1. The Worldwide Economic Recession

This is the biggest story of the year. Many of us in transportation have been talking about the “freight recession” in North America for the past couple of years. The U.S. mortgage crisis and credit crunch transformed the “freight recession” into an economic recession with escalating job losses, home foreclosures and government bailouts. Coming off two soft years in the transportation industry, there was hope that a fall 2008 recovery was at hand. The fact is that just the opposite is happening as tight credit and a lack of confidence are resulting in consumer cut backs on purchases. This is further reducing freight volumes and freight rates. It looks like it is going to get worse before it gets better.

2. The DHL departure from the domestic US Market

For the past several years, Deutsche Post has made a determined effort to penetrate the domestic U.S. small parcel market by expanding its DHL operation in the United States. During this period, DHL played the spoiler role by keeping domestic small parcel rates competitive. After enormous financial losses, the decision was made to maintain DHL’s international service but terminate its domestic U.S. operations, laying off 9500 employees. DHL’s two key competitors, FedEx and UPS, have moved forward with rate increases to take advantage of their market dominance.

3. The Yellow/Roadway Merger

YRC has made a number of acquisitions over the last five years including Roadway, USF and some transportation companies in China. Despite a number of back office rationalizations, several executive changes and closures of poorly performing businesses, YRC finds itself at the point of having to merge Yellow and Roadway, closing and selling off 200 redundant terminals, reducing management salaries, renegotiating union contracts with the Teamsters and restructuring its balance sheet in order to survive. The question is whether these changes going to work? Will YRC be able to retain its revenue base as its competitors target its customers by offering them a “safe haven” for their LTL freight? How much revenue erosion will they suffer as they merge these two large operations? Will they be able to add any new customers during this period of uncertainty? Can the Roadway and Yellow terminal networks be “right sized” and calibrated to correspond with the adjusted revenue base? Can all of this be done with such a shaky balance sheet? Stay tuned in 2009.

4. The Rise and Fall of Crude Oil Prices

The rise and fall of crude oil prices has defied all logic. After hitting a high of US$147 a barrel in July, crude oil prices tumbled all the way down to the $40 range. While this is bad news for those folks involved in the Alberta Tar Sands projects, it is good news for carriers and shippers. At their peak, the surcharges on truckload shipments were equal to fifty percent of the cost of freight, an almost unbelievable number considering where these percentages were a few years ago. Lower fuel costs significantly reduce carrier operating costs and, as a result, shipping costs. This will be very beneficial during these difficult economic times. Nevertheless we must learn the lesson that fuel costs do not correlate directly with the laws of supply and demand. A strong economic turnaround, which now looks to be a few years in the making, could bring back $147 a barrel crude oil costs.

5. The Shrinking Truck Capacity Market

A number of well known carriers left the market in 2008 including Jevic, Alvan and Al’s Cartage. But these relatively small business closures don’t tell the whole story. Many smaller fleets closed their doors while most trucking firms parked some trucks and curtailed purchases. In addition, thousands of used trucks were sold to Russia and other countries. The fact is that an estimated five percent of the available truck capacity exited the market in 2008. We now have many less trucks chasing a lot less freight.

6. The Rise and Fall of the Canadian and U.S. dollars

Currency fluctuations played a large part in the world of transportation in 2008. The Canadian dollar reached a high of $1.10 to the U.S. dollar before sinking back to $0.80. The U.S. dollar, which had declined dramatically in value, is now viewed as the safest haven among world currencies, despite the country’s current economic woes. Recently it has increased in value against many of the world’s currencies. For Canada this is a good news/bad news story. For companies in resource industries, the sharp decline in the Canadian dollar makes Canadian products more cost competitive to export to the United States. The bad news is that over the past few years, many Canadian firms (in such industries as pulp and paper) have closed plants and cut capacity. With the U.S. in recession and with reduced capacity, the currency change may be a case of too little, too late. The currency re-evaluation may not give the Canadian trucking industry much of a lift.

7. Near Shoring

Over the past decade many North America manufacturers shifted their production overseas to China, India and other countries to take advantage of lower costs of production and attractive transportation costs. Then something started to happen. The confluence of production quality problems, rapidly increasing fuel costs, declines in the value of the U.S. dollar, port congestion and long lead times caused logistics executives to question the viability of the off shore movement. A number of companies began to pull back production to the United States, Canada or Mexico. While many of the forces driving near shoring have abated over the past few months, this will not stop companies from revisiting the economics of where to manufacture their products.

8. The Green Movement

A number of factors have brought about this movement, including the cost of crude oil noted above, the issue of climate change and the need for energy conservation. The green movement has resulted in a number of initiatives including hybrid vehicles, bio-fuels, the Smartway program and speed limiters, just to name a few. It has caused carriers to be much more focused on energy conservation and efficiency, reducing idling times, deadhead and out of route miles. This is clearly a movement that will be with us for decades.

9. Shipper / Carrier Collaboration

The realities of the current economic environment have caused many shippers and carriers to rethink their relationships with one another. For shippers, one of the key issues to surface is which carriers are going to make it and which ones are not. Which carriers can I count on to transport my freight, in good times and bad? While there are still many shippers focused primarily on cost savings, many others saw the light in 2008. They realized that when we come “out of the tunnel” and the sun rises again, it will be critical to have strong alliances with quality core carriers. Enlightened shippers are realizing that it is important to surround themselves with dependable business partners. Carriers are also realizing how important it is to partner with shippers that treat them ethically and fairly and pay them in a timely manner. This was an important development in 2008.

10. The Declining Domestic U.S. Big 3 Auto Sector

When I first came into the trucking industry, hauling automotive freight was the backbone of the company I worked for. Performing LTL consolidations for Ford and GM and moving full loads to assembly plants on a JIT basis, was the foundation of the company. It helped me realize how important the automotive business is to the economy of Ontario, Canada (and to various regions of the United States). There is no doubt the original big 3 have lost their way over the past quarter century. Nevertheless, this industry and the jobs that go with it, both in the automotive and trucking industries, are crucial to the economies of the United States and Canada.

While it is true that if cars are not made by the big 3 in North America, there will likely always be some car manufacturing in North America (for Asian or European manufacturers). That is not the point. The issue is that for much of the past century, car and truck manufacturing by the big 3 has been a key component of our economies, even if the three companies in question have not been particularly well run. As the year 2008 comes to a close, there seems to be a growing recognition that in this time of rapid job loss, we need to find a way to make these companies relevant and productive again. This business is very important to the transportation industry in North America.

There were a host of other developments that had an impact on transportation in 2008. While truck capacity was a challenge much of the year, this was a good year for many freight brokers. Many shippers turned to them to find the scarce capacity that was available. Freight bids became the norm as shippers sought to leverage their freight volumes to reduce freight rates and solidify capacity. The third party logistics movement continued to grow as shippers continued to outsource their non-core logistics and transportation functions to companies that provide these services as their core competence. Purchases of transportation management software remained strong as some industry consolidation took place.

On a personal note, I have been in the freight business for almost 27 years. I have been through recessions and economic recoveries several times. Nevertheless, there has never been a year quite like 2008. It was year when carriers had to look at every truck, every driver and every customer and challenge their economic viability. It was a year when shippers had to be just as knowledgeable about a carrier’s on-time service report as its balance sheet. For the companies that survive this tough time, they will be stronger and more financially focused than ever before. 2008 was a very challenging year. In next week’s blog, we will look ahead at some of the trends shaping freight transportation in 2009.