One of the most interesting topics discussed by both shippers and carriers at last week’s Carrier Conference, co-hosted by MotorTruck Fleet Executive and Dan Goodwill & Associates, was rate increases. The carrier perspective is that despite all of the cost cutting that was done from September 2008 through to the end of 2009, profit margins have sunk to unsustainably low levels. The shipper position is that with the deterioration in business activity, freight rate reductions were required for many shippers to maintain their profitability.

The economist who spoke at the conference indicated that we are clearly on the road to recovery. There will be volatility so it is going to be a slow and bumpy climb. The Canadian economy is well positioned to respond more quickly than other economies but no country is an island unto itself. Canada is still strongly linked to the U.S that faces significant challenges at this time.

Shippers understand that carriers will be seeking rate increases this year to improve margins. However, one of the messages communicated very clearly last week was that carriers looking for rate relief should not expect shippers to sign a blank cheque. Some shippers are receptive to rate increases but they must be cost justified.

The carrier sales person must come in armed with data on union wage increases, increases in operating costs, fleet upgrade costs and other documented expense increases. For a carrier rep to just walk in and “sing the blues” is not going to be a recipe for success with some shippers. Both shippers and carriers must do their due diligence and have a good knowledge of carrier capacity and the volume of freight flows on each lane, particularly on freight moving between the United States and Canada. With so many trucking companies having left the business or parked trucks, capacity is going to be an issue in certain markets at certain times. On lanes where limited or no backhaul exists, premium or round trip rates may be necessary to move a shipper’s freight.

The carrier panel at the conference addressed the issue of transparency. One carrier executive indicated that his company is willing to open its books to selected shippers and share with them the costs and margins on their accounts. The expectation is that this openness will ultimately translate into much needed rate relief.

Certainly this is not an approach that will work with all shippers and carriers. This demands a level of trust and maturity that is missing with some companies on both sides of this negotiation. It requires a level of honesty and transparency on the part of the carrier that is a new paradigm for many companies.

On the shipper side, there is a requirement for receptivity, integrity and fair play. For those that shop the costs and rates back to the competition, it will ultimately undermine their ability to surround themselves with reliable, durable carrier partners.

For shippers that have worked with their core carriers for some time and where the value proposition and trust have been established, this could be an effective mechanism to reach a fair meeting point on rates. This type of communication can be the foundation for a long lasting partnership

We live in an amazing time. Economists, transportation trade journals and the investment analysts who follow the transportation sector paint a picture of an economy and a transportation industry on the rebound. They present a large array of facts and figures to support their case.

Interest rates are at record lows. The affordability of U.S. homes is at record levels. Inventory levels are on the rebound. Car production is up. Key indices such as the U.S. ISM (Institute for Supply Management) that measures economic activity in the manufacturing sector expanded in May for the 10th consecutive month. The rate of growth as indicated by the PMI is driven by continued strength in new orders and production. Employment continues to grow as manufacturers have added to payrolls for six consecutive months. The recovery continues to broaden as 16 of 18 industries report growth. There are a number of reports, particularly in the tech sector, of shortages of components; this is the result of excessive inventory de-stocking during the downturn."

A host of transportation indices are in very positive territory. The ATA truck tonnage index and the rail tonnage index have been positive for a number of months. Spot market rates are way up and contracted rates are moving into positive territory.

All of this positive news seems to suggest that we were “out of the woods.” The Great Recession and the Great Freight Recession were starting to become a thing of the past. But a number of recent events are shaking people’s confidence in the recovery.

The gulf oil spill, the financial challenges in Europe, and the stock market gyrations all paint a different picture. The daily high definition video footage of the oil spill in the gulf along with pictures of birds covered in oil tell a story of futility and ineptitude. These images are made worse by the statements of the U.S. President claiming he is in charge but cannot fix the problem and by the head of BP Oil who changes his story on a daily basis and who also cannot fix the problem.

