As a derived demand industry, the trucking industry’s prospects are to a great extent a reflection of economic conditions. In Canada, the economy is made up of distinct regional economies. The following comments relate mainly to the current challenges of truckload general freight carriers in Central Canada, but carriers from all industry sectors, regardless of domicile, are not immune to the external forces shaping the current market for trucking service.

Earlier this decade, a perfect storm blew into the country’s traditional economic heartland.

In its wake – particularly in the more capacity-sensitive truckload sector – were market conditions that were more agreeable to decent returns on investment.

Much-needed and long overdue increases in trucking rates were accommodated.

Fuel surcharges became a fact of life. Previously unknown measures of performance such as EBITDA’s started to become part of the industry lexicon. Accessorial charges, usually associated with the railways, started to take hold in trucking. Trucking was, as some said at the time, “fun again.”

Today, many, if not most, truckload carriers are feeling the effects of a new perfect storm. But, rather than putting wind in the sails of the trucking industry, the 2007 sequel has created major challenges for carriers.

Soft volumes, combined at least in part with cheap credit for equipment and a pre-2007 truck buying binge, have created a situation where there are too many trucks chasing too little freight, and many carriers are seeking revenues/volume if only to keep trucks on the road and drivers working.

Rates are at best stagnant and, in many cases, have been discounted sometimes to levels not seen in a decade. Margins are being squeezed.

Southbound freight, in particular, has been hit hard. Under-capacity has been replaced by over- capacity. Trucks have been shifted from transborder routes to already congested domestic corridors like Toronto-Montreal.

The economic underpinnings of this situation are structural in nature. Chief among them is the appreciation of the Canadian dollar versus the US greenback which has hurt the competitiveness of domestic manufacturers and is showing up in the volumes of southbound freight. These volumes are presently insufficient to sustain the capacity levels dedicated to Canada-US trade in recent years.

We will not likely see a 65 cent dollar again, or at least not for a very long time. Manufacturers will need to regain competitiveness through productivity enhancement, product differentiation, etc., but in the meantime they are trying to stay as competitive as they can by reducing costs, including transportation costs.

The rise of China as the world’s predominant manufacturer is adding to the erosion in domestic goods production. The influx of Asian imports has also had a profound effect on the trajectory and mix of traffic. East-west container traffic has exploded with the railways taking a big share of the pie, even offering door-to-door service using local cartage to warehouses and retailers.

The forestry products industry – historically a major source of southbound freight – has been dealt a huge blow. The Big Three auto makers are struggling to adjust to customer demand for cheaper, higher quality, and more fuel-efficient cars.

The thickening of the Canada-US border is calling into question the reliability of the North American supply chain and heaping on added costs. Some Canadian exporters have had to open warehouses in the US to ensure supply to their US customers.

Others, including some potential foreign investors, have decided that it’s easier to set up shop in the US and avoid the border problems altogether.

The three NAFTA governments talk about a stronger, more competitive North American trading bloc, but until the roadblocks at our land borders are removed this cannot happen.

Still, the destiny of individual motor carriers is not entirely out of their hands. Industry prospects are predicated upon the carriers’ ability to control and manage capacity.

During a previous downturn, someone told me the reason there was over-capacity in the industry was that, “the economy is not generating enough freight.”

This type of thinking is part of the problem. The economy is producing the right amount of freight for the current circumstances – it is the industry that is providing too many trucks, too much capacity.

During the “good times,” a shortage of drivers more than anything else kept a lid on capacity, creating conditions amenable to upward rate pressure. (You could buy trucks; but drivers were hard to come by). Since there was a better balance between the freight volumes being generated and industry capacity, carriers were able to be more selective and allocate their resources to those customers who wanted to maintain service and were prepared to pay compensatory rates.

It is tempting to say that the industry can solve its current problems simply by saying “no” to rate discounts; by reducing capacity; by reminding ourselves that a few short years ago we were saying things like “I’d rather be a profitable 50-truck operator than an unprofitable 100-truck operator.”

If only it were it so easy. Carriers must cope with a host of business realities. There is that thing called competition, and trucking is a hyper-competitive market.

Carriers want to hold on to their drivers for when things do turn around. There are challenges in managing their sales forces. There are truck lease agreements to be honoured.

There is the problem of what to do with trucks that are not being utilized and how to dispose of them. Still, it’s up to carriers to fix the problem of excess capacity or the marketplace will do it for them through mergers and acquisitions, and in some cases through business failure.

While the latter is not an attractive proposition, at least for those directly involved, it is inevitable for those without the resources to weather the current storm; especially those who do not have a good handle on their costs.

Despite everything, I remain very bullish on the industry. Well-managed carriers – with the support of their customers – will pull through. Shippers should not take their carriers for granted, nor should they consider currently soft rate levels to be permanent. Upward pressure on key operating costs – labour, fuel and equipment – continues and margins will have to provide for them.

The demographics of the driving force clearly point to a deepening driver shortage which will be reflected in tighter capacity – the industry is facing a labour crisis.

New regulations and more effective enforcement – e.g., hours-of-service, border security, speed, etc. – will require a higher level of sophistication to remain in the business. People will not stop consuming and goods will still need to get to market. Trucking will continue to be the predominant mode of freight transportation.

– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.