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Trend spotting

DON MILLS, Ont. - As we experience the fallout of the Sept. 11 terrorist attacks on the U.S., several significant trends are becoming evident in the trucking industry. While some may call for adjustme...

KEY QUESTIONS: As we pull into 2002, many of the issues facing the industry centre around the events of Sept. 11.
KEY QUESTIONS: As we pull into 2002, many of the issues facing the industry centre around the events of Sept. 11.

DON MILLS, Ont. – As we experience the fallout of the Sept. 11 terrorist attacks on the U.S., several significant trends are becoming evident in the trucking industry. While some may call for adjustments within the trucking industry’s control, other outside factors will prove to be as, if not more, challenging.

“To a large extent, the significant cost increases of border crossing delays were absorbed by the trucking industry. Although delay times are back to normal, in most cases the carriers have to be prepared in the event of future delays. We will be collecting baseline information that will allow carriers to determine increases in border delays if they again occur,” says Dave Sirgey, president of the Freight Carriers Association of Canada (FCAC).

David Bradley, chief executive officer of the Canadian Trucking Alliance and president of the Ontario Trucking Association, predicts his member and other fleets will call for tax reform and for capital spending to stimulate the economy.

“Your associations will ensure that the voice of trucking is heard in these debates. The post-Sept. 11 security consciousness will also underscore the need for Canada and the provinces to get their act together and implement a truly national carrier safety ratings system and a truly national safety database. With any luck, the trucking Hours-of-Service rules will finally be rewritten in 2002 and will reflect the CCMTA proposals that have been on the table for three years now,” he says.

Today’s fixes

Meanwhile, analysts are busily forecasting an increase in consolidation and mergers in the trucking industry.

“There has obviously been consolidation on the LTL side, and tonnage is down while yields are up. But this tells a good story: you have fewer players, and a more sophisticated and rational marketplace. Bottom line, the LTLs are pretty well positioned coming out of the recession next year and I think will do quite well. The industry continues to be fragmented on the TL side, with fewer barriers of entry and more irrational pricing,” says Patrick Byrne, vice-president, AT Kearney.

As firms turn to their core competencies to stay afloat, outsourcing and collaboration, whether forced or voluntary, are now big musts in transportation, analysts say.

Trucking companies will also need concrete solutions to avert or control the impact of the crisis, with technology key.

“To develop differentiation in the marketplace, carriers should be providing an integrated suite of services, and deciding what areas to focus on geographically. Shippers are looking for real-time data, and for carriers who bring ideas to the company,” says Byrne.

What will drive the recovery will not be just software, but asset-based improvements such as GPS systems, engine and safety improvements. E-markets will also find an important niche, but security, dispute resolution and access issues weigh most heavily now.

Traffic will increase

The trucking industry is already in a good position to ride out the current crisis, says Yossi Sheffi, professor/director, Massachusetts Institute of Technology.

“I see the percentage of traffic moving by truck will go up, for several reasons: the level of service will continue to be important, and people will want to be more efficient. If you take the security point of view, truck transportation is actually a lot more secure because it doesn’t take a lot to shut down rail. By its ubiquitous nature, truck transportation is a lot less vulnerable,” he says.

Lots to consider

But while many of the consequences of Sept. 11 may be seen as a chance to get one’s house in order, other factors like re-regulation and slowed globalization loom on the horizon.

“A slower economy does not mean that trade associations like OTA, CTA and the other provincial trucking associations will be any less busy. The issues agenda will, no doubt, be dominated by concerns over border security and trade facilitation. This is perhaps the single biggest threat to direct investment in Canada. The industry will need to prepare for less privacy, more data collection, and more electronic monitoring,” says Bradley.

“Security (requirements) will bring longer lead times, therefore problems with forecasting because they may need higher safety stocks. Also, I think HazMat transportation will get a lot of scrutiny in the coming years, and I think every truck/rail will see individual registration and tracking, like filing a flight plan,” says Sheffi.

And that’s without even considering insurance costs.

Paying a premium

“The events of Sept. 11 will cause additional insurance increases to the trucking industry, which was already being hit with large cost increases, in some cases up by 50 per cent,” says Sirgey.

Meanwhile, on the equipment side, the declining value of the Canadian dollar will cause many carriers to postpone or cancel purchases for the remainder of 2001, he says. What will this do to rates?

The bottom line

While prior to the events of Sept. 11, the FCAC was already calling for a freight rate increase of 5.5 per cent, reflecting higher costs in labor, equipment and insurance, fuel surcharges which are, calculated separately, are dropping.

“Changes in fuel costs are excluded from general rate increases and taken into account by the fuel surcharge program. The LTL surcharge has dropped from 3.3 per cent Sept. 21, to 2.4 per cent Nov. 5, reflecting the drop in diesel fuel prices,” says Sirgey.

While the slowdown in activity, says Bradley, is likely to constrain the long overdue shift to higher freight rates, he says that industry balance sheets are also healthier than they were during the last downturn, though trucking remains a highly leveraged industry.

“Nevertheless, the economy will still require trucks. People need to eat. And while there is likely to be some upward pressure on fuel costs during the cold months, prices appear to have moderated compared to the last couple of years. World crude prices are significantly off their recent highs,” says Bradley.

“It is important to keep some things in mind. The Canadian economy, while slowing, has been stronger than the U.S. economy and has continued to generate freight. The underlying fundamentals in Canada are perhaps as good as they have ever been heading into a downturn-low inflation, small or no fiscal deficits, low interest rates. And, as one of my old economics professors used to say-never count out the U.S. economy,” he concludes.

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