Why can’t these talented minds figure out a way to cap a leak the width of a garbage can? The constant media attention this receives and the lack of results are very disheartening. The symbolism of these events go well beyond the oil spill itself, suggesting an inability on the part of our leaders to share the facts, to create a sound plan and to implement a solution in a timely and effective manner. This is a disgrace and a huge distraction from the major economic issues that need to be addressed.

The constant threats of a European debt crisis are creating additional uncertainty and fear. If the solution is less government spending and cuts to government employee wages, why can’t everybody jump on the train and get on with the task at hand? Canada went through a process of bet tightening in the 90’s that did not cause massive job losses. It helped make our country stronger financially.

The report in today’s Toronto Globe & Mail reinforces the view that the recovery is facing strong headwinds. “The once mighty American consumer . . . (who is key to both a Canadian and American turnaround) . . . is emerging from the recession weighed down by worries about jobs and debts and is in no mood to drive a global economic recovery. . . Shoppers turned especially cautious in May, defying economists’ predictions of a rise. Retail sales fell 1.2 percent from the prior month, the first such decline since last September, according to data from the Commerce Department released Friday. . .

Now, however, the effects of the government stimulus are slowly petering out, while banks remain reluctant to extend credit to consumers. Unless either of those factors changes, consumer spending will have to grow the old-fashioned way – through rising incomes.”

The report quotes two esteemed sources. Charles Plosser, head of the Federal Reserve Bank of Philadelphia, noted in a speech that while consumer spending has improved in recent months, it wouldn’t rebound as strongly as it did in prior recessions. That’s because “labour market weakness will likely restrain income growth and thus consumer purchases.” Joshua Shapiro, chief economist at MFR Inc. in New York supports this view by stating that “since the unemployment rate is hovering near 10 percent and hiring remains anaemic, consumer spending will be lacklustre.”

The doomsayers seem to be carrying the day. In a recent financial report the following passage appeared. “Whether the European currency can survive is debatable. . . . Now it appears that many countries balance sheets cannot sustain the debts they have taken on. Despite massive stimulus programs, the world economy is still very fragile and may be too weak to offset these problems. The whole paper money system that the world uses is now in jeopardy of falling apart. . . .”

Canadian companies have to deal with a number of other realities. Some 73 percent of Canadian exports went to the United States last year, despite the rise in the value of the Canadian dollar and the economic challenges in the U.S. If the Canadian dollar remains within a range of $0.90 to parity, it will make it difficult to increase business to that large market. For those companies seeking to build business to Europe, they will face another set of challenges. Some European countries will likely be bogged down in a mix of major spending cuts and tax hikes that will curtail demand for imported goods.

Clearly we are not out of the woods yet. This recovery is going to take time.

This topic of freight capacity surfaced several times at last week’s 2010 Shipper Workshop co-sponsored by Canadian Transportation & Logistics and Dan Goodwill & Associates. Representatives from four well known Canadian trucking firms, Wes Armour of Armour Transportation System, Sandro Caccaro of Canada Cartage, Peter DiTecco of Armbro Transport and Mike McCarron of MSM Transportation, along with several industry consultants and the shippers who participated in a panel discussion expressed some interesting views on this topic.

It is hard to imagine a shortage of trucking capacity when we look at the wounded state of the Canadian and American economies at the present time. While there are signs of an economic rebound, economic activity levels are well down from those in the mid 90’s when tight capacity and high freight rates were the norm.

However, as you listen to the views of the various speakers and panellists, they paint a troubling picture of what lies ahead. These are the issues to consider.

Disappearance of Trucking Companies

FTR Associates has reported that an estimated 2000 trucking companies went out of business in 2009. The same number is expected to leave the industry this year.

Shrinkage of Fleet Sizes

While the number mentioned above may come across to some as large, it represents a small fraction of the total number of companies in the trucking industry in North America. As highlighted at the workshop this week, this number masks the many trucking companies that downsized their fleets. As trucking company executives put their business model under a microscope and looked more carefully at their yields on different lanes, it was not uncommon for some to reduce their fleet size by 25 to 50 percent. The net effect of the company failures and equipment downsizing is an estimated drop of 12 percent in freight capacity in North America.

