Payday

Richard Nixon once noted that the Chinese use two brush strokes to write the character for “crisis.”

One stroke stands for danger; the other for opportunity. One should be aware of the danger, he said, while recognizing the opportunity. It’s apropos, considering that Canada’s for-hire trucking industry always seems to be facing one crisis or another. Spiking fuel prices. Big regulatory changes. Fickle shippers. Expensive delays. The rising dollar. Competitive pressure from other modes. Competitive pressure from other trucking companies. There’s danger at every turn, mostly in the form of ascending costs. But at the same time, there are hidden opportunities.

At the Ontario Trucking Association’s annual convention in November, a panel of CEOs for a dozen or so for-hire carriers received a standing ovation when they told colleagues that the time has never been more right for a rate increase, especially in the truckload market.

Despite grumbles from the back of the room–“Easier said than done,” one skeptic was heard to say–the session was the talk of the conference. For the next three days, trucking company execs bandied about the idea and for the most part agreed that pricing needs to firm up and accessorial charges need to stick.

For Stan Dunford, this isn’t fodder for discussion. It’s reality.

“It’s unprecedented to have this many new or increased costs hitting us all at once,” says the president and CEO of Contrans Income Fund, the Woodstock, Ont., company whose trucking operations include Laidlaw Carriers, Brookville Carriers, and Tri-Line Freight Systems.

Dunford is referring to a sort of “perfect storm” hovering over the expense side of the balance sheet these days. According to Statistics Canada, average for-hire carrier expenses climbed 6.2 per cent to $4.94 billion just in the second quarter of 2003 alone. In many cases–currency exchange rates, insurance premiums, delays due to security at border points–costs aren’t just rising, they’re climbing unpredictably.

New regulations have also hurt. Diesel engines made to comply with tighter emission rules can add $5,000 to $10,000 to the price of a new truck. Cross-border carriers face expenses associated with security and customs clearance. Some are hard to quantify: productivity lost while waiting to reach an inspection booth, or drivers who are denied access to an expedited clearance program like FAST (Free and Secure Trade) because of a long-ago criminal offence.

“All these costs,” Dunford says, “are what you’re going to have to package together and present to your customer–with specifics. If you aren’t passing these increases on, you’re missing one of the best opportunities I’ve seen in the industry during my 37-year career.”

Rick Way, president of 30-truck flatbed hauler WayFreight Services in Guelph, Ont., believes that after underselling themselves for years many for-hire carriers are at a crossroads: be buried by expenses or use them as leverage to negotiate a better rate.

“We’re asked to spend more, monitor more, maintain more,” he says. “I’ve approached customers about helping us absorb all that. To be honest, I’ve had very little trouble.”
If “trouble” arises, what can you do? Dunford and Rick Gaetz, CEO of Vitran Corp., suggest it may be time to “de-market” yourself. If the quality of revenue isn’t there, walk away.

“I’m not talking about a good customer who just can’t give you that increase this year,” says Gaetz. “But if you have a client that can’t give you an increase this year, or next year, or again later, well, maybe that’s a client we’re happy to let go. When you go through more than a 24-month period and there’s been no upside in the account, and your costs are up, you have to realize that this is not a partnership.”

Insert the “easy-for-you-to-say” argument here. Gaetz operates one of the largest less-than-truckload carriers in North America. Yet he says you don’t need the leverage of a big freight network or account list to work out a better deal–or go looking for that quality revenue.

Indeed, Rick Way is a self-described small guy who has no trouble saying hasta la vista. “There’s a perception that a little guy can’t afford to say no to revenue,” Way says. “If a customer is going to make you eat these costs, you have no choice. I’ve walked away and I’ve lost some lanes. But I’m still here.”

A move to raise rates in the mid-Nineties brought out the worst in a post-deregulated industry that accepted living off 5-per-cent profit margins. Too little freight and too much capacity made it a buyer’s market for shippers. A price war erupted, and Friday Night Specials hit the highway in droves.

The industry always will have operators who eventually discount themselves out of business, yet much has changed since 1996. One obvious difference is that there are fewer marginal carriers today. It’s hard to be cut-rate when the cost of capital, insurance, and labour is so expensive. And bankruptcies have acted as scarecrows to glassy-eyed newcomers.

“Everybody is so convinced they can’t say ‘no’ to a customer, that the customer will go somewhere else,” says Dunford. “It’s not true, at least not as true today. The customer doesn’t have the same choices he used to.”

Moreover, almost 20 years after deregulation, the industry is seeing a parallel maturity in both the trucking and shipping communities.

