Carriers and shippers share concerns about capacity and pricing at State of Freight 2011
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By: Lou Smyrlis While the number of trucks and trailers on the road may be what shippers focus on when discussing available capacity for land transportation, it's the shortage of available drivers that will prove to be the real issue in the future, according to motor carrier executives speaking at the recent State of Freight 2011 event, hosted by Cormark Securities.
"Depending on the level of economic improvement, it's going to be a horrendous issue," warned Stan Dunford, chairman and CEO, Contrans Group. "We are already saying no to some customers. My advice to shippers today is to start signing long-term contracts with carriers they trust and settle in as quickly as possible with them."
Murray Mullen, chairman and CEO, Mullen Group, echoed those comments. He said that while capacity and freight volumes in the TL sector are in relative balance after about 10-15% of capacity being removed from the market over the past couple of years, the long-term trend is for capacity to be an issue.
"I give away too many 25-year pins these days in our company," he said, referring to the aging population of Canada's driver force.
Mullen and Dunford were part of a panel of shipper and carrier executives which also included Gary Fast, associate vice president, domestic transportation, Canadian Tire; Warren Sarafinchan, supply chain director, Mars Canada; Doug Payne, president and COO, Nulogx; and Tom Schmitt, president and CEO, Purolator.
The discussion, on a variety of topics ranging from economic conditions and the impact of global trade patterns to pricing and outsourcing trends was moderated by David Newman, director, institutional equity research, transportation & industrial products, Cormark Securities and Lou Smyrlis, editorial director of Transportation Media.
Carriers believe that the largest culprit for the growing shortage of drivers is the quality of life and working conditions in the long-haul truck driving job, instead of wages. However, new legislation affecting carriers operating in the US -- Comprehensive Safety Analysis 2010, revised hours-of-service rules and border security issues -- could potentially remove 2-5% of drivers, according to panel members.
Payne pointed out this confluence of factors placing such pressure on the driver pool will force shippers to reconsider how their own practices affect the efficient use of drivers.
"It's not just the carrier's duty; it's the shipper's duty too," he said referring to the need for an intelligent approach to the driver shortage and adding that carriers will likely get tougher on the misusers of their equipment.
That was music to the ears of Dunford who advised shippers to adopt practices that turn their shipping and receiving facilities into "Indy pit stops".
"At the end of the day, guess who pays for the cost of a driver running out of hours. We have an investment in that driver asset and that investment has to make X amount of dollars a day. ...Shippers want cheaper rates instead of talking about what they can do more efficiently," he said.
Dunford said that for example, if a shipper agreed to stay open an hour longer so he could get an extra load delivered during the day, the efficiencies gained by the carrier would be significant enough that he would even be willing to pay the shipper for the cost of staying open the extra hour.
"The shipper's freight costs would go down too, yet they won't do it," Dunford lamented.
Carriers are expecting further fleet reductions across the industry, especially in LTL, where overcapacity is still an issue but not as bad as it was in 2009. The LTL business has not recovered as quickly as TL (it usually lags by upward of a year). Further, as Purolator's Schmitt pointed out, LTL has been aggressively targeted by TL and parcel players encroaching on the space to gain market share.
The issue of pricing caused the most sparks on the panel. Payne from Nulogx pointed out that his company's monthly Canadian General Freight Index (published in all Transportation Media publications) saw price increases in domestic truck transport during 2010 but those increases have recently tailed off. But the motor carrier executives saw rate increases in the future, arguing there could be no other alternative to rising labor and fuel costs. Further, carriers are witnessing more pricing leverage in markets where new investment is required.
Shippers noted that although they want their carriers to be profitable, large pricing increases would be hard to accept at this point given the economic uncertainty and the need to stay competitive within their own market space by keeping pricing in check..
"The important thing is a partnership that takes costs out of the system. If the carrier can't substantiate why they need a rate increase, I won't accept it, " said Mars Canada's Sarafinchan.
Fast from Canadian tire also argued that a partnership between the carrier and shipper that focuses on removing inefficiencies and reducing costs is key. For example, he said Canadian Tire has invested a great deal in its forecasting capabilities and providing seasonal and annual forecasts so that carriers have a better handle on how much equipment will be required to handle Canadian Tire business.
Trucking rates dropped dramatically from their peak in 2008 and motor carrier executives across Canada complain that increasing use of the spot market by shippers is part of the reason why. They add that placing such emphasis on the lowest freight rate is jeopardizing shipper-carrier relationships.
Both Sarafinchan and Fast, however, said they prefer not to use load brokers.
"We will not use load brokers. Having that direct relationship with the carrier is important....You need to stand for something in this industry. And we look at the CVOR (commercial vehicle operating record) of all the carriers we use. If any carriers do not have a good CVOR they do not do business with us," said Sarafinchan.
Dunford praised Sarafinchan for being so selective in his carrier selection but said that is rare in the shipping community.
"If the entire shipping community felt the same, there would be better relationships in transportation, Dunford said. "You wouldn't believe how many shippers are using carriers with bad CVORs."
All panelists agreed the trend towards increased use of intermodal transportation (long-haul on rail and short-haul on trucks) will continue. Customers' demands for faster service, rising fuel costs and the looming driver shortage in the trucking industry are all aiding intermodal growth. Given the long-term growth potential of the intermodal segment, several carriers are increasingly looking to build their intermodal business, following in the footsteps of some US carriers such as JB Hunt, which significantly increased its profitability following its efforts on this front. Interestingly, given the intermodal business for trucking companies is short-haul in nature, intermodal/TL carriers do not usually face as many driver shortage issues, which could also drive more carriers toward the intermodal business.
In the meantime, both shippers and carriers are expecting an increase in freight volumes in 2011 but not at levels worth getting excited about, unless you are looking at specific regions in the country which are experiencing double-digit growth.
"The economy is really in two parts right now. If you are a net beneficiary of high energy pricing, you are doing well. We are seeing that in our businesses in Western Canada where the dynamics are driven by the amount of capital going into big projects. Saskatchewan is on absolute fire....Eastern Canada will lag," Mullen said.
Schmitt said his company is also experiencing heavy growth rates in Western Canada and wondered how long it would be before e-tailing would take off in the Canada to the degree it has in the US. He said Canadian e-tailing levels are one third of that experienced in the US. He also said with labor costs rising in China, environmental stewardship rising in importance and energy pricing concerns returning, manufacturing in Mexico and transporting products from there into the US and Canadian markets is looking increasingly attractive.