Driver Losses

Some companies cut drivers and / or reduced the wages of their drivers. For those individuals who could find employment at higher pay in other industries, these developments served as an incentive to leave the trucking industry. This coupled with the fact that many drivers are in their mid 50’s or higher suggests that a significant number may not return as the economy improves.

Looking down the road, the question is whether young people will seek a career that keeps them away from home for days or weeks at a time? If the money isn’t sufficiently attractive, they may go elsewhere. One panellist pointed to this as one of the most significant causes of the looming capacity crunch in the future.

Financial Institutions May Ultimately Pull the Plug on Many Trucking Companies

One of the other reasons cited at this week’s conference for the limited closures of trucking companies is the lack of a market for used trucking equipment. Faced with the prospect of receiving twenty cents on the dollar for a used piece of trucking equipment, creditors have chosen to prop up some of the (financially) weaker players. As some of the trucking company executives mentioned at the workshop, there are many truck fleets that are technically bankrupt. They continue to operate because their creditors are not willing to put them out of their misery. If the economy recovers and the market for used equipment improves, some of these companies may be pushed into bankruptcy.

No Market for the Weak Players

While some of the financially troubled carriers are seeking a “white knight” to buy them, potential purchasers with deeper pockets are walking away. As one panellist commented this week, why buy a business with no real estate, no profits, old equipment and a base of customers that is largely derived from load brokers. The smarter companies are looking in another direction and are focussing on organic growth. If an opportunistic purchase comes along that is complementary to the core business and has positive financials, their balance sheet will be scrutinized. For a company with “no assets, no profits and no hope,” they are a “dead man walking,” waiting to go to “trucking company heaven.” This could happen in big numbers in 2010.

Some weak players, who manage their business well during the recovery, by sticking to their value proposition, increasing yields, selling off excess equipment and adding profitable business, may live for another day. The expectation is that the long expected consolidation in the trucking industry is on the way.

State of the Freight Report from Wolfe, Trahan Supports This View

The second quarter State of the Freight Report from Wolfe, Trahan & Co. (formerly Wolfe Research) reveals that shippers are seeing supply and demand in the transport markets finally starting to swing back somewhat towards carriers. In the Q2 2010 report, Wolfe Trahan sees further signs that volumes and rates are continuing to rise amid economic recovery. Shippers foresee tightening capacity in the US truckload market.

What does all mean for shippers? If this set of forces plays out as some of the folks at this week’s conference are predicting, a driver shortage and a lack of equipment will induce a severe capacity shortage. Freight rates have come down about as far as they are likely to go. The most logical place for rates to go is up. If capacity tightens significantly as some expect, freight rates could go way up.

For the past 21 years CSCMP has issued a report on the state of the logistics industry. This year’s report, prepared by Rosalyn Wilson, has the very apt title, The Great Freight Recession. The report contains some astonishing statistics that place the devastation of the past couple of years in perspective.

To start, the cost of logistics in the United States declined by 18.2 percent, the largest one year drop since the report was first prepared. Taking 2008 and 2009 together, logistics costs have declined by almost $300 billion during the recession. Transportation costs have declined by 20.2 percent since 2008. Trucking and other modes of transport both declined by over 20 percent. Ms. Wilson concludes that this drop was due to two factors - - - “a rapid decline in shipments and the cutthroat rate environment.”

In her report, Ms. Wilson identified some interesting developments in the area of inventories. She noted that compared to 2001, manufacturers were slower to clear out inventories in 2009. One of the main reasons was the long supply chains which resulted in orders being fulfilled and delivered well into the recession. The inventory to sales ratio began to “skyrocket” at the beginning of the recession and is now just returning to more normal levels. While sales are picking up, inventory levels remain moderate due to the lean manufacturing processes put in place by many manufacturers.

Retailers responded by shrinking their product mix and skewing their mix toward more lower cost items. Suppliers were encouraged to hold supplies in their inventories.

