Last week we received some unexpected good news in the United States as the unemployment rate fell to 8.6%. In Canada the news wasn’t as good as the unemployment rate increased to 7.4 percent. Without counting those people who have given up looking for work or who are underemployed (e.g. performing a job below their level of expertise and education at a wage inferior to what they should be earning), there are about 14 million people unemployed in North America (e.g. 13.3 million in the United States and 1.3 million in Canada).

FTR Associates estimated that there was a shortage of 200,000 drivers in the United States in the first quarter of 2011. How does one explain the fact that out of a pool of 13.3 million unemployed people (plus millions more if you include those who are underemployed), we cannot find 100,000 to 200,000 individuals to fill these jobs?

Here are some thoughts on this apparent anomaly. There were 3.2 million commercial drivers in the United States in 2008, including 1.8 million heavy haul or tractor-trailer drivers, according to the U.S. Labor Department. By May 2010, the number of big rig drivers had dropped 18.4 percent to about 1.5 million. In other words, there are 300,000 drivers that left the labour force that should be available to fill the available jobs. Why is it so hard to convince them to come back to work?

One of the most frequently mentioned reasons is compensation. In the United States, experienced truck drivers can make $50,000 a year at some truckload carriers. According to a BLS survey, the average wage was $39,450 in 2010 while the median wage was $37,770. The survey indicated that 75% earn less than $47,000 per annum.

The trucking industry has a long term practice of paying its drivers by the mile. While there is certain fairness to this approach since it correlates directly with the amount of miles driven and hours worked, it also injects a level of uncertainty into the driver’s weekly pay package. Inconsistent load availability translates into inconsistent pay.

Pay raises are difficult to implement since they cannot be easily correlated with increases in freight rates. In fact, there has been tremendous downward pressure on freight rates as the recession took hold and shippers sought a means of reducing supply chain costs. According to the American Transportation Research Institute, U.S. driver pay fell by 7.4 % in 2009.
Then there is the lifestyle issue. For long haul drivers, being away from home for days or weeks at a time is another deterrent. While there can be a certain glamour in being on the open road and visiting different regions of North America, spending so much time away from home can lead to a range of potential lifestyle issues (e.g. marital difficulties, unhealthy living etc.).

There are a host of other issues that contribute to the problem. At the heart of it is the fact that being a truck driver is not a recognized profession. The current driver compensation packages make drivers a commodity who can sell their services to the highest bidder.
Hours of Service regulations may or may not improve driver safety but restrict work hours. The new CSA provisions improve the quality of those drivers who meet the standards but make it tough on those who work for trucking companies that do not support them with a high quality fleet management program.

The driver shortage problem is coming to a head. Fleet costs are rising as more demanding emissions standards are imposed by governments. The CSA program will push poor quality drivers out of the business. An increasing number of shippers are challenging carrier rate increases (that are intended to cover these rising costs). A driver shortage problem that will exacerbate the capacity shortage is not a sustainable situation, particularly as we try to pull ourselves out of recession.

So what has to change? It will take a combined effort from shippers, carriers and governments to help avert a capacity shortage situation that will disrupt the Canadian and U.S. economies.

From a shipper perspective, there is a need to have “carrier friendly” freight. This can be achieved by removing inefficient and non-productive processes. This includes making improvements in freight packaging, loading, paperwork, vendor and customer network management. Many shippers need to get their “house in order” to keep their freight costs in line. As unpleasant as this may sound, freight rates have to go up (although the level of increase can be muted by Best in Class transportation practices).

From a carrier perspective, there is a need to run a sound operation, to properly recruit and train drivers and to offer them a job and a career within the organization. It is time to look at other pay options including guaranteed pay and incentive based pay for drivers who achieve certain metrics and CSA scores. There is a need to manage and communicate with drivers effectively including dispatcher training so drivers are treated with respect and dignity. We need to create a class of professional drivers who meet specific metrics on an ongoing basis and are properly recognized and compensated for their excellence.

For governments, they need to think through every law and policy they pass that has an impact on driver safety, performance and lifestyle. In North America we need a team of professional drivers that are intelligent, hard-working, thoughtful and motivated employees that serve as a differentiator as we compete with the other leading world economies.

Freight Transportation Adjusts to a Resetting World Economy

The year 2011 was another momentous one that was shaped by events on all continents of the world. Uprisings in the Middle East and the overthrow of Hosni Mubarak and Muammar Gadhafi, the European debt crisis, the Occupy Wall Street Movement, the assassination of Osama Bin Laden, the earthquake and tsunami in Japan, the wedding of Prince William to Kate Middleton, and the premature passing of Steve Jobs were just a few of the signature events of another action-packed year.

