The current economic crisis has been described by esteemed investor Warren Buffet as an economic “Pearl Harbour.” The cost of the bailout ($700 billion), the earmark spending ($100 billion) included in the bailout bill along with the nationalizing of Fannie Mae and Freddie Mac and the insurer A.I.G. and the financial support provided to the forced mergers of some giant U.S. financial companies has run up a tab estimated at $1.8 trillion. This sum of money is larger than the combined economies of Canada and Spain. This is clearly the worst financial crisis since the Great Depression.

In this blog, I will examine the potential impacts of the financial crisis on the U.S. economy as a whole and on the trucking industry. The effects of the U.S. economic downturn are becoming quite apparent.

• Increasing Job Losses - September was the worst month for job losses in a number of years and there are projections that U.S. unemployment could grow from 6.1 to 10 percent
• Increasing home foreclosures – Significant numbers of Americans, particularly those who acquired so-called sub-prime mortgages are finding that their debts exceed their equity in their homes and are walking away from them
• Tightening Credit – Stung by load defaults, lenders are raising interest rates, down payment requirements and credit worthiness requirements to minimize bad debt exposure.
• Declining Home Sales and Home Building – As home prices fall and with economic uncertainty, home sales are declining and house prices are declining
• Declining Consumer Confidence – As stock markets decline, job losses increase and home values decrease, consumers feel less wealthy and less confident

Tighter credit makes it more difficult to buy a car. Falling home prices will make it more difficult to borrow money against the equity on your home. Less confident consumers will be less likely to renovate their homes and buy luxury items such as flat screen TV’s and numerous other goods. The impacts of the expected U.S. slowdown will be felt around the world. As the wealthiest nation on earth, declining U.S. consumption will hurt the economies of many other nations.

How bad will things get? The current issue of Business Week contains some interesting data. During the Great Depression of 1929-1934, 10,000 commercial banks disappeared. Since August 2007, 14 banks and 3 major investment houses went out of business. Take home pay income shrank 25% by 1933. In the U.S. the decline is 5% since May. The output of U.S factories and mines declined by 54% between 1929 and 1932. Industrial production has shrunk by only 2% since January 2008. Of course, the Great Depression data was complied over a longer time horizon. On the other hand, it is unlikely that U.S. will experience economic declines of the magnitude of the Great Depression in the coming years.

There is no way to tell how well this bail-out package will work. There is no doubt that we are heading into a difficult period and it will take time to work our way out of what many experts believe is a certain recession. The new U.S. President along with the House and Senate will have a major challenge on their hands. Many aspects of the U.S. financial situation and U.S. culture will require an overhaul. There will need to be more regulation of financial institutions, better oversight of financial activities, an improvement in executive pay for performance metrics and procedures, tighter lending requirements and a mindset change on the part of many consumers that you can enjoy the “American Dream,” a home and cars in the suburbs, if you can afford to pay for them or have the income stream that will allow you to obtain credit. That is a tall order and it will take time.

What are implications for the trucking industry? These have already been two of the most difficult years that many long time observers, including me, have seen. A positive effect of the trucking company bankruptcies and parked trucks has been that supply and demand appeared to coming into balance. ATA shipping volumes appeared to be firming up.

This will almost certainly change. Tighter credit, higher unemployment and lower consumer confidence will certainly shrink demand. Tighter credit will restrict capital investment in new truck fleets. One can also expect to see slower payment from shippers. For those companies hanging on “by their fingernails” and hoping for an economic turnaround, recent events will almost certainly mean another twelve months of difficult times.

Some companies are already reading the economic “tea leaves” and taking drastic action. The decision by YRC to merge the operations of Roadway and Yellow after insisting for years on the importance of maintaining their individual brand identities is clearly an acknowledgement of the tough times ahead. I would expect to see more bankruptcies and a speed-up in merger activity. In some sectors of the freight market there are simply too many companies chasing too little freight. With declining demand, this will continue to place shippers in the driver's seat on rate negotiations. This should enocourage carriers to remain lean and focus on improving their value propositions. Some further carrier rationalization would seem inevitable and probably desirable to keep freight rates at profitable levels.

Looking ahead, America is still a strong country with an excellent workforce and a great entrepreneurial spirit. The country will soon be under new political leadership. While the enormous bail-out package will impose limitations on spending, new leadership should create a more positive environment than has existed over the past number of years. As noted above, this financial crisis pales in comparison to the Great Depression. The speed with which the bailout package was designed and passed into legislation already reflects the determination and resilience of the American people. If the bailout money is used wisely and consumers and businesses are given the right tax breaks and incentives, this should help quickly move America back on the road to recovery.

Some years ago I had the privilege of seeing Benjamin Zander speak. In addition to being the conductor of the Boston Philharmonic Orchestra, Mr. Zander is a motivational speaker and teacher. His method of delivery is truly unique in that he mixes wit, humour and music with a very powerful message.

His message is one of hope, of not getting caught in the downward spiral. It is a message about the art of possibilities and transformation. I was reminded of his message as I was reading the current issue of Fortune magazine. In this issue, they explain the three cycles that are spinning downward. These are the three cycles that are undermining the global economy at the present time. In this blog I would like to review the nature of these three interrelated downward spinning cycles and then share some thoughts with you as to how we can transform ourselves out of the doom and gloom that has gripped North America and the world.

