The current recession is producing changes to our economy that we are all trying to comprehend. I have recently written about these changes in my blog on “Shipper/Carrier Strategies for the Resetting Economy,” that was posted on August 28, 2009. I have also highlighted some lessons we can all learn from the current recession in last week’s blog, “Essential Skills for the Post-Recession Economy.” My objectives in trying to research and learn about these changes are twofold:

First, I want to ensure that the clients of Dan Goodwill & Associates benefit from the latest and most relevant wisdom and business strategies. Second, I hope to provide readers of this blog with some thought leadership with respect to what impacts these changes are having on the successful operation of a trucking business.

In this blog, I will look at some ideas that have been proposed on how to more effectively manage business enterprises to succeed as the economy “resets.” The inspiration for the blog came from a thought-provoking presentation I heard on Next Generation Management, delivered by John R. Brant of the MPI Group at the SMC3 Summer Conference this year. I will attempt to draw out the inferences for distributors and transportation companies.

In his presentation, Mr. Brant highlighted five key elements that will be essential to success in the “Next Generation.” Most of these elements apply to both transportation companies and manufacturing organizations. They are:

1. Customer-focused innovation: Develop, make and market new products and services that meet customers’ needs at a faster pace than the competition.

2. Engaged people/human capital acquisition, development and retention: Secure a competitive performance advantage by having superior systems in place to recruit, hire, develop and retain talent.

3. Superior processes/improvement focus: Record annual productivity and quality gains that exceed the competition through a companywide commitment to continuous improvement.

4. Green/sustainability: Design and implement waste and energy-use reductions at a level that provides superior cost performance and recognize customer value.

5. Global engagement: Secure business advantages by having people, partnerships, and systems in place capable of engaging global markets and talents better.

In the research conducted by the MPI Group, they identified that those companies with world class supply chains have a higher percentage of their workforce dedicated to their Supply Chains and more staff working on supply chain partnerships.

These companies spend a higher percentage of their revenues on IT. They have been more successful in reducing inventory levels and most important, companies with world class supply chains tend to make more money than companies that are not best in class. Mr. Brant argued that many companies measure the wrong metrics. World class supply chains have metrics that are more customer-focused.

He argued that next generation supply chains will look different. They will have:

• Advanced Measurement Systems: The companies that are closest to “world class” status have more advanced metrics than the laggard companies. They more frequently provide a “perfect delivery” to their customers.

Implications for logistics organizations: World class companies utilize more effective scorecards and dashboards. They are better able to track performance and to ensure that their freight arrives consistently on time.

• Overall Performance: Manufacturers at or near world-class status are far more likely to identify their supply chains as advanced extended enterprises. They feature real-time communication of demand and their entire supply chains are flexible to demand spikes. Standard delivery times are consistently met and these companies maintain just-in-time inventories.

Implications for logistics organizations: World class companies feature better shipper/carrier communication. They are better equipped to proactively inform their partners of demand changes so they have sufficient trucking capacity in place to handle fluctuations in demand.

• Responsiveness: A higher percentage of world class companies report that “strategic suppliers and customers are active participants” in operations versus those companies that are not at this level.

Implications for logistics organizations: World class companies collaborate more effectively with their supply chain partners. They work with their partners to achieve superior results.

World class companies hire better, train better and perform better. Their employees have a better understanding of how their companies make money and how they each contribute to the bottom line. The compensation of their employees is tied directly to their financial performance. As we gradually exit the recession, these are important principles that companies should attempt to emulate in their management processes to enhance their opportunities for success.

The average forecast of the 52 economists surveyed by Blue Chip Economic Indicators calls for growth in real domestic product of 2.7% in the United States over the next four quarters, with the annual rate in any one quarter no greater than 3%. It is hard to argue with these forecasts. Unemployment in the United States is just under 10% and rising while the true unemployment/underemployment figure that includes individuals no longer seeking employment or managers flipping burgers at MacDonald’s brings the number closer to 16%.

