial charges have become more standardized across the board, making it easier to compare freight bids between carriers.

Hard times mean bargains are available among companies with poor fundamentals and cash flow. “The big players continue to make strategic purchases in specific areas,” according to Dan Goodwill of Goodwill and Associates, a Toronto transportation consultant. “Consolidation has been going along for 25 years certainly and we’re starting to see the giants having very full portfolios. The big American players are coming into their own and becoming very prevalent across the country. UPS, Yellow and others offer a variety of services, and FedEx has just opened LTL terminals in Canada.”

Allan N. Robison, president and CEO of Reimer Express Lines Ltd., thinks consolidation is good to a degree. “You’ll continue to see big carriers buying more carriers. This allows for synergies of size. They can buy insurance and fuel cheaper and those things do help,” he says. “As far as the customer goes, it can be good for them because it means they can service a bigger territory.”

Freight moving east-west through Canada is subject to imbalances as well. Steady volumes are moving into Alberta but little back-freight is coming out, leaving trucks sitting in truck stops waiting for return loads. Some eastern carriers chose to send their units through to Vancouver rather than have them sit idle.

But it’s not all doom and darkness out there. Many regional carriers with strong niches are coping quite well. “Domestically, it’s still a good market place,” says Robison, “with some parts of Canada doing quite well, like BC, Alberta and Saskatchewan, while some other areas are having problems. The north south routes are not as busy as they were but we’re still having trouble finding long haul drivers. The demand may have eased because of the churning in the industry, but it has not gone away.”

Gary Coleman, CEO of Big Freight Systems of Steinbeck, Manitoba, thinks that good drivers are crucial to the success of a motor carrier. “The driver shortage is going to get worse as the front end of the baby boomer bubble starts to retire. The guy that owns the driver is the guy who will own the freight,” he says.

“Today it’s still the shippers that dictate what happens on the shipping side. But that will all change in the next 10-15 years, with shippers collaborating with carriers in true partnerships. Progressive shippers are seeing the real value of working with a carrier as a true extension of their logistics and manufacturing arms.”

David Savelli of Home Depot Canada is one transportation manager who understands the value of working closely with carriers. Presently he uses two core carriers to service all of Canada, along with a handful of preferred ones to fill in the gaps. “We want to be efficient and that’s the key,” he says.

“At one time we had 30-50 carriers servicing our stores. Now we limit it to three appointments per day, so we look at consolidation (of freight) as a way to decrease the number of trucks on the road. As far as road carriers go, we know they are hurting to get into the US so we have that built into the contracts to help them. The key to building a relationship is not to find a new one just because rates go up.”

A good working partnership is also key when contracts are up for renewal, according to Ginnie Venslovaitis, transportation manager for Unilever Canada. “We usually look to our carriers for rate increases every year. But we want to know what’s driving those costs and how we can fix those costs,” she says.

Venslovaitis ships 80% of her freight by rail and 20% by road, but admits to having an ongoing problem with the railroads. She’s even had to pull some accounts off the rails and give them to trucking firms. “It depends if you want to have the freight next month or not,” she says. “Wal-Mart has to get their shampoo on time. But our partners usually manage to work around the problems by having staff available to strip the containers when they finally arrive.”

Robison of Reimer is also unhappy with rail service that sh
ows no improvement in the near future. “We use intermodal but we expect to use less of it in 2008,” he says. “Service isn’t where it’s meant to be.”

But Dan Einwechter, chair and CEO of Challenger Motor Freight of Cambridge, Ont., sees intermodal as one of the bright spots in today’s trucking environment. “I used to think the only way to ship was by truck, but now I know better. I’d double my intermodal use if I could,” he says.

Murray Mullen, chair and CEO of Mullen Group Income Trust Fund, believes that rail service will eventually supplant most long haul trucking moves. “Intermodal will dominate the long haul freight business, forever. This change, in my opinion, is irreversible due to the competitive advantage rail has over truck and the continued driver shortage issue.”

Overall, in these uncertain times, it was difficult to get projections from the executives and managers I consulted. But Larry Jensen, senior manager of logistics procurement for Ryder Transportation Management is willing to stick his neck out.

He expects freight rates to increase 5-6% in 2008 on average. Jensen also adds, “The average length of haul will fall drastically. Carriers who used to run long haul south to USA are now running the Windsor/Quebec City corridor. Better to run short lanes than to sit drivers.”

As far as volumes go, some shippers, at least, foresee strengthening volumes in 2008. According to Venslovaitis, Unilever Canada expects a 5-7% increase. “That’s a dollar value but that usually translates into more cases on the truck,” she says.

Times may be tough, but what’s that old saying? One thing we can count on is well-managed trucking companies sticking around for some time to come. “The demand for trucking services will always be needed,” says Reimer’s Robison. “We always go through these cycles and we’ll always be here.”

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