The Downward Cycle of Confidence

There has been a major loss of confidence in recent weeks in a number of Wall Street financial institutions. Problems at Fannie Mae, Freddie Mac and Lehman Brothers turned into crises due in large part to a lack of confidence. As Fortune reported, “the less capital that goes into the sector, the weaker it becomes, driving capital away....” Washington’s giant bailout was intended to squelch the crisis of confidence in the whole U.S. financial sector. The lack of confidence is also apparent in the wild gyrations of the stock markets around the world. The huge dips simply reflect the panic that has gripped investors.

The Downward Spiral of Deleveraging

Many financial firms have concluded that they have too much debt. They have also concluded that they need to more vigilant about any new debt that they take on. To reduce debt, they are trying to sell financial assets. With supply greater than demand, this is reducing the value of the debt that they still hold. To further reduce debt, they continue to try to sell assets further reducing prices. This is a downward cycle in real asset values rather than a downward cycle of confidence.

The Downward Cycle of Housing

From 2000 until 2006, housing prices in the United States were on an upward gradient. Easy credit and incentives (e.g. zero or minimal down payment) launched a six year housing boom. Housing, the root cause of much of the financial mess in the United States is now in a downward spiral. Sellers are rushing to sell before the prices go lower. Many home buyers are facing foreclosure on their homes as interest rates increase. With a weakening economy and a lack of confidence, there is too great a supply of homes chasing too few “confident” buyers.

The question then is how do we transform this situation? How do we attack these downward spirals and turn them in a positive direction? Here are five “possibilities,” some of which have been implemented or are in the process of being implemented.

1. The Financial Rescue Package

As reported in the previous blog, the $700 billion Wall Street bailout, coupled with the other actions taken by the U.S. Federal Government to prop up a number of ailing institutions, was a first step. This was a major frontal assault on confidence and it was clearly intended to protect the integrity of America's financial institutions.

2. Interest Rate Reductions

The fifty basis point drop this week by a number of the world’s major banks was intended to ease credit and encourage investment. It was intended to demonstrate that several major governments around the world are working together, in a coordinated fashion, to solve this crisis.

3. Buy Equity Stake in America’s Banks

Treasury Secretary has proposed taking an equity stake in a “broad array” of banks and other financial institutions “as soon as we can.” This significant shift from buying the “toxic” debt which was part of the previous week’s bailout package to taking equity stakes surfaced this week after Britain took this more aggressive approach. The hope is that massive infusions of taxpayer-funded equity will prop up financial institutions such that they will be more inclined to lend money.

4. Buy Residential Mortgages

This was an initiative taken by the Canadian government this week. It announced a plan to buy $25 billion in residential mortgages. The intent of the cash injection is to shore up the nation’s banking system by helping them deal with sky-rocketing funding costs so they can keep providing mortgages to consumers. Commercial banks in Canada responded by lowering their prime rates. The U.S. needs to look at a similar plan which will create a floor on housing prices and instil confidence in banks to lend money and consumers to buy homes.

5. New Political Leadership

The U.S. has been operating with a “lame duck” or as one pundit stated a “dead duck” President for a long time. Most polls suggest that Barrack Obama and Joe Biden are favoured to take over the White House in January. The election of a new President and V.P. will create hope and optimism. These are two very gifted and capable leaders. With a four year mandate to lead the country, this will provide these two individuals with a unique opportunity to create a more positive, hopeful business climate. It will provide them with mandate to follow through on their campaign promises (e.g. lower taxes for the middle class) and right the ship. They will also have an opportunity to fix the tarnished image of America in economic and foreign policy.

Clearly there is a plan or plans in place to transform the financial situation in North America and around the world. A number of very positive forces are in place for the mid-term. Among these are generally low inflation, the continued positive impact of technology and innovation on productivity, the overwhelmingly beneficial effects of increasing global trade, good economic and political news from most of Eastern Europe and South America, and the inexorable momentum towards opening up markets in China, India and other parts of the developing world. Importantly, while declining oil prices have hurt stocks in the oil patch, they are helping reduce freight costs and easing the strain on our personal finances. The stage is set for the Great Recovery.

The current credit crisis is placing increased pressure on shippers and carriers to offset shrinking volumes and cash flows. Published statistics indicate that both manufacturing production and retail sales sank in September to their lowest level in years. This is resulting in production cuts and layoffs.

Carriers are facing challenges from shippers on a number for fronts.

• Smaller shipments and less volume
• Slower payment of freight invoices
• Increasing numbers of shipper bankruptcies that result in non-payment of their overdue accounts
• Shippers holding up payment or claiming they need to offset (contra) their payables for alleged damage or poor service

In addition, truckers are finding that their access to credit is being more restricted by financial institutions and suppliers. Banks are trying to do a more effective job of prioritizing their loan portfolios. This may make the flow of money to certain truckers more problematic than in previous times. Whether it is short term payments for fuel and payroll or more significant funds for new capital equipment or an acquisition, credit liquidity is being more carefully scrutinized.
What can carriers do to help themselves during these difficult times?