Then you have to layer in the number of people who have received one or more salary cuts and the millions of Americans whose mortgages are larger than the value of their homes. All of these folks are feeling poorer and are now less inclined to spend money than they did prior to the recession. In addition, some argue that the U.S. economy will slip backwards as the stimulus money is depleted and is no longer available to sustain economic growth. These are very powerful headwinds and compelling reasons to support the consensus economic forecast.

However, “the correlation between the depth of recessions and the strength of recoveries over the last nine business cycles is unmistakable,” argues James C. Cooper in his Business Outlook in the current issue of Business Week. In the first year after the severe slumps in 1973-75 and 1981-82, real GDP grew 6.2% and 7.7% respectively. “Like a rubber band, the economy snaps back in proportion to how far it was pulled down, as consumers finally upgrade old laptops and buy new clothes, and businesses replace inventories and worn-out equipment.”

Robert J. Barbera at the research and trading firm ITG notes that after each of the past nine recessions, deep or shallow, real GDP has never required more than three quarters to regain its peak level prior to the downturn. This view is also supported by FedEx’s Chief Economist, Gene Huang. According to Mr. Huang, the average GDP growth rate in the year following the 10 recessions since World War II was 5.4 percent. Industrial production has historically jumped by 10 percent or more in the year after a recession.

Could history repeat itself and what would that mean for the beleaguered transportation industry?

The consensus “doom and gloom” scenario fails to recognize a few key points. Unemployment has been as high or higher in previous recessions. Canadian employers added to payrolls for the second month in a row, creating a better-than-expected 30,600 jobs last month and sending the jobless rate down in a sign the country's labour market is recuperating. The jobless rate unexpectedly tumbled three notches to 8.4 per cent in September, the first monthly decline since the downturn began last fall, Statistics Canada said Friday. Will the United States unemployment rate soon begin to drop?

Many companies have drawn down inventories and would need to ramp up production to meet an upswing in demand. The large upsurge in the stock market over the past six months, usually a predictor of better times, restored $4 trillion in household wealth, and a 4 percent savings rate is adding $400 billion a year to household balance sheets, reported Morgan Stanley. This is encouraging consumers to feel more confident. Ninety percent of the population is working and wealthier than it was six months ago. The index of leading indicators, a composite of 10 gauges that tends to foreshadow recessions and recoveries, has made a sharp upturn. Since March the index has grown at an 11.7% annual rate, the fastest five-month pace since the 1981-82 recession.

This begs the question of how much of this growth has been fuelled by the stimulus money and how much has been generated by a true upswing in non-stimulus related business activity? If history provides us with the answer, this could be a short lived recession with a powerful turnaround. This is clearly the minority view.

What would that mean for shippers and carriers? It would likely result in:

Capacity shortages

The slow economic recovery forecast by many economists would likely allow sufficient time for parked trucks and railcars to be methodically brought back into service and for drivers to be hired and trained. A quick upturn could result in capacity shortages in certain locations.

Significant freight rate increases

Reports this week suggest that truckload capacity in the United States is firming up and freight rates are beginning to solidify. A sharp upturn in truckload shipping activity could likely trigger capacity shortages and large rate hikes. The 13 members of the Transpacific Stabilization Agreement (TSA) announced there would be a general rate increase of $800 per FEU for West Coast-bound cargo, and $1,000 per FEU for cargo intermodal and U.S. East-and-Gulf-coast all-water cargo. The TSA members are: APL, CMA-CGM, COSCO, CSCL, Evergreen, Hanjin, Hapag-Lloyd, Hyundai, "K" Line, MSC, NYK, OOCL, Yangming, and Zim.

Large spikes in fuel costs

The cost of fuel seems to defy the standard laws of supply in demand. At this point in time, there appear to be substantial reserves of refined oil. However, since the cost of fuel is so largely driven by emotion and irrational behaviour, one could argue that fuel prices could certainly return to $80 or $90 a barrel if there is a spike in demand.

Would this be enough to keep some of the trucking companies teetering on the brink of bankruptcy from going down? Not likely. This week, Bruce R Smith, a long established truckload carrier in Canada, filed for creditor protection. This may signal the much awaited purging of some of the industry’s weaker players as the recession comes to an end.