Closer to home, the three countries in North America all faced significant challenges. The powerful drug cartels in Mexico are threatening its very existence as a democracy as the country gears up for elections in 2012. The untimely death of Jack Layton, the very popular leader of the New Democratic party and the demise of Michael Ignatieff and the Liberal Party have given Steven Harper a majority government and a free hand at steering the Canadian economy over the next four years. The U.S. situation is exactly the opposite as Democrats and Republicans cannot reach agreement on almost anything and as a result the country is in gridlock on most economic initiatives to spark its economy.

Against a background of 8.6 percent unemployment in the U.S., millions more underemployed, one in four homes is worth less than the value of the mortgage, tight credit, anxiety over job security and a possible relapse into another recession, the economy is resetting. Americans are saving more. As various generations of families live together to better withstand the current economic uncertainties, home builders are erecting homes with two master bedrooms to address the social consequences of these challenging times. Smartphones, tablets and the internet are reshaping so many of our day to day activities. The economies of North America and around the world are being reset by this confluence of forces and by the rise of China and other developing nations around the world.

In 2011, freight transportation in North America was impacted by many of the above listed events and by a slow moving recovery from the Great Recession of the late 2008-2009. During that period, between 15 and 20 percent of fleet capacity was taken out of service either through the departure of carriers from the industry or the parking of equipment by many companies. The dynamic of tight freight capacity and a slowly increasing shipment demand made for some interesting capacity challenges this year. Here is my list, not in order of importance, of the major transportation related activities in 2011.

The Freight Economy Disconnects from the General Economy

The news media do a great job of reporting on a broad range of economic issues, both domestically and internationally. But there is an economy that is not properly scrutinized and reported on and that is the freight economy. The big news this year was that this economy held up better than the general economy. Despite the high unemployment numbers and other negative data, consumers showed surprising confidence and spent money. For many carriers business volumes held up better than expected. Consumers have defied the experts and have been spending their way out of the recession. Carrier bankruptcies are down from the dark period a few years ago.

Peak Season shifts from October to August

Another element of the freight economy that has been playing out the past five years is that August is replacing October as the peak shipping month. This phenomenon was confirmed in recent data presented by the Intermodal Association of North America. There seem to be a number of elements that are causing this shift. With capacity tight, smart shippers are moving their freight earlier to beat the crunch and to be in a better position to take advantage of lower cost modes of transport. Unlike the U.S. housing market where there is glut of homes on the market and more foreclosures every day, a good segment of the freight capacity has come back. The early peak shipping season reflects the requirement for shippers to be proactive to protect the integrity of their supply chain.

Diesel fuel sneaks back up to $100 a barrel/The Keystone Pipeline Project is deferred

Diesel fuel has quietly found its way back up to $100 a barrel. The U.S. consumes 15 million barrels of oil each day and imports 10 to 11 million barrels per day. Industry forecasts predict oil consumption will continue at these levels for the next two to three decades, so a secure supply of crude oil is critical to U.S. energy security. With fuel at $4.00 a gallon (U.S.) of $1.20 a liter (Canada), fuel surcharges are on the rise again.

One of the disappointments of 2011 was the postponement of the Keystone Pipeline, a pipeline system designed to transport synthetic crude oil and diluted bitumen from the Athabasca Oil Sands in northeastern Alberta, Canada to multiple destinations in the United States. At its peak the pipeline could deliver 590,000 barrels of oil per day. In November, 2011, President Obama postponed the decision until 2013. Keystone XL is shovel-ready. TransCanada is poised to put 13,000 Americans to work to construct the pipeline - pipefitters, welders, mechanics, electricians, heavy equipment operators, among other jobs - in addition to 7,000 manufacturing jobs that would be created across the U.S. Additionally, local businesses along the pipeline route will benefit from the 118,000 spin-off jobs Keystone XL will create through increased business for local goods and service providers. The postponement, a calculated political move, is a most unfortunate development for the economies of the United States and Canada.

YRC Survives to fight another day

After losing billions of dollars the past few years, YRC made news again in 2011 as it restructured its balance sheet with a $500 million capital infusion, right sized its terminal network and changed its leadership team. The company brought back James Welsh, a former YRC executive, as CEO of the YRC group to see if this LTL veteran can restore consistent profitability. YRC now has enough liquidity to survive in 2012 but it must deliver consistent service and profits to remain in the LTL business.

In fairness, other major LTL players made changes as well. As an example, FedEx Freight purged 100 terminals, consolidated its Watkins acquisition into FedEx Freight and changed leaders. The LTL industry reduced capacity in 2011 to bring it more in line with demand.

Domestic Container Traffic Drives Intermodal Growth

Spurred by a nine percent year / year gain on the U.S. domestic container front, intermodal volumes for the third quarter of this year resulted in annual gains for the seventh straight quarter, according to third quarter Market Trends report published by the Intermodal Association of North America (IANA). “Part of what is driving this is the aggressive approach towards intermodal by motor carriers to moving freight on the rails. Service has improved as has the reliability, service integrity, and transit times, which are all within supply chain managers’ plans,” commented Tom Malloy, IANA Vice President, Policy and Communications.

