Like the old axiom urging us to "make hay while the sun shines,"the trucking industry has tended to do relatively well from a pricing perspective during business cycle peaks, then give back some of it...
Like the old axiom urging us to “make hay while the sun shines,”the trucking industry has tended to do relatively well from a pricing perspective during business cycle peaks, then give back some of its gains during the inevitable periods of softness. Few carriers, unless they are in a more specialized segment of the market, have been able to consistently buck that trend.
Compared to other business cycles, many carriers would likely argue that the current times are the most difficult they have seen. There is little that carriers can do to change the external forces that are at play. So much of what is impacting the Canadian economy is structural in nature and this time around there are no tariff barriers, exchange rate buffers or low fuel prices to insulate the goods-producing sectors from what is going on in the world. And, right now at least we cannot rely upon the US economy to pull us out of the doldrums.
The combination of these forces has been reflected in softening freight volumes leading to over-capacity in trucking service. Shippers (many of whom are in their own battles for survival) and their load brokers and 3PLs have naturally been trying to take advantage of this change in circumstance by seeking lower freight rates and fuel surcharges – even though carrier operating costs, especially fuel costs, continue to escalate.
Call it audacious on the shippers’ part. Call it unfair. Call it crazy. But, the industry is not going to pull itself out of this situation by waiting for a change in shipper behaviour. The problem is not what the shippers demand from carriers in terms of pricing, but what they are able to command in the current marketplace. In other words, just because they ask, does not mean they should always get. Have fuel prices gone down? Have the banks eased up on credit terms? The answer is “no,”just as the response to some of the demands being made by shippers, load brokers and 3PLs should be “no.”
Most carriers can and do try to maintain profitability or at least minimize the level of profit given up in a lower rate environment by controlling costs and capacity. Many carriers have taken action in this regard. There has been a lot of belt-tightening; even more focus on fuel efficiency; and some layoffs. But, in an industry that is already extremely efficient and whose productivity is often restricted by regulation, there is only so much that can be done to reduce costs other than at the margins. For example, the increase in fuel prices has far outstripped the industry’s capacity to improve its fuel efficiency.
Internal factors are exacerbating the over-capacity and rate strain problem. Given the economic conditions, some softening in freight rates was inevitable. Few carriers – even those who resist hauling cheap freight or getting sucked into lowball bidding – are immune from the pressure to meet market prices in order to retain certain business from time to time. (Those carriers also likely have the ability to withstand periods of softness better than most). But, the key is to think before acting, to be responsible.
Unfortunately, some of the rate cuts I have heard about in recent months can only be described as mind-boggling especially in the face of ongoing cost pressures. How or why do some carriers allow themselves to fall into this trap? Desperation? A complete lack of business sense? Disregard for their obligations to their employees and/or to the people they share the road with? Probably all of the above. These carriers are putting their businesses at great risk and many will likely not survive. Better they get on with it and in so doing, help to eliminate excess capacity.
I expect that I am preaching mainly to the converted. The challenge, as always, is to get everyone on the same page. I am under no illusions about how difficult a task this is. There are always going to be those who will cling to the belief that things will never change; or that they do not have to change or take responsibility for their actions whether they be related to economic, safety or environmental decisions.
There will continue to be choppy waters for some time yet. Carriers will exit the industry this year. Still, I do not believe that the recent rate environment is permanent or sustainable. The demographics of the industry, particularly the age of the driving force, create a natural and very real hedge against future overcapacity. But, carriers need to stop beating up on each other, to start thinking seriously about their businesses decisions.
So, ask yourself these questions next time you are in front of a mirror or thinking about the future of your business. Does the future health and competitiveness of the economy depend solely on what carriers charge for their service? Absolutely not. Will the future health and competitiveness of the economy continue to rely upon motor carriers to get goods to market? Absolutely. So, why are we/you in so many cases basically giving service away for prices that surely are insufficient to generate a reasonable return on investment? That is for you to answer. Think before you act.
– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.
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