Could this fast turnaround scenario actually happen? Have the leading economists been wrong before?

Of course it is possible that we may be in for a “W-shaped” recovery. Stubborn consumer angst could hobble the economy, however, and a “W-shaped” recovery is a distinct possibility, warned Mr. Huang. Although the initial recovery may prove stronger than expected, it may stall within a few quarters as consumers “de-lever.” Huang expects another 2 to 2.5 years of consumer caution. The current good news may be overshadowed by more bad news as the commercial credit market takes a hit and unemployment levels rise extending the current recession.

Nobody knows for sure how and when the recession will end. Clearly there are a variety of possible scenarios and there is good rationale for each one. We live in interesting times.

Internet-based load matching services have been around for years. For shippers, freight brokers and 3PL’s seeking carriers to move loads and for carriers seeking loads to move, internet-based load boards have been a very valuable resource to the transportation industry.

Like all segments of the industry, these types of services have been impacted by the current recession. To provide the readers of this blog with an update on what is happening, I interviewed two industry players. They are Claudia Milicevic, TransCore’s Link Logistics General Manager for its Canadian load matching service and one of the industry’s largest players and Roy Thacker, President of LoadSurfer Corporation, a Milton, Ontario-based company, that began operations in April 2009. Here is what they had to say.

The Impact of the Recession on Load-Matching Services

“I think the recession has had some degree of impact on the load boards,” commented Roy. “As we all know, there is a natural churn to the industry with so many companies coming and going (in good times and in bad). In the good times, that natural churn tends to have a positive effect on the size of the subscriber bases of the major boards. In this recession, there have been many companies and personnel exiting the industry with fewer new companies coming into the mix. The result is that the natural churn has been mostly downward. From the people that we have been talking to, it would seem that many companies, especially the smaller ones, have either cancelled their load board subscription because they can no longer justify it or they have scaled down their subscription to a much lower package with less features. Although this is merely our observation, there must be a certain degree of truth to it since we are seeing the major players in Canada starting to advertise their Load Matching services heavily; something that they did not have to do when times were good.”

“We have experienced higher turnover than usual,” stated Claudia. “We’ve lost business due to companies that have closed. There are other companies however that have joined because they may have lost a steady contract or can’t fill their trucks to capacity due to lower volumes. These companies have joined Loadlink to find freight to fill their trucks.”

Industry Changes over the past 3 Years

Claudia commented that “the industry is reflective of the economy. A few years ago when the economy was in much better shape, customers were looking for features and functionality that would enhance their daily use and supplementary services that were complimentary to the basic offerings. Today, when times are much tougher, speed of download, ease of use and number of loads and trucks are first and foremost for all of our subscribers. People need to get loaded quickly and keep their trucks running at capacity. Other ancillary services are not as important as they were a few years ago.”

“One of the biggest changes recently has been the recent purchase of GetLoaded by Roper Industries in the summer of 2008” Roy stated. “This normally would not be that significant except Roper Industries also owns TransCore which in turn owns Loadlink and DAT. The end result is that although there are 4 major load boards in North America, 3 of them are owned directly or indirectly by the same shareholders.

Another big change in recent years has been in the number of smaller load boards popping up here and there. There are probably 40 load boards out there now with the majority being focused on the USA market. Although a couple of them are doing quite well, the majority seem to be operated by various industry suppliers who are looking to draw traffic to their site in order to sell users on other products.”

Roy and Claudia were questioned on how the industry has changed from the perspective of a shipper, carrier or 3PL. Claudia mentioned that “there are not a lot of changes from how they used Loadlink a year ago. The economy was in similar shape and they were using it in a similar fashion to how it’s being used today."

Roy expressed a somewhat different view. “I think that there is a big push to deal with people that you know and trust. There has been a lot of fraud being perpetuated on the load boards so a lot of subscribers have been telling us that they would rather deal with carriers and brokers that they are familiar with. Credit data also plays a key role. People really want to know that they are going to get paid at the end of the day.”

