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.