Walter Spracklin

TORONTO — A transportation analyst with RBC says conditions are slowly turning in favour of trucking companies, and higher transportation costs are not only likely, they’re expected.

Walter Spracklin told an audience of fleet owners and managers at the Ontario Trucking Association (OTA) convention in Toronto on Friday that a growing driver shortage, capacity issues, and a recovering economy are all harbingers of higher freight rates.

“Pricing is starting to come back, but we’re still not where we want to be,” he said. “Pricing has to come back higher. From an investment perspective, that’s something we’re focused on.”

And it’s not like shippers aren’t expecting to pay more, he said. A recent RBC survey of 70 major shippers showed that 62% expected transportation rates would increase more than 5% in 2011.

“That compares to 26% last year,” he said. “Nobody saw rates going up in 2010 and they were quite right. Rates actually went down.”

Conditions have changed however, including shippers’ expectations for economic growth in 2011. Most of those surveyed (64%) said they expect flat to modest growth in 2011. About 12% are expecting more than 10% growth.

The full RBC report is expected to be released tomorrow (Tuesday).

Spracklin said conditions are slowly turning to favour trucking firms and will soon give them leverage to insist on profitable carrying rates.

“We’ve heard a lot about a driver shortage and as an analyst, I can tell you, my eyes light up when you talk about a driver shortage because it means capacity is going to stay constrained,” he said. “So if driver shortage is really a structural change in your industry, don’t try to fix it in the short term. It’s not a problem. This will allow you to raise your rates.”

Spracklin said he’s hearing more and more trucking executives say they’re no longer going to go after business that doesn’t make economic sense to them.

“They’re saying, ‘If it doesn’t make sense to our bottom line we’re going to walk away from that business.’ That’s a tough job for you as operators to do, to let an asset sit idle, but you know what, it’s a very important decision. We in the investment community love to see that kind of discipline in senior management.”

Capacity will take another step in the right direction with the death of trucking operations that are running on empty.

“There is still over capacity in most areas of the trucking business. Delinquent operators are still out there, those that have not been making payments on their trucks or assets are still on the road, those that are still out there, by the grace of the banks that don’t want to claim those assets, do not want to force receivership,” he said.

“We need to see higher receiverships at some of those players that – you guys know who they are – never should have been in business to begin with, or the unsophisticated players who don’t know what they’re doing but because lending was cheap and the lenders came up here and gave them the capital, they were able to go out there and buy trucks and get on the road and really screw things up for everybody. Those operators, hopefully, are going to fall away and we’ll have the strong players driving prices going forward.”

On the subject of long-term contracts, which came up at several OTA sessions, Spracklin suggested there is too much volatility in the market for service agreements to be much more than targets.

“Reality shows that long-term contracts aren’t really long-term contracts,” he said.

A carrier is not going to hold a shipper to a contract that is unsustainable. “That carrier is not going to say, ‘Forget it; we’ve got you locked in; you’ve got to deal with it.’ They’re going to lose that client at the end of the contract. Similarly, when times are good, your client is not going to come back to you and say, ‘Hey, can I get a rate increase on this contract?’ You know that’s not going to happen.”

Like many at the convention, he urged caution when considering the wisdom or viability of long-term contracts.

Spracklin shared the session, which considered the global and North American economic outlook and its impact on Canadian Trucking, with Dawn Desjardin, an assistant chief economist with RBC. Desjardin concentrated on the macro view, detailing the cause and the ramifications of the global economic meltdown.

“When we look at a situation where our economy is growing faster than the U.S. economy, our interest rates are higher than in the U.S., and commodity prices remain elevated, that’s a strong story for Canada’s currency.”

She suggested Canada’s overall growth rate should remain around the 3% mark over the next couple of years, but trucking will likely perform much better than that.

“When we look at the service side of the economy, we’re seeing that the movers of the goods are the ones that are recovering. In particular, the transportation sector, having been hit back, during the economic downturn, GDP output for the trucking industry it was basically flat in 2008 and fell by over 4% in 2009. However the recovery that we’re seeing in terms of GDP data shows a growth rate in the trucking and transportation sector of about 9%. Certainly strong upward momentum is being exhibited,” she said. “Although the decline was quite sharp, the recovery has already been equally as substantial.”