Where is this Industry going over the next 2 Years?

Roy sees some major changes. “Having worked in transportation for 20+ years, I have seen the balance of power shift several times. With freight still being scarce, the shippers and brokers hold the balance of power. However, a lot of people seem to have forgotten about the driver shortage that existed a few short years ago. Due to the fact that freight volumes dropped so far and so fast, it created the illusion that the driver/capacity shortage has gone away. This is not true at all. The fact that so many drivers have left the market due to retirement, greener pastures, etc., what was probably a driver/capacity shortage of 4-5% is now probably 8-10%. The end result is that as the economy emerges from recession, the carriers that manage to hang in there are going to be in the driver’s seat. Rates will increase and brokers will be left scrambling to cover their loads.

As far as Load Surfer is concerned, we expect to continue our development over the next two years. We expect to add social media, our own version, not what Facebook and MySpace offer. They don’t work for our industry as well as the capital portion which we have started on with our new partnership with J D Factors. If one is to look at the internet 5, 6, 7, 8 years ago, it was largely an untapped resource. It was basically an electronic pipeline that contained millions upon millions of bits of data. As technology improved and companies found better ways to access and utilize the information, the internet became a more and more powerful tool and more importantly; prevalent in our daily lives. We look at a freight matching board in the same way.

Whereas most of the major boards out there today are based upon the user connecting to the load board through a common interface, we look at it more as if our product is a pipeline of sorts that contains freight, equipment and most importantly capital. We recognize that there are a multitude of different users and many ways that they would like to connect. In order to give them what they want, we are in the process of creating multiple methods to access and utilize the data in our pipeline. Obviously, many companies will want to connect via a web site which is the traditional method. However, many other companies use dispatching programs meaning that the average user has to flip from screen to screen to find loads and equipment on a load board(s) and then enter the data into their dispatch system.

We are changing all of that. Currently, Load Surfer is integrated to 4 different dispatching systems, Axon, Infosite Technologies, TransPlus and Millogiciel. Users of those systems can actually edit, update and post their freight and equipment directly from their dispatching software. Future integrations will allow them to retrieve the loads back into their dispatch.

Our recent partnership with J D Factors adds another dimension to the pipeline. Currently, J D Factors’ customers can determine at a glance whether or not a particular load on our system is factorable by looking for a money bag next to the load. The bottom line is that Load Surfer will end up being an information pipeline of sorts that looks like a cross between a traditional load board, Facebook and eBay. It will be very exciting.”

For Claudia, “the next two years will be determined by what’s happening in the economy. We always strive to meet the needs of our customers. They let us know what their requirements are and we implement solutions to address their needs.”

Value Propositions of Internet-Based Load Matching Services

“We are the largest freight matching service in Canada with the largest database and with reputable customers posting to the network. We have also integrated to TransCore’s DAT network to provide the largest database of US based subscribers that appear in the Loadlink program,” stated Claudia.

“We sell our solutions to the Canadian transportation industry. Carriers, private fleets, freight forwarders, brokers, 3PL’s that need freight shipped or a truck loaded will benefit from Loadlink. We are confident that our subscribers will receive additional freight from our program or will find the trucks needed to move their loads and that it will pay for itself many times over. We provide a full 30 day money back guarantee if they are not satisfied. Close to 100% of all new subscribers that have subscribed to Loadlink have booked freight off Loadlink and the system has paid for itself with the extra freight they’ve booked.

We are extremely diligent in our acceptance process. We collect and validate a lot of documentation on an organization prior to allowing them to become a subscriber. We provide a lot of information to our customers on other members, including, but not limited to D&B credit reports, updated weekly, Equifax credit reports including daily alert notifications, TransCredit credit reports updated monthly as well as guaranteed payment indicators. We do provide our customers with many tools to enable them to make an accurate decision as to whether or not they want to deal with a potential counter party through Loadlink.