While we have not seen data to support this, some people are asserting that some of the gains in domestic traffic are on shorter lengths of haul (e.g. less than 550 - 600 miles) where intermodal is now better able to compete with truck on rates and service. The multi-billion investments by CSX and Norfolk Southern in double-stack corridors are in the process of restructuring rail traffic along the east coast of the United States. CSX’s National Gateway, designed to capture more east-west container traffic and NS’s Crescent Corridor, designed to strengthen its network in the northeast and southeast, are key investments in the growth of intermodal transportation.

Pricing discipline the key in a tight capacity market

In 2011 surface transportation carriers held together to increase freight rates. Tight capacity and stronger than expected demand for freight services created an environment conducive to rate increases. In recent years many carriers have acquired the necessary tools to calculate their operating costs. Better tools coupled with tight capacity and better discipline have helped carriers secure increases in contract rates and GRIs. As an example, truckload rates are up 8.5 percent year-to-date as of the end of November 2011.

Carriers expand into new markets

For many years, logistics service providers have been building their businesses by assembling and managing an array of transportation and warehousing services. During this same period, global trade, free trade agreements, the ascent of the big three, China, Brazil and India, have significantly changed the supply chains of many North American companies. To respond to changing shipping patterns, both on a domestic and global basis, many North American carriers and LSPs have been upgrading their portfolio of services. George Abernathy, executive vice president and COO of Transplace expressed it this way. “We are looking at verticals where we already don’t have a broad footprint.” As examples, DHL purchased a mid-west less than truckload carrier and Averitt Express, a major regional LTL provider launched an intermodal service.

Cyber Monday drives growth in E Commerce and home delivery business

ChannelAdvisor, a global e-commerce software provider that helps retailers sell more across online channels, announced that its customers experienced a tremendous Cyber Five, the five-day shopping push beginning Thanksgiving Day that culminated in a record-breaking Cyber Monday. Amazon was a clear winner with more than 50 percent growth year over year - well over twice the growth rate of overall e-commerce. As big box retailers competed to see who could open first on Thanksgiving, online retailers, including Amazon, pushed up their promotions as well. This resulted in steady growth throughout all of November as opposed to the more concentrated numbers we’ve experienced the past few years during the Cyber Five.”

The rapid growth in sales of smartphones and tablets is also playing a part in online shopping. Along with the growth in E Commerce is the growth in home deliveries, an important trend in freight transportation that took another leap forward in 2011.

Dedicated Trucking shifts into full gear

As shippers faced the reality of capacity shortages, regulatory changes and the rising costs of fleet upgrades, fuel and driver wages in 2011, they looked for ways to preserve cash and reduce risks. One such option is dedicated contract carriage. In 2011 this option became attractive as a means of locking up capacity, without making the capital investment, at savings of 10 to 15 percent. For shippers that reduced staff during the recession, this allowed them to outsource the management of its fleet operations to companies that have this as a core competence.

A potential NAFTA – Part 2 is unveiled at year end

U.S. President Obama and Canadian Prime Minister Harper met in early December to unveil a set of agreements for freight and passenger traffic between the two countries. From a freight transportation perspective, the two leaders discussed a set of pilots to expedite the border clearance processes, to move towards a more common set of standards and regulations for dealing with the movement of goods and services, with particular emphasis on food, agriculture and health-care products and to adopt a variety of “trusted trader” programs. The countries agreed that by December 2012 they would seek to implement joint cargo inspection and clearance of goods that arrive by land, rail and sea. The security-focused plan calls for harmonization of the U.S. Customs-Trade Partnership Against Terrorism and Canada’s Partners in Protection program by December 2013. Both programs call for voluntary participation by importers to secure their supply chains, but PIP includes import-compliance provisions that are not part of C-TPAT. With an election looming in the United States in 2012, time will tell if these much needed initiatives will be the stepping stone to a NAFTA part 2 program or will dissipate over time.

What a year! Next year should be even more interesting. Happy holidays!

As we enter the New Year, it is time to reflect on the events of the past year and try to anticipate some of the drivers of the economy in the months ahead. In this blog, I will take a look at some of the key economic trends in 2012. In the following blog, I will share some thoughts on the major drivers of freight transportation in the coming 12 months.

Here are some of the economic forces shaping the economies of North America in 2012.

1. North America will avoid Recession

The United States and Canada will probably avoid a recession. The good news is that domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire—albeit cautiously. The consensus among economists is that over the next year growth in the United States and Canada will average between 1.5% and 2.0%.

