As the year comes to an end, it is time to reflect on the major events that shaped the transportation world in 2009. Many of the stories were directly related to the economic downturn. They are not listed in order of importance.
1. The YRC Soap Opera and its Aftermath
YRC was the freight transportation soap opera of 2009, the “Desperate Housewives” of the Freight Industry. The story played out each week as the company renegotiated the wages of its union employees, sold terminals, sold businesses, extended debt repayment terms, restructured and purged staff, all in an effort to survive. At one point YRC even proposed seeking TARP money and then backtracked. The story stayed in the news as the company posted huge quarterly losses. In the latest instalment, YRC is seeking to convert debt into equity in the hope of reducing the bleeding. There has never been a trucking company that has gone through as many cost cutting measures over such a prolonged period.
While this was playing out, YRC’s competitors were pricing very aggressively or as some called it, engaging in predatory pricing to run them off the road. This, along with low volumes and excess LTL capacity, made this a year to remember for LTL shippers.
2. Warren Buffet purchases BNSF
The “Sage of Omaha” made a strategic move by not just buying shares in one of America’s premier railways, Burlington Northern Santa Fe, but by offering to pay $26 billion for the entire company. While some may question the decision to make such a large investment in a railway, this is a very wise move. BNSF is a well managed company that is positioned to take advantage of its energy efficiencies as compared to truck and its favourable location adjacent to the key ports of Los Angeles and Long Beach. As fuel prices rise, more and more truckload business will switch to intermodal transport. BNSF is a “cash cow” that will provide Mr. Buffet’s shareholders with an attractive income stream for many years to come.
3. Shippers in the Driver’s Seat
This was the “Year of the Shipper.” Freight rates came “tumbling down” in 2009. With carriers hungry for business across all modes, it did not take a lot of skill to obtain rate concessions. In some cases rates reached levels that defied logic and good business sense. All shippers had to do was ask, or even better, name their rate and they got it. Shipper loyalty became somewhat of an oxymoron as Transportation Managers across North America were “under the gun” to reduce costs.
4. How Low can Revenues Go?
As a result, carrier revenues sank by 10, 20, 30 or 48% in the case of YRC. The speed and depth of the revenue declines was often staggering. Freight companies had to learn how to restructure their companies to bring expenses in line with the big drops in revenue.
5. The Fall of the American Dollar
At the beginning of the recession, the greenback firmed up against other world currencies. As the severity of the recession in the United States became apparent, its currency hit a 15 month low against many of the world currencies. This had a major effect on trade. For Canadian companies, a $0.95 dollar made their goods less competitive to American purchasers, driving down NAFTA trade. Overall U.S. containerized exports dropped almost 15% in the first nine months of this year, despite the drop in the value of the currency.
6. China becomes America’s Largest Trading Partner
After many years as America’s number one trading partner, Canada finished in second place after China. The decline of the dollar has had little impact on U.S. containerized trade in both directions with China. Since China has kept its Yuan fixed close to the U.S. dollar for the past year, the impact on the general dollar decline has not inhibited U.S. imports from China.
7. The Major Transportation Companies Survived
There was much talk of the 3000 road carriers that disappeared from the marketplace this past year, along with the capacity that came off the road. This statistic misses a key point. There were virtually no business failures among the tier 1 trucking companies in Canada or the United States. While a few mid-size companies disappeared, most companies read the warning signals in the fall of 2008. Trucks were parked, staffing levels were reduced, wages were cut, bonuses were eliminated, expense reductions were made (and rates were cut). While most trucking companies suffered revenue erosion of varying degrees, they survived to live another day. That is one of the big and most underreported stories of 2009.
8. Keep Those Inventories Low
The inventory to sales ratio is a major KPI for many manufacturers. As the recession took hold, inventory levels remained chronically high since many consumers reduced their purchases. Excess inventories coupled with low production and excess truck capacity was a recipe for freight transportation disaster. The well-know phrase of “too much capacity chasing too little freight” became the norm.
9. Logistics and Transportation Professionals hit the streets in Record Numbers
Logistics and Transportation professionals were not spared from the cold winds of downsizing across North America. Unprecedented levels of high quality, experienced logistics professionals entered the ranks of the unemployed. The lead time to find a job was also extended making it a difficult situation for many families. The number of resumes circulating and the number of job postings on social networking cites was remarkable.
10. Capacity Leaves the Market
This was the worst of times for truck manufacturers. Trucking companies across North America parked equipment. FTR Associates estimated that 38,000 trucks were scrapped during the first half of 2009. This resulted in an estimated 20% reduction in North American truck capacity. The capacity reductions also transcended trucking. Rail locomotives and ocean shipping fleets were also placed in mothballs.
11. Wal-Mart Steps Up Its Green Initiative
Wal-Mart has been described as “a supply chain company masquerading as a retail company.” The sheer size of their operations is staggering. They operate 7,900 stores in 15 countries, they run 228 DC’s, and have a fleet of 7200 tractors making them the 5th largest fleet in the United States. Wal-Mart’s stated goal has been to double fuel efficiency between 2005 and 2015. By 2008 Wal-Mart had achieved a 20% improvement in fuel efficiency and was moving forward towards its 13 mile per gallon goal. They are currently testing heavy duty commercial hybrid and alternative fuel trucks. In addition to these initiatives, Wal-Mart also has a program to hold inventory growth at less than half the rate of sales growth.
The company is continuing with their packaging design initiative. As an example, they redesigned milk jugs improving the cube utilization of refrigerated trailers by 50%. They have been experimenting with a product sustainable index similar to the nutritional index we see on many product labels. Wal-Mart continues to be the market leader in supply chain efficiency and their every move is closely watched.