TransCore has been in business for 70 years. Loadlink has been operating in Canada for close to 20. We have longstanding customers and have built strong relationships with our customers. There are many players in the industry. Every year there are always players that enter and exit the industry. Some offer their services at low cost. Some offer their services at no cost. If it results in additional effort put forth and time spent, some actually cost you a lot more in time wasted. Many do not exercise due diligence to screen companies prior to permitting them to post on their service. Some may say that they review some documentation, but we exercise the highest quality control for all subscribers.”

Roy commented that “the one thing that all of those large competitors have in common is that they all started small and grew. None of them started out as the conglomerates that we are familiar with today. Having been in the load matching industry for many years, I have seen what makes some load boards successful and others fail. Perhaps the most common thing among the successful load boards is that they all started out as very good sales and marketing organizations. As they grew, they shifted away from that and it has not been lost on the industry. We have been very strong in both of those areas and we are now finding that people actually know about us when we call.

Another thing that the other load boards used to be very good at is customer service. Customers need to know that you care about them and will respond quickly and fairly to their concerns. At Load Surfer, we encourage feedback and suggestions and most importantly, we acknowledge and act on them. People seem to appreciate that so far. Load Surfer is trying not to be just another load board. We are trying to position ourselves as a company that cares about its people, its customers and its environment. We are trying to create an online community that promotes fair business practices. This is probably a tall order in the industry that we work in, but we are going to do our best to achieve this goal.

We target carriers and brokers of all shapes and sizes. Our value proposition is based on price, product and service. Our price is 30-50% less expensive than our closest competition. In today’s tough operating environment, this is a very important selling feature. Our product is 100% web based and is built using 2009 technology. (In terms of) service, we aim to take care of our customers as best we can. We try to deal with their questions and concerns as quickly as possible. In many cases, we have had customers who were very surprised to have a customer service representative get back to them a couple of minutes after submitting a request on the web.

Our approach is not that much different from the the other Load Boards used to do. The difference is that as they started to grow, their motivations and value changed and the people who suffer are the subscribers. It is our firm belief that if we treat and continue to treat our customers as we expect to be treated, we will be very successful. It is a pretty simple recipe but I know for a fact that it works.”

Technological Change

Since this is such a technology driven industry and since we live in such a fast changing world, where will the technology in this industry take us? This is what Roy had to say.

“Smart phones are becoming more and more popular and some of the load board guys have started to offer applications that work on these devices. Without any modification, Load Surfer actually runs on any web enabled phone. Probably the best way to give you a vision of where I see technology going is to share a small excerpt from our original business plan that talks about what is possible in today’s technology:

A potential enhancement to this product could involve adding a ‘personal intuition’ feature that would take into account the carrier’s current database and freight contracts in its planning. For example, a truck could be scheduled on a contract load from Toronto to Dallas. Based on this information, the system would know that it was going to have equipment available in Dallas. It would then analyze the upcoming customer freight possibilities for the truck and watch for freight opportunities coming available to move the truck to the next customer load pickup point. Of course, the system would have to consider other equipment coming available as well as freight composites. As an example, a truck emptying in Dallas is assigned a load from the freight matching system that goes from Dallas to Little Rock, AK, where they have a customer load taking the truck back to Toronto. This system could eventually be built to take into account a driver’s driving habits and preferences with regard to elements like home time, etc., an added feature that would do a great deal to help companies reduce turnover and increase driver retention.”

Summary

Clearly the load matching service industry is surviving the downturn and is being propelled in new directions by changes in consumer demand, economics and technology. These companies provide a very valuable service to the transportation industry.

For some 3PL’s, load matching boards are becoming the option of last resort as they seek to build their own internal carrier base. One problem is the reliability of carriers and the documented cases of unsavoury carriers promising to handle orders at attractive rates and disappearing in the middle of the night. The load boards promise to investigate but have little leverage as their goal is to sell more memberships and increase their own revenue. Some load boards only collect the data and post operating authority and credit information but do not guarantee users of their accuracy. As a result, 3PL’s cannot blindly assume that the carriers’ stated insurance liability is accurate. There is still a requirement to perform due diligence.