“When you think of deregulation, which in the grand scheme of things happened not that many years ago, it takes some time for an industry to mature,” says Allan Robison, president of Reimer Express Lines in Winnipeg. “It takes time to fully understand what your costs are and how they affect you; what different pricing can do to you; and what happens to you if you don’t understand it all. Is that (immaturity) still going on? Yes. But nothing like it used to be.”

Bob Ballantyne is president of the Canadian Industrial Transportation Association, which represents some of Canada’s largest shippers. He says the perils of moving freight today are hard to ignore. A good customer will refrain from doing business with someone who is going to keep losing money, says Ballantyne. While no customer likes price increases, there are times when shippers simply have to pay up. “I suspect this is one of those times,” he says. “Most reasonable people know what’s happening and are prepared to sit down and discuss these issues.”

Doug Wilcox, distribution manager for Hershey Canada in Mississauga, Ont., says shippers ought to pay a fair rate for a solid and secure supply chain. However, while the shipping community should at least consider absorbing costs that are out of the carrier’s hands, he says more carriers must be able to quantify those costs, and not just for their total operations, but per customer.

“I think I’m pretty reasonable, Wilcox explains, “but you hate the guy who comes in and says, ‘Well, I need 4 per cent.’ OK, I say, ‘Show me something for my account.’ Don’t show me your operating ratios for your whole business. Be specific. These guys have to become more sophisticated to validate those increases.”

While overlapping costs like fuel, insurance, and border requirements are justifications for higher rates, Stan Dunford says the best leverage a carrier has these days is the people at the wheel. According to Dunford, while the inability to find qualified drivers is a crisis in the making, it opens the door for a competitive advantage. If shippers are willing to pay for anything in the coming years, says Dunford, it should be for the security of knowing their freight won’t be tied up due to lack of manpower.

“He who has the drivers will win!” Dunford says. “There was always an oversupply of drivers. But now, all these years later, it’s a job of last resort, and there’s only one thing that will encourage people back in this industry.”

That, of course, is money. Dunford says recruiting these days isn’t about horsepower or fancy sleeper-cabs. “Now it’s pay-day,” says Dunford. “What I want to explain to the shipper is yes, he needs to keep me whole on all these other cost issues, and that takes care of today. But he needs to know I’m likely going to be back tomorrow on a whole new issue, which is driver pay. This issue is not going to go away until the job of driving a truck becomes appealing to new generation of people. It’s that simple.”

When Contrans acquired a smaller carrier recently, it found real value in the owner-operators and ultimately dumped the freight contracts. “It’s not like we did it strictly for the drivers, but that’s what ended up happening,” says Dunford. He expects more acquisitions to be based on the demand for drivers.

Adds Reimer’s Robison: “When you’re buying companies for their drivers, that pretty much tells you all you need to know about where we’re headed.”

Moreover, new hours-of-service rules that require drivers to log waiting time as on-duty will exacerbate what some call the most critical recruiting and retention hurdle the industry has faced.

Claude Robert, president of Boucherville, Que.-based Transport Robert, agrees that drivers and owner-operators are hot commodities. However, he cautions against using driver pay as the basis for a rate increase, at least not before pursuing ways to shippers and receivers can make those drivers more productive by reducing waiting time at docks.

“What is going to be interesting is how successful carriers and shippers are in scheduling and planning loads,” Robert says. “It’s going to cost an arm and a leg for those that don’t plan well and the result will be people asking for 20 and 30 per cent increases, which is not realistic.”

While improving productivity is a good start, pay increases for drivers are inevitable, says Dunford. “Once the economy really turns around, and there’s freight sitting on docks with no drivers to deliver it, watch what happens,” he warns. “It’s not a matter of if but when this all starts to take place. The cost for moving freight is going to go up astronomically over the next 10 years. That’s just a fact.”

Dunford says that for the first time in his career, shippers want to sign long-term contracts–of three to five years–to secure drivers. Robert concurs, adding that last month a shipper asked him to guarantee 15 to 20 trucks on a regular basis. “These are some first signs,” he says.

Rick Way says he was surprised late last fall when sales prospects started calling him instead of the other way around. “I’m sure they could find some other guy to bootleg this stuff. But shippers want reliability. Good carriers with good drivers are hard to find,” says Way, who considers the success of his own operation as living proof that smaller carriers can capitalize in this market if they can, as the Chinese say, draw opportunities from crisis.
Stan Dunford says if you don’t take advantage of the market and “step up to the plate and keep yourself whole, then I’m sorry, but you won’t be in business for long.

“In fact,” he adds, “you’re just giving me the opportunity to buy you out of bankruptcy.”