The Sky Is Not Falling

by Lou Smyrlis

TORONTO, Ont. – Carriers that had grown accustomed to being selective about their client base thanks to an abundance of freight the last three years had to search further afield in 2006, particularly for southbound freight. That challenge is likely to continue into 2007, as indicated by the data from our Annual Transportation Buying Trends Survey.

The research, conducted in partnership once again with the Canadian Industrial Transportation Association and CITT, was completed in November and included input from more than 700 shippers across the country.

It found that while the sky is certainly not falling, 2007 will be a year where the ceiling will be a little lower with some notable dark clouds on the horizon.

Two-thirds of shippers expect to increase their shipment levels next year and 44% expect to increase their use of truckload services as a result. A similar percentage expect to increase their use of less-than-truckload services. Twenty nine percent expect to increase their use of courier services.

However, although a healthy number of shippers are planning to increase their shipment volumes in 2007, the magnitude of those increases will be lower than in previous years. In 2005, two-thirds of shippers reported shipment volume increases of greater than 10%. By 2006 that declined to 60% of shippers. Next year only 49% of shippers expect to have double-digit freight volume increases, our survey found.

The dark clouds are in Central and Eastern Canada, particularly within the manufacturing sector. While 62% of Western Canada shippers increased their shipment volumes in 2006, only 56% of Central and Eastern Canada shippers did likewise. The divide will be more evident in 2007 with 72% of Western Canada shippers expecting to increase shipments compared to 68% in Eastern Canada and only 63% in Central Canada. (Traditionally freight increase volume forecasts tend be 2-3% short of reality when revisited the next year.)

Looking specifically at the manufacturing sector in Central Canada, only 49% of shippers in this sector reported increasing their shipment volumes in 2006 (compared to 58% for the overall survey sample) and only 57% expect to increase shipments next year (compared to 67% for the overall survey sample). This is in line with the trend we noted with the survey last year as well.

Motor carriers have enjoyed sizeable rate increases in recent years. Eighty three percent of shippers reported increases in their truck freight rates in 2005 and 64% reported increases to their courier rates. Two-thirds paid out increases (exclusive of surcharges) higher than 4%, with about one fifth agreeing to a more than 10% increase. Forty seven percent of shippers using courier services reported rate increases of greater than 4% in 2005.

The upward momentum in rates slowed considerably this year, our survey found, with 64% of shippers using LTL services and 63% of those using TL services reporting rate increases for 2006. Fifty six percent of those using courier services also reported paying more in 2006.

The magnitude of the increases was also down considerably with 40% of shippers using LTL services, 42% of shippers using TL services, and 29% of shippers using courier services reporting rate increases higher than 4% for 2006. (Again, all increases noted are exclusive of surcharges.)

Looking to next year, the downward pressure on rates is expected to continue, our survey shows. Only 59% of shippers using LTL services, 58% of shippers using TL services and 54% of shippers using courier services expect their rates to go up for 2007.

And the magnitude of those increases is expected to be down considerably from years past with only 27% of shippers using LTL services, 28% of shippers using TL services and 18% of shippers using courier services expecting rate increases higher than 4%. Particularly revealing is that only 1% of shippers using trucking services expected increases higher than 1% compared to the 21% who paid such increases back in 2005.

A major reason for the downward pressure on rates in 2007 will be the considerable easing of concern among shippers about capacity. Whereas from 2003 to 2005 shippers were very concerned about there not being enough capacity in certain markets to handle their transportation needs, their capacity concerns eased back in 2006 and heading into 2007 shippers told our survey they see slight over-capacity in both the courier and the LTL markets.

Shippers were asked to describe the amount of capacity they saw as currently available for each mode to handle their shipment needs based on a 10-point scale with 1 representing plenty of capacity, 5 representing balanced capacity and 10 representing very tight capacity. While they scored TL capacity a 5.50, indicating capacity in that sector still remains a bit tight, they considered LTL capacity to be at 4.73 and courier at 4.03, indicating excess capacity in both of those sectors. In comparison, they scored rail capacity at 5.81.

After three successive years of hefty shipment volumes and healthy rate increases is this the new normal? For the time being, yes. But most economists view the current slowdown in the US economy as a short-term market correction following the bursting of the American housing bubble. And the main factors (industry consolidation and the driver shortage) behind the capacity shortage experienced from 2003 till about the first quarter of 2006 are significant enough that they will return once the North American economy picks up its pace.

“What I’m hearing (from shippers) is that it’s a long-term issue,” acknowledges Bob Ballantyne, head of the Canadian Industrial Transportation Association, one of the country’s major shipper organizations.

“We know enough about the truck driver population to know that we have an aging driver group and it doesn’t appear to be an attractive job for young people so we are not getting them coming in to the profession. There are a lot of occupations in our society that don’t have status or pay but are absolutely crucial to our society and truck driving is one of them. Our long-term history shows that we do experience economic growth over the long term and so we are going to end up with a continuing driver shortage and growth at the same time. Clearly there will continue to be pressure on capacity that is driver driven.”

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