The larger 3PLs have invested heavily in TMS systems that download load information to multiple load boards at the click of a mouse and rely on these load matching services to find cheaper carriers. There is still a lot of business done on a transactional basis. Some 3PL’s offer very low rates on certain lanes (i.e. Toronto to Chicago at $500) in order to attract the desperate or bottom feeder carriers. A number of 3PL’s that subscribed to multiple load boards have chosen to reduce the number of load matching services they use to save money. Due to cost considerations and the large membership of TransCore’s Loadlink service, it has become the default load board.

As the economy improves, there will be new entrants into the 3PL and trucking industries. These companies will need the data base of carriers and loads offered by the load matching services. If we face a more severe driver shortage in the years ahead, load boards could become an even more critical resource to find truck capacity. This relatively young industry still has a long and exciting future.

During these difficult times, motor carriers throughout North America are seeking strategies to navigate through the challenges of declining volumes, excess capacity and very active price competition. Over the past year, some companies such as Bruce R. Smith have faltered and filed for credit protection while others have left the industry. Very recently MacKinnon Transport and L.E. Walker announced that they have joined forces to create synergies and lower their centre of gravity. Most trucking companies are trying to “tough it out” with a combination of revenue maintenance and cost controls.

One such company is a Quebec based trucker, Normandin Transit that has developed a comprehensive “Quebec home-made” plan to maintain its forward momentum. I recently spoke with Eric Raimondo, Vice President of Sales & Marketing, who shared with me some of his company’s initiatives. This is what he had to say.

“Normandin Transit is an asset based motor carrier with 258 Kenworth tractors and 581 trailers, dry box and reefers. We have an enviable employee retention of 95%. The company’s main niche is trans-border transportation, mostly between Quebec and Ontario, Western Canada and the USA. Normandin offers LTL and truck load service, both dry and reefer service.” This carrier’s value proposition consists of its capacity, adaptability and flexibility.

I asked Eric to articulate some of the strategies his company has employed to retain and build its base of business. He commented that “one of the things we've done was to stay very close to existing customers, contacting them daily or weekly. Another was to get our sales force to blitz the market, to expand relationships with existing 3PL’s and to open the door to new ones. Most of all, we have to be perfect, or almost perfect, by keeping the focus on superior service and performance. (We have done this) in order to not give our clients a reason to look somewhere else.

In the last 2 years, Normandin also took advantage of opportunities - - some in construction and some in real estate. We constructed a major addition to an existing terminal (50 thousand square foot warehouse and corporate offices). A few months back, we purchased our neighbour’s (a carpet manufacturer) installations and converted that space into another 50 thousand feet of warehousing capacity.”

I asked Eric to outline some of the challenges that his company has faced. “On the negative side, we did not have a choice. (We had) to bring down our rates in order to retain a portion of our client base. In some cases we understood the situation; in other cases we felt betrayed.” Eric indicated that his company had to lower some of its rates to “obsolete” levels because of “illegitimate competition.” He also mentioned that his company has tried to “maintain a respectable level of fuel surcharges.”

He noted that “on the positive side, the drop in demand pushed us to re-invent ourselves.” Eric indicated that his company found new ways of serving its customer base. This included offering ''carrier convenience'' transit times (economic deliveries) on some lanes. “We also elevated the service and promoted our expedited JIT LTL service.”

Many companies are trying to maintain an aggressive sales posture while employing a tight control on expenses. I asked Eric what Normandin has been up to in the area of cost savings. This is what he had to say.

“In some cases we had to spend and invest. For example, in order to control expenses we installed ‘’freight wings’’ wind deflectors on a part of our fleet. There should be a reasonable fuel economy resulting from this. Our tractors are limited to 105 KM per hour. This contributes to economies. We also optimized our routes.

We created a position in the Continuous Improvement sector. We now have a Director who concentrates on training drivers on such items as fuel economy and idle control. Their performance is monitored weekly.”

