MT: During the recession every carrier was forced into cost-cutting. In hindsight, are there cuts that should not be made because they cut into service performance? Is there anything that should be sa...
MT: During the recession every carrier was forced into cost-cutting. In hindsight, are there cuts that should not be made because they cut into service performance? Is there anything that should be sacred as far as you are concerned?
DiTecco: We are in a service industry. You cannot afford to cut the front line interface with your customer and your customer service reps in the terminal, and you cannot touch your maintenance. You better be running the same maintenance program that you had before. I think it is hard enough going to sleep knowing that you have done the best you can in our business, but I certainly would not be able to sleep if I knew I was not maintaining the equipment.
Munro: It goes a little bit against some common thinking, but one of the areas that I would not cut costs on would be the wages of staff and owner/operators; the front-line people doing that work. As we know, most of the driver wages and owner/operator wages are already pretty well rock bottom; they have never been very high. To go into those areas and cut, I think, is just a recipe for disaster in the long-run, and it ruins the environment and morale in the company.
Einwechter: Each year in this business, and any successful business, you have to raise the bar, whether it is on maintenance or customer service issues. We want our outcomes to be the same or better, but I can tell you that no rock went unturned in analyzing input costs to make sure that we were maximizing things. We are now looking to add another business analyst to our operation just to help the different departments drill down. We are looking at profitability analyzers, and there are a couple of different options there. We have to constantly look for new, better, cheaper ways to provide the same or better outcome.
MT: Let’s touch on capacity, which has been a root evil during the recession for basically all carriers, but particularly so in LTL. Possibly, we are looking at maybe 20-30% overcapacity. Where would you say we stand right now, first of all in the LTL segment, and then also in the truckload segment as far as being over capacity?
DiTecco: I certainly believe that there is still excess capacity in the market. I think our brothers in the truckload business have done a better job, and maybe it is a little bit easier for them to cut finite capacity. In the LTL game when you are servicing a geographic market, you still have to cover that geographic area, and even though you are picking up fewer shipments and making fewer deliveries, you still have to have the equipment out there. There is still excess capacity in the industry, and it is going to stay that way until the market improves or some players exit. When the banks start dealing with their problem accounts, some of us will be happy.
Munro: Whether it is truckload, LTL, restaurants, cars, whatever, there is an overcapacity in the whole economy in my opinion. I think we are just a symptom of that, and I would say that we are at least 20-30% over capacity.
Einwechter: We still have excess truckload capacity in Canada right now. But I have talked to a lot of US friends in the industry, and suppliers, and they are saying to get ready because it is coming. They have this great, solid wave of activity. One of my friends said, ‘I wish I was back in the trucking business.’ He said the golden era is about the happen. I said, ‘Please lay that golden egg right now because I could use it.’ I think we are lagging, but it really indicates that we are going to have it here. We have the whole CSA 2010 issue, whether it is 2010 or 2011 when we feel the effect of it. If the US carriers are busier, they will have less capacity and less inclination to come across the border because of that. Then layer the CSA 2010 on top. There is going to be a greater tightness in this Canadian marketplace then people suspect. One of the analysts that spoke at a profitability seminar in Athens, Ga. said that he is now getting asked by some major corporations to go in and talk to senior executives -the logistics peoples’ bosses -to provide an overview of transportation to prepare them for what is coming. We have too much capacity now, and yet by September we will be short of capacity. That is what I am telling my drivers. Right now it is just nice and easy work, but by September we will be asking you guys to do one more run. It is going to be busy as hell.
MT: This is interesting what you are saying because for the last two years, we have been hearing that the only way for the excess capacity to be resolved is to have a lot of these carriers that are just hanging on to finally just close their doors. Are you still saying that?
Einwechter: I am still saying that. We are seeing prospectuses that come across our desks every day for carriers that are just languishing. They look strikingly similar to me: gray hair. They have been at it for 35 to 40 years and want to go and spend time with the grandkids, or have got this cottage they have not seen for a while. They are just going, ‘The jig is up,’ because they are fed up with waiting for that future promise. Some of them may have been involved in a freight recession for four years and are thinking, ‘I have lost four years of my life.’ There is a lot of frustration. They are going to go by the wayside either voluntarily, or the banks are going to do it.
MT: Doug and Peter, when you are looking out in your marketplaces, do you see a situation where we are going to see another capacity shortage like we saw back in 2004, for example?
Munro: I wish I could share that view of Dan’s -I am not quite as optimistic. In my opinion, there is big overcapacity in the market, and that is resulting in lower rates. The economy is probably not going to do it because consumer confidence is not really improving like we would have hoped, especially in the US with the debt loads that the people are carrying and the government deficits. In the absence of an increase in the economy, then we are back to the overhang in the market and what that is going to mean. Unfortunately, I think that is going to mean some rationalization. The carriers that are in the weaker financial position have to step out, and that will ultimately help the industry back to an equilibrium, but I am expecting it to go on for several years.
MT: Peter, you get the tie-breaking vote. How is it going to go?
DiTecco: I am more inclined to agree with Mr. Munro. Again, being a regional carrier servicing Ontario and Quebec, I think those were the provinces hit most in the manufacturing sector, and we are a business-to-business carrier. I think there is probably much more recovery going on west of Ontario. I think Ontario-Quebec is still going to be slow, and I think it is going to be a while. Ultimately, there will be a shortage of capacity and drivers, but I do not see it for a couple of years.