Ms. Wilson noted a number of significant trends in transportation. Many shippers abandoned their longstanding relationships with their carriers in favour of spot market pricing or 3PL’s. Average length of hauls and truck-ton miles declined. Increased use of intermodal transportation and more regionalization of DC’s became important. While about 2000 trucking companies left the business, many more reduced the size of their fleets. U.S. freight capacity dropped by 12.5 percent. With heavy truck utilization at 75%, new truck sales dropped dramatically.

The consequences of actions taken (or not taken) by truckers in 2009 will play out in 2010. Those companies that held back on preventative maintenance to reduce costs in 2009 may now face the prospects of not being able to pay for those repairs in 2010. The Federal Safety Administration’s new CSA 2010 (Comprehensive Safety Analysis) program will create challenges for those carriers that receive poor safety scores.

Rail transportation was not immune to the recession. Carload traffic dropped by 16.1 percent in 2009 while intermodal traffic declined by 14.1 percent. This was the worst year on record since the Association of American Railroads began tracking rail data in 1988. By mid 2009, an astonishing 500,000 railcars, or 32 percent of rail capacity, was placed into storage. As Ms. Wilson points out in her report, “the big difference between the loss of capacity in the trucking sector and the loss in the rail sector is the rail equipment has been merely sidelined and is readily available to return to service when demand rises.”

The good news is that 2009 is now in the rear view mirror. Business is picking up, albeit at a slower pace than most of us would like to see.

For the past 21 years CSCMP has issued a report on the state of the logistics industry. This year’s report, prepared by Rosalyn Wilson, has the very apt title, The Great Freight Recession. The report contains some astonishing statistics that place the devastation of the past couple of years in perspective.

To start, the cost of logistics in the United States declined by 18.2 percent, the largest one year drop since the report was first prepared. Taking 2008 and 2009 together, logistics costs have declined by almost $300 billion during the recession. Transportation costs have declined by 20.2 percent since 2008. Trucking and other modes of transport both declined by over 20 percent. Ms. Wilson concludes that this drop was due to two factors - - - “a rapid decline in shipments and the cutthroat rate environment.”

In her report, Ms. Wilson identified some interesting developments in the area of inventories. She noted that compared to 2001, manufacturers were slower to clear out inventories in 2009. One of the main reasons was the long supply chains which resulted in orders being fulfilled and delivered well into the recession. The inventory to sales ratio began to “skyrocket” at the beginning of the recession and is now just returning to more normal levels. While sales are picking up, inventory levels remain moderate due to the lean manufacturing processes put in place by many manufacturers.

Retailers responded by shrinking their product mix and skewing their mix toward more lower cost items. Suppliers were encouraged to hold supplies in their inventories.

Ms. Wilson noted a number of significant trends in transportation. Many shippers abandoned their longstanding relationships with their carriers in favour of spot market pricing or 3PL’s. Average length of hauls and truck-ton miles declined. Increased use of intermodal transportation and more regionalization of DC’s became important. While about 2000 trucking companies left the business, many more reduced the size of their fleets. U.S. freight capacity dropped by 12.5 percent. With heavy truck utilization at 75%, new truck sales dropped dramatically.

The consequences of actions taken (or not taken) by truckers in 2009 will play out in 2010. Those companies that held back on preventative maintenance to reduce costs in 2009 may now face the prospects of not being able to pay for those repairs in 2010. The Federal Safety Administration’s new CSA 2010 (Comprehensive Safety Analysis) program will create challenges for those carriers that receive poor safety scores.

Rail transportation was not immune to the recession. Carload traffic dropped by 16.1 percent in 2009 while intermodal traffic declined by 14.1 percent. This was the worst year on record since the Association of American Railroads began tracking rail data in 1988. By mid 2009, an astonishing 500,000 railcars, or 32 percent of rail capacity, was placed into storage. As Ms. Wilson points out in her report, “the big difference between the loss of capacity in the trucking sector and the loss in the rail sector is the rail equipment has been merely sidelined and is readily available to return to service when demand rises.”

The good news is that 2009 is now in the rear view mirror. Business is picking up, albeit at a slower pace than most of us would like to see.