Eric highlighted a problem being experienced by carriers across North America, namely slow payment of invoices by shippers. “One of the challenges is in dealing with shippers that are using their economic leverage to bring down the rates, again and again. Unfortunately some carriers are on an 'artificial respiratory system.'' This serves to encourage this practice.“We have to deal with credit issues all the time, even if you do your homework and investigate potential clients through the credit channels. You still never get the realistic picture until you start collecting sums due.

The trend in our industry is 30 days. We all know that this ends up being an average of 45 days before you actually deposit the amounts. Unfortunately some shippers also have their problems and issues. When the time comes to pay the creditors and the sums are insufficient, we truckers do not have many avenues. We are a service industry and do not have a means of recouping these monies. Also, shippers will simply turn their business over to a new and eager-to-please player if we apply too much muscle on their Payables Department.”

Eric explained how this has a snowball effect. Since the shipper has given the business to another carrier, “that can makes things worse. The shipper will naturally hold even more payments in order to start fresh with the other player and show the new carrier the best picture in the first months (of that relationship).

Another example is Claims negotiations. (These are) unhealthy when, for example, a shipper owes you 5000$ and holds it while you have the same amount in unsolved and ambiguous (claims) issues. You often end up at the shallow end of the pool as you will not go through legal procedures for these less important amounts.”

I probed Eric to see how his company is dealing with this thorny issue. “On the never ending rate and fuel surcharge discount request, we deal one by one by choosing where we can accommodate and where we can’t, always taking into consideration which markets we can combine to optimize our revenues.On the (matter of) payables, we have put in place a credit card payment facility. This permits Normandin to organize a transaction within minutes of speaking to an, up until now, unknown shipper.”

To wrap up our discussion, I asked Eric how his company is performing financially and to outline his plans to keep his company on a positive track over the next twelve months. Eric mentioned that his company has been able to retain its revenue base and has maintained its profitability. Looking ahead to the future, he stated that “we will continue to work hard on sales, harder in operations and even harder in receivables. Normandin Transit intends to continue to show its great adaptability and flexibility to the market’s evolving needs.”

It is hard to find anyone who has anything good to say about the LTL freight market. Analysts at investment firm Stifel, Nicolaus & Co. expect trucking rates charged by less-than-truckload motor carriers to remain low through the holiday season and into the first quarter of 2010. In a note to investors, the firm's transportation analysts said they expect LTL volumes to pick up 3 percent to 5 percent in 2010 as retailers slowly restock inventories. The increase in freight traffic could be slightly higher or lower, depending on how quickly the economy recovers from the recession, they said.

The report noted that fuel surcharges, and fuel costs, are far lower than a year ago, meaning they aren't as much an issue in pricing and contract negotiations. And with low demand, there is still plenty of overcapacity in the industry. The good news for shippers is that fuel surcharges are not having as big an impact on costs as they did a year ago. For example, in the second quarter of 2008, carrier fuel surcharges were averaging an amazing 33%. In the second quarter of this year, they averaged 13.6%, according to Stifel's research. "With average fuel surcharges today well off highs of last summer . . . and accounting for roughly 12% of the average shipper's bill, they are less important today in pricing negotiations," Stifel analysts say. "Volatility in fuel prices is not good for carriers' margins or shippers' budgets, in our opinion, because it does not allow for proper pricing or planning." Low fuel surcharges is not all good news for LTL carriers that were deriving a significant source of profits from the more elevated fuel surcharges of the past.

A recent survey of LTL market participants conducted by Longbow Research in Independence, Ohio found that "aggressive and unprofitable pricing tactics are widespread as carriers focus on fighting for market share. Perhaps the carrier most effectively executing this strategy is Con-way Freight. In a recent interview, Con-way's CEO Doug Stotlar told Reuters "we have more aggressively priced than we historically have. We've captured some market share because of that." Stotlar also said overall he sees the pricing environment in the industry stabilizing now after an extended period of decline, driven down by excess capacity and weak demand.

This view was challenged by Earl Congdon, the CEO of Old Dominion, another major LTL carrier. Mr Congdon cited the economic downturn and trucking overcapacity as culprits behind "the worst pricing environment we've ever experienced." He also said in an interview that some of the pricing trends likely stem from deliberate moves to undercut YRC, the large but financially challenged player in the LTL shipping market.