MT: So some disagreement on the panel in terms of how fast this recovery will come and how strong it will be. Let’s see if there is agreement on this next question. Are there specific green shoots that we can see right now in terms of freight volumes?
Munro: There are, depending on the type of business. We do some bulk work up in the North hauling cement and commodities like that, and there has been an increase on those. I think the auto industry, although we do not do much for it, is improving. There are some areas, but I think growth is minimal. From what I have been hearing from other people, there has been an improvement in overall volumes, but it’s negligible.
MT: Dan, obviously you are more bullish on the future. Any green shoots that you are se
Einwechter: I am not going to be dancing the streets any time soon because I have a lot of losses that I have to make up for. In the first four months of this year, we have made no money because it has been a difficult marketplace. Do I think for the balance of the year it is going to be good? Yeah, I do, and I think next year will be a pretty decent year financially for us because of how we manage. I am not saying that we have to have a dynamic, buoyant rebound in the economy, but the slightest change because of the dynamics going in -aging workforce, lack of capital, concern on ownership level about making the right investments, even if they have access to capital -all of that is going to come into play. For those that are operators in the industry, it will be at least slightly better than what it is now. If we look at the US experience, as go they in many ways so go we. So if they cannot service our market cross-border with their trucks, and if they have CSA 2010, and if we have our other challenges that we have talked about, I think there is a market to be made for those of us that are left standing.
MT: Peter, Armbro is a regular winner of our Shipper’s Choice award. When you look at what is coming, how would you say the smart players are positioning themselves right now for the growth that is going to come?
DiTecco: I do not think that I am going to be out looking to buy a bunch of trucks waiting for the economy to turn around. You need to keep to your knitting and do what you have done well. Keep close to your customers. In the LTL business, we have capacity on the trucks that are going out half full, coming back half empty. There is a lot, in my mind, of improvement in the market that has to happen before I, or, I am sure, the majority of my competitors, have to go out and buy equipment or hire more people. We have to get a full day’s work and a vehicle full of freight before we have to even think about capacity as far as new assets.
MT: In order to attract more people and be more fair, obviously motor carriers need to do a better job in raising rates in the years to come. Our research shows that most motor carriers are expecting rates in 2010 to basically be close to flat. When you look at 2011, what do you see in terms of rates and where they are going?
DiTecco: I would think that if the recovery continues at the pace that it is going, you are probably going to see 1-3%. If you got 3% you would be ecstatic. Hopefully we will be able to get paid for assessorials, or all the assessorials that we provide. If we were to focus on getting paid for assessorials as opposed to a 1% rate increase, we would probably do better.
Einwechter: You may think I am wrong, but I think rates have got to go up 5%. I have talked to so many carriers about their financial condition, how precarious it is, and the things that they have done to reduce their cost inputs, some on their back solely, and some on the backs of their employees. Although the employees are maybe paid fairly, there definitely was not any room to take money away. When I put all of that in the equation and look at what is going on, rates are going up. It has been a cakewalk for so many people for so long. I do not care how you analyze it, percentage of cost of goods sold, on a global basis (GDP), per mile, per tonne, per hundred weight, they have to go up. If we are going to have a vibrant, healthy, successful, dynamic trucking industry to help maintain the trading status that we have as a country, they have to go up. It does not mean that customers have to bend over backwards when a carrier walks in, but there has to be meaningful dialogue about what the input costs are, and then having the shipper understand what those input costs are.
MT: Let me ask you about a subject that has an impact on rates. We have been hearing now for two years that there are all these zombie trucking companies out there barely hanging on. As soon as the economy picks up and their equipment is worth more, the banks are going to decide it is time to move on them and take them out. It has not happened. Why? Is it time for a new theory?
Munro: I believe that it is probably because the equipment values that they are looking at are depressed, so they are more inclined to want to nurse them along and to try to amortize the equipment down more. There has been a lot of equipment purchased in the last number of years, so they are probably trying to work that through by more time. I believe, as Dan says, the rates are going to go up in the long run. In the short run, I do not think rates will be going up in any significant way because there is just too much overcapacity. I also believe, as we have started looking at our business, it is kind of like a plant in a way. You sometimes have to prune back a plant. You are better off to just look at the business you have and try to better manage it. Where you have really low rates, try to prune those out and then it opens some kind of path within the company with higher rates within, without having to add more capacity into the fleet.
Einwechter: Zombie truckers -there are a lot of people waiting for them to go by the wayside. That means that you are really saying, ‘I am willing to let somebody else control my destiny. If they fail, I will be successful.’ You cannot operate like that. You have to operate to be successful on your own, and it will be an added business when those companies fail.
MT: When you look at your company, what do you see as the major impediments to your future growth?
DiTecco: In the short term, I am not sure how much real opportunity there is for growth unless you can find another market niche that you can be good at. Again, you will be going into an area that probably has overcapacity as well. Growth by acquisition seems to be the more rational approach if growth of significance is in your sphere of interest.
Munro: The economy, which has created overcapacity, is the main concern and impediment to future growth, and coupling that with the reluctance of banks and financial institutions to loan to trucking companies. Even if we do get an upturn, there will probably be a long period before banks will be as free as they were in past years to loan money. The good carriers will get the money, but they will get it at probably a higher cost, and the ones who are shaky will not be able to get it. In the long run, that will be a good thing, but in the short run it will hold back growth.
Einwechter: My biggest challenge is to continue to make sure that I have the right people at the company to deliver on our promise; a promise that our customers need to value and are willing to pay for.
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