12. Selected Industries were Hit Hard
There were certain industries that received disproportionate punishment from the recession. Lumber shipments plummeted as the housing industry tanked. Automotive shipping was severely contracted as famous brands (e.g. Pontiac, Saturn) were terminated and factories were closed. This had huge impacts on transportation that specialized in these industries.
13. The Year of the Big Intermodal Deals
In 2009, J.B. Hunt inked a long term deal with Norfolk Southern while Pacer reached an agreement with Union Pacific. Hunt moved over 837,575 loads last year and already has a long-term contract with BNSF Railway in the Western U.S. They are the largest box customer for the largest intermodal railroad. The new deal with NS, the trucker said, gives both partners “a platform to accelerate the conversion of traditional truck traffic to cost effective, environmentally friendly intermodal transportation with service that is competitive with truckload moves.” One key item of the Pacer deal includes a nearly $250 million in wholesale intermodal traffic that will transition from Pacer to UP by end of the first quarter of 2010.
14. Global Sourcing Shifts Direction
During the past year, a number of discernable trends took place in global sourcing. Increased labor restrictions and rising material costs have produced shifts to Vietnam and other emerging markets beyond South China. Near-shoring to Mexico took flight due to the country’s proximity to the United States and Canada, its low cost labour, its NAFTA participation, its new intermodal corroders and terminals, its time zone alignment and the ease with which goods can be returned. Central and South America (Brazil) also became important near-shoring locations with their quality labour pool and manufacturing expertise.
15. The Western Hemisphere Travel Initiative
While truck traffic from Canada to the United States has experienced major declines, security rules for truckers went up. The Western Hemisphere Travel Initiative that took effect on June 1 requires all travellers, including truck drivers, to have a valid passport and a special frequent traveler card or special driver’s license to enter the United States. This along with tougher U.S. emission standards for diesel truck engines and the “Buy America” provisions under the American Recovery and Reinvestment Act made doing business in the U.S. that much more difficult for Canadian companies.
16. Raising Cash – Everything is For Sale
Transportation companies in all industry sectors sold businesses, shipyards and terminals to raise cash. Maersk shut its historic Odense shipyard in Denmark while YRC sold freight terminals on a sale-leaseback arrangement. Singapore’s Neptune Orient Lines, parent of APL, raised nearly $1 billion in a rights issue. Carriers have turned back ships at the end of contracts rather than renew the contracts or deferred orders for others. Cash was king in 2009.
17. Maersk’s Direct ChassisLink
Maersk, the world’s largest ocean container line launched Direct ChassisLink on August 3. Instead of providing chassis free of charge, as carriers do in the United States, Maersk plans to lease chassis in its national trailer pool to truckers at a rate of $11 a day. The intent is to bring the U.S. market in line with other world markets. It is seeking to alter the seemingly untouchable economic and operating relationships that have been built over decades of inland goods transport. Maersk’s 90,000 unit chassis fleet is the largest in the world. It launched its program with 5,000 chassis in the New York/New Jersey area and plans to roll out the plan in other market areas.
18. Truckers Expand Beyond their Traditional Markets
The recession of 2009 brought out the entrepreneurial spirit in some truckers and acts of desperation in others. As demand dropped, this made shipping full loads more problematic for some shippers. Truckload carriers launched LTL divisions. Some went on the spot market looking for large, or at least multi pallet shipments to fill their capacity. A number of national truckload carriers expanded their regional networks.
Many carriers sought out or expanded their geographic footprint beyond North America. YRC, FedEx, UPS, J.B. Hunt (and Matson) and Con-Way (and APL) had previously made moves to build trans-Pacific freight businesses. Old Dominion formed a partnership with Hanjin Shipping to provide consistent, competitive transit times between major Chinese ports and North America.
19. Trucking Company Executives Relearn the Basics of Trucking 101
There are a number of truisms in freight transportation. One of the most frequently heard expressions is that strong revenues can hide a multitude of sins. Simply stated this means that the heavy business volumes of the mid-2000’s helped mask operational inefficiencies in many trucking companies.
In 2009, the reverse happened. As so well stated by Warren Buffet, “You only find out who is swimming naked when the tide goes out.” As revenues declined in 2009, many trucking company executives had to relearn the basics of trucking. They had to do a “deep dive” into their income statements and balance sheets. Decisions had to be made on which trucks to park, which people to cut and how much freight rates on certain blocks of business could be reduced. A back to basics approach become critical to survival.
20. Is your Company ready for 10 + 2?
On January 26, 2010, U.S. Customs and Border Protection will begin enforcing the Importer Security Filing or 10+2 rule. Noncompliant importers may face delays in the delivery of their goods, or monetary sanctions. This has been the year of the great ramp-up to 10+2. Apparently there are tens of thousands or potential foreign filers who don’t understand that they have this new obligation. Now is the time to get with the program.
A Last Look at the Great Recession of 2009
This was a transformational year. The Great Recession caused almost every C-suite executive in North America to deconstruct and reconstruct their supply chains. Almost every product, plant, DC and employee was re-evaluated. Major changes were made.
Transportation company executives were humbled by the severity and speed of the revenue declines. They had to park trucks, sell business units or terminals and reduce staff to survive and fight another day.
Smart transportation company executives learned that the good times don’t last forever. They focused on assessing the value of every asset in their businesses and made the trade-offs they believed would maintain the viability of their companies. Hopefully many companies learned some key lessons on how to “recession proof” their firms for the inevitable downturns that occur every few years. In the next blog I will take a look at some of the forces that will drive the world of freight transportation in 2010.
Happy Holidays to Everyone!