Another key factor in the hostile pricing environment is the massive amount of LTL bidding as freight buyers try to secure aggressive rates and carriers seek as much market share as possible in an era of overcapacity. In addition to the long-running slump in demand, the overcapacity issues are being driven in part by a lower-than-expected number of bankruptcies for such a slow market. According to the latest data from FTR Associates, only 370 trucking fleets went bankrupt in the second quarter of this year, for example, "a number similar to the rate at the peak of the last upturn" says FTR's report. None of the tier 1 or even tier 2 LTL players has left the scene in the past year.

"Lenders are reluctant to foreclose because of the extremely low prices for used equipment and to avoid having to book losses on sensitive balance sheet reports. The main effect is to swell the number of surplus vehicles competing for freight, now around 200,000 units. Volumes are stabilizing but rates will be under pressure until there is a strong market-clearing of unprofitable fleets." As the economy picks up and the market for used truck equipment returns, some lenders may change their “carrier prop-up” strategies.

In their report this week, Stifel, Nicolaus & Co. suggested that rates for less-than-truckload services will remain low into the first quarter of next year, unless YRC shuts down or other carriers exit the market. That's good news for freight buyers but also means carriers on the “bubble" could struggle with another quarter of lower revenues, putting them at risk.

On Friday, YRCW reported a third quarter loss of $158.7 million. Despite sequential improvements from the second quarter and modest profits in its regional and logistics businesses, the company is still far from breakeven. While YRC continues to restructure labor agreements and extend debt repayment terms, YRC's future remains in question.

Longbow analysts say the carrier's chances of survival increase the longer it keeps its door open and the economy picks up. "The bankers, union, and large shippers want YRC to survive, in our view. In short, the bankers do not want the assets, the union doesn't want more job loss, and sophisticated shippers do not want to see roughly 18% market share leave due to the impact on competition."

Certainly, freight buyers are pulling for YRC to survive. According to Stifel's estimates, if YRC were to fail today, it would "immediately cure the overcapacity and increase rates." When former competitor Consolidated Freightways shut down in 2002, “within 90 days rates up were by almost 9 percent,” said Mike Regan, president of TranzAct Technologies. “If something were to happen to YRC, I wouldn't be surprised to see rates go up at least as much,” he said.

The Stifel, Nicolaus view is that “YRC will run out of money by the end of 1Q10, absent a restructuring and/or miraculous freight rebound." The Longbow view is that “since most of the stakeholders appear to want the company to survive, we believe there is a greater probability that it does barring the economy heading into a double dip recession."

Are there lessons to be learned from history? After decades of battle, there are two large players that remain standing in the small parcel market, FedEx and UPS. These two companies just happen to be well positioned to reap the benefits if YRC exits the LTL market. Most large LTL carriers that have been in YRC’s position in the past did not make it, but none have had the ongoing support of unions, bankers and customers.

The fact is that the showdown in the LTL market is fast approaching. The battle lines are drawn. On the one side you have a multitude of LTL carriers, national and regional, with much stronger balance sheets that YRC. YRC’s competitors continue to land “body blows” with what some folks characterize as below variable cost or “predatory” pricing to drive them off the road. With year/year revenues at YRC down almost fifty percent, these body blows are taking a toll. It should be noted that these price battles are damaging the entire industry, not just YRC. With its debt repayment terms having been extended twelve times, YRC has had more than nine lives.

On the other side is YRC, with the support of its unions, creditors and customers. It is fighting a valiant battle through its rightsizing and customer retention activities. If YRC doesn’t make it, this will bring capacity into line with business volumes. It will create pricing stability and shippers will face increased rates. If YRC prevails, the spotlight will shift onto the other weak players in the industry. Pricing below variable costs is not sustainable and there will likely be casualties among the other LTL companies left standing. It is a fascinating story, the transportation story of 2009. It should reach its inevitable conclusion in 2010. Stay tuned.