2. Fundamental Changes are taking place in the Housing Market

The housing markets in Canada and the United States are vastly different. In the United States, the market seems to be reaching an inflection point. One in five homeowners owes more on their mortgage than the value of their homes. Some people continue to pay their mortgages while others have abandoned their homes. For many Americans, the dream of owning a home has turned into a financial nightmare. This is causing some former and current landholders to move to rental properties.

High unemployment is driving multi-generational families to merge and live in the same home. Some builders are constructing homes with two master bedrooms to meet this requirement. The high foreclosure rate and the low demand for these homes are creating a shift from stock speculators to home buying speculators. As reported on 60 Minutes, some neighborhoods in certain cities (e.g. Detroit) are being demolished to reduce crime (e.g. vandalism) and the inventory of homes. In Canada the hot housing market for the past decade is expected to cool over the next couple of years. This is a message we have heard before so time will tell if this will actually come to pass.

3. Debt and Expense Reduction

There isn’t a news broadcast that doesn’t talk about the debt crisis in Europe, the United States or among the citizens of Canada and the United States. Low interest rates have fueled the escalation in debt in North America that for the average person is about 150% of their annual income. There is lots of talk among politicians and private citizens about debt reduction and cutting programs. While governments and citizens must pay down their debts to avoid financial ruin, this is proving to be very tough. The debt crisis is so serious in Europe that if unresolved, it could plunge the world into a major financial crisis. All indications are that the Eurozone will suffer through a recession in 2012—a mild one if the region’s sovereign-debt problems are resolved, or a deep one if they are not. Certainly if the Euro is devalued, this will make it tougher to sell North American made goods in this market of 500 million people. As a result, if this crisis remains unresolved, it will inevitably lead to hard times for all of the world’s citizens. As one expert sees it, we are likely to see a focus on putting food on the table as opposed to presents under the Christmas tree.

4. A Focus on Exports

Both President Obama and Prime Minister Harper have spoken about the need to increase exports as a means of increasing GDP and bolstering tax revenues. This is causing both governments to take action to facilitate trade. Early in December the two leaders outlined a series of tasks that are being undertaken between the two countries to improve security and facilitate the movement of goods and services between the two countries. Prime Minister Harper is in the process of negotiating a free trade agreement with Europe. Canada and the U.S. are working on efforts to increase trade with countries in the Pacific.

5. Chronic Unemployment and Underemployment

The drop in the unemployment rate in the United States to 8.6% made front page news (as Canada’s unemployment rate increased). The big debate in the U.S. Congress is over how long to extend unemployment benefits. Unlike previous recessions, the jobs are not coming back this time. There are many people who have been out of work for 6 to 12 months or more and their opportunities to be reintegrated into the workforce diminish by the day. There are many individuals who have had to accept lesser positions at lower salaries to earn an income. There is a large requirement to retrain displaced employees so they can find meaningful employment and incomes to support their families. Continuing improvements in technology are making existing workers more productive, lessening the need to hire. Hiring is not likely to keep pace with economic growth. There is no quick fix and there is not much likelihood the unemployment number will come down significantly until several months beyond the next U.S. election.

6. Inflation will ease; wage increases will remain modest

Prices have gone up this year for food, electronics and freight transportation, to name a few. Energy prices have gone up and down and would likely spike again if there was to be any increase in demand. With such a huge supply of homes and more being foreclosed every day, housing prices should remain at depressed levels at least for 2012. Interest rates will likely remain low to spur economic growth. With world growth softening and commodity prices off their peaks, inflation in every region of the world will likely decline in 2012. Without a spike in oil or food prices—triggered by a geopolitical events or bad weather—the inflation picture in 2012 will be quite benign. But wages are not keeping pace. Trying to pay higher prices for goods and services and pay down debt while wages are stagnating is not a recipe for a healthy recovery.

7. More Civil Unrest

Time Magazine named 2011 the Year of the Protestor. We are seeing civil unrest on our television screens in many parts of the world - - - the Arab Spring, Russia, Occupy Wall Street, European unrest. These movements, facilitated by the social media, have been unsuccessful to date at producing new democratic states and governments but have been a major force for upheaval. They have not produced any more middle class jobs or changes to the tax code. Despite the bloodshed in Egypt and Syria, these movements show little sign of abating. The raison d’etre for these movements grows stronger by the day.

8. Technology reaches the masses

The hot technology of our era - - - iPads and iPhones are being reduced in costs (not by Apple) by other vendors of similar products. Android smartphones and Kindle “Fire” tablets are becoming accessible to the masses. As we have seen in so many other areas of technology (e.g. laptop computers, colour printers, digital cameras), the cost of these devices is coming down. The technology coupled with social media and online shopping is creating the next wave in digital communication. The IPO of Facebook in 2012 will be one of the closest watched economic events in the New Year.

The New Year will likely be another tumultuous one as we head towards a U.S. election, hopefully a resolution of the European debt crisis and modest economic growth.