Large carriers with lots of cash on their balance sheets are in the best position to whether the storm. For carriers with less cash, there are a number of possible initiatives that may be helpful. They include:

 Sale of non-core businesses or excess equipment (where possible)
 Trimming capacity
 Merging operations and removing redundancy
 Reducing fixed costs, including salaried employees, and utilizing more outside agency personnel on an as required basis
 Performing more careful due diligence of prospective shippers
 Shying away from one shot or large short term spurts in freight, particularly from shippers that are unknown
 Demanding payment on delivery from specific slow-paying shippers
 Hiring collection agencies to recover unpaid bills that are 30 days and over
 Speeding up the process of sending out invoices
 Charging for round trip mileage in situations where backhaul freight is very difficult to secure
 Updating their fuel surcharge tables more frequently
 Offering incentives to shippers for “quick pay”

Some carriers are turning to more desperate measures such as factoring their receivables. Factoring fees typically run from 5 to 10% and are based on the credit worthiness of the client. While factoring can help some companies, it can also push others into a “downward spiral.” With margins so lean in trucking, giving away some precious points in margin may jeopardize the trucker’s long term survival.

This is also a time for marketing initiatives. Offering new services, which are an extension of, or an improvement on existing services, is another way to offset the financial challenges. Generating new and profitable revenue sources can be very helpful in taking advantage of a company’s existing infrastructure and resources. This is also an opportunity to secure market share from weaker carriers that are terminating good people, exiting profitable markets and/or “cheating” on service. The anxiety level of strong sales performers working for your competitors is often heightened by rumours and substandard operating performance. This can make these individuals more open to overtures from stronger, better financed companies. Those companies that are able to maintain strong cost control, good financial management and aggressive marketing activities will be the ones in the best position to ride out the current financial crisis.

As we head into some tough times, this makes it that much more important for shippers to skilfully manage their freight costs. With freight transportation expenses running at between 1 and 10% of revenues in most manufacturing and distribution firms, a few percentage points in savings can make a big difference to a company’s bottom line. This makes the process of carrier selection and rate negotiations an important element of any company’s cost savings program.

The process can take many forms. There are shippers who wait for carriers to come in with their annual increases as a trigger to launch a rate negotiation process. Others may take a more proactive approach by conducting a freight bid on some or all of their freight. The results of the freight bid can form the basis for updating their routing guide.

Between the two extremes of “watchful waiting” for your carriers to make the first move and aggressively going to market to secure rates from new and existing carriers, there are a number of options open to shippers. You can bid certain problem lanes or specific blocks of freight (e.g. cross-border LTL freight, Western Canada shipments, small parcel shipments etc.) or you can bid your entire freight program.

Develop a Carrier Selection Strategy

The decision on how and when to initiate the carrier selection/rate negotiation process should be based on answers to the following questions:

• What changes have taken place in my business over the past year (e.g. new products, new markets, new vendors, new cycle times, new warehouse locations etc.)?
• How does my company’s supply chain differ from the way it was a year ago?
• What are the freight transportation implications of these changes?
• What options do I have to switch modes (e.g. truck to intermodal, LTL to truckload) to achieve cost savings while meeting production and/or customer service requirements?
• Can I leverage my inbound and outbound freight movements?
• Are there locations where my vendors and customers both have offices such that I can create round trip opportunities?
• Is there anything I can do to increase the utilization of my company’s private fleet and/or should this freight be leveraged with my other freight and tendered to common carriers?
• When was the last time I bid each segment of my freight transportation business?
• What is the current economic climate and what is the forecast for the next 24 months?
• What are the biggest freight transportation challenges and opportunities that I am facing at the present time?
• Is my company able to effectively manage freight transportation or would there be savings and efficiencies by outsourcing this non-core function to a third party logistics or freight management company?

By answering each of these questions, this should allow you to develop a well thought out group of objectives to launch your carrier selection process.

Analyze your Freight Spend Data and Carrier Scorecard

You also need to look at your freight spend data and your carrier scorecard or dashboard. By analyzing the past twelve months of shipping data, you may be able to discern trends and patterns that should be considered in your procurement exercise. These are some of the items to be examined.

• What is my annual freight spend and how many core carriers do I have?
• Are there opportunities to reduce my freight costs by rationalizing my core carrier base?
• Are there certain carriers that are not meeting our expectations in terms of on time service, claims, billing accuracy etc?
• Have I got all of my carriers on the same fuel surcharge formula?
• How much money am I spending on accessorial charges and why and where are these costs being incurred?

Create a Starting Point for Rate Negotiations by Benchmarking your Freight Costs

The next question is have you benchmarked your freight costs? How do you know that you are paying at or below market rates for all of your freight movements? If you don’t have this data, you may need to conduct an informal rate gathering exercise or conduct a formal freight benchmarking study.

With a thorough analysis of your business needs and objectives, as they pertain to freight transportation, an analysis of your freight spend data and carrier performance metrics and a set of freight rate benchmarking data, you are able to initiate a focused carrier selection process.