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work on your patience

In preparing my speaking notes for McMaster University's Translog 2011 conference in Hamilton, CITT Manitoba's annual get together in Winnipeg, Transcore's annual user's conference in Brampton and other conferences I was recently invited to...


In preparing my speaking notes for McMaster University’s Translog 2011 conference in Hamilton, CITT Manitoba’s annual get together in Winnipeg, Transcore’s annual user’s conference in Brampton and other conferences I was recently invited to speak on the transportation trends, I was expecting to tell a positive story of continually improving conditions for motor carriers.

After surviving through two nightmarish years where they saw their rates contract in the range of 15% to 25%, I knew carrier executives were very anxious to see an upward bounce in what they get paid for their services.

I also knew that carrier executives were looking to a confluence of events – an improving economy, higher freight volumes and tighter capacity – to create the right conditions for significant rate increases and that many industry experts were forecasting the exact same pressures. Consider this statement from a report I recently read entitled Domestic Transportation, Finding the Right Balance of Volume, Capacity and Pricing: “Supply chain professionals who are responsible for securing transportation services – regardless of mode – are about to reap the benefits (or pay the price) for how strategic and mutually beneficial their company’s carrier relationships have been over the past two years. But make no mistake, costs are on the rise in either case. The only question is whether a company’s increase will be closer to 2% or 20%.”

Sounds pretty encouraging if you are carrier executive. There is only one problem: So far, it hasn’t come true.

As many of the carrier executives I’ve been speaking to have confirmed, those hoped for rate increases are proving difficult to nail down. Almost all of the increase in rates in 2011 has come from the fuel surcharge, which is now up to almost 20% of the base rate on average, according to the latest data from the Canadian General Freight Index published by Nulogx. I’ve hosted several shipper panels over the past couple of months, both on retail and the manufacturing side. Whether it was Heather Felbel, vice president , supply chain with Indigo Books & Music or Brian Springer, vice president of transportation at Loblaw Companies or Mike Owens, vice president of physical logistics at Nestle Canada, buyers of truck transportation are proving fiercely resistant to rate increases at this point.  And if they are going to agree to one, it’s certainly not going to be because trucking companies have been taking it on the chin the last two years. Consider Felbel’s recounting of how she handled one of her carriers asking for an increase:

“I ask my carriers to come to the table in a very educated way. I had one carrier recently that said ‘Here’s the price increase’ and I went ‘No, thank you, unless you can tell me what this is for and justify it, right back atcha.'”

Shippers do, however, seem very interested in working more closely with carriers to understand the parts of their business or practices that are creating unnecessary costs for the carrier and boosting the carrier’s margins by improving on those areas. And that is a much tougher order than simply asking for a rate increase.

Of course, sheer supply and demand pressures may force shippers to accept higher rates. Our own research, conducted late last year, showed that 60% of shippers expected an increase in their shipment volumes in 2011 and 43% expected to increase their use of LTL services while 48% expected to increase their use of TL services. Transport Canada statistics show there was definite drop in Class 8 truck registrations starting in 2009 and sales of new Class 8 trucks so far this year, although on the rise, are still lagging far behind the banner years of 1999 and 2000 and 2004 to 2008.

So if freight volumes are on the increase and capacity is on the decrease, why isn’t the capacity squeeze placing greater upward pressure on rates?

Because over the past couple of months both the Canadian and US economic recoveries have hit a soft patch that is giving shippers breathing space. Every major economic indicator I’ve been looking at lately – from RBC’s Canadian Manufacturing Purchasing Managers Index to ATA’s US Truck Tonnage Index to The Shippers’ Condition Index published by FTR Associates – confirms that the second quarter was a dud as far as economic growth is concerned.

As disheartening as the latest economic figures may be, it’s important to remember that no recovery is a straight upward line. Brief periods of slow economic activity are the norm, not the exception. I would not be surprised if by the end of summer or early fall, that confluence of events that carrier executives were banking on placing upward pressure on rates did come into play.


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