Softer Season

“What goes up must come down” is the maxim used to sum up Isaac Newton’s theory of gravity. But if the famed English physicist and philosopher was carting apples around town instead of having them fall on his head, that line might have rather gotten him remembered as an important economist.

Contemporary economists might enjoy the parallel, but they’d all likely say that when it comes to free markets, Isaac’s rule makes better sense backwards: that the market, after sinking, always corrects itself. The question for trucking, then, is “how long might this current mini-recession last?”

It depends who you ask. Is the current downturn just a cyclical blip in the market — a jammed gear — or is the industry at the mercy of more profound, North American economic shifts?

There’s no doubt that general truckload carriers in many linehaul lanes, especially in manufacturing-dependant Central Canada, are no longer partying like it’s 2004.

A couple years ago, a time already being referred to by some truckers as “the good ‘ol days,” the so-called perfect storm of high fuel, insurance, border-crossing costs, and a worsening driver shortage, coupled with booming freight demand, led to a severe capacity crunch — and therefore robust trucking rates — in almost every sector.

“How quickly things can change,” says Rick Way, president of 40-truck WayFreight Services in Guelph, Ont. “I wouldn’t say the bottom’s fallen out, but since the American Thanksgiving, manufactured goods — especially on the van side — have taken a beating. And I know we’re not alone.”

As a former Bay St. economist and current CEO of the Canadian Trucking Alliance, David Bradley doesn’t think today’s market sluggishness is a cyclical correction as much as a reaction to major structural changes in the North American economy which “will take longer than a business cycle to correct.”

The rise of the Canadian dollar, vis-à-vis the U.S. greenback, has played havoc with southbound lanes. And despite the loonie gaining alot of its ground in 2003-2004, the most significant impacts began surfacing late last year, says Bradley.

“When it started, it was a pricing issue that carriers quickly adjusted to. But longer-term, it’s taken a bite out of exports, and [apart from] oil products, manufacturing products are down significantly,” confirms Bradley. “In some situations, carriers are scrambling to procure northbound traffic. In a sense, that has become the headhaul, because the southbound freight isn’t there.”

According to Statistics Canada, international exports hit a record annual high in 2006 with no help from American trade. While U.S.-bound shipments have been flat (largely because of weakness in the automobile and forestry industries), China has continued swallowing Canada’s commodities and raw materials and spitting them back to us in the form of cheaper manufactured goods.

That has forced a sharp turn in the trajectory of freight and transportation movement from north-south to domestic lateral lanes for the first time since NAFTA hit its stride in the early ’90s.

With almost all his lanes being cross-border, Harold Heffernan of Kitchener, Ont.-based Celadon Canada says he’s definitely noticed an operational change.

“The reality is that there isn’t the capacity there was 12 or 15 months ago,” he says. “The truck counts haven’t changed, and we still have problems getting drivers, but now the market has switched and the demand for our services is not as high. From that perspective, the supply and demand model we all loved is now pushing rates down.”

And this time, Way observes, it isn’t just small carriers and owner-ops vulturing-in on cheaper spot market freight. With shippers sensing buying leverage swinging back their way, larger primary lane carriers are offering lower rates in the near term — in some cases re-bidding on their own contracts — in an effort to secure freight ­commitments and keep drivers in their seats until things improve.

“It’s not just the little guys. Some big guys are monopolizing and giving back all the gains (the industry has) made,” says Way. “With 100 trucks against the fence, and 100 guys to pay, you got to get them out there somehow.”

There’s no shortage of work in Alberta many
carriers say. It’s Keeping up that’s the problem.

In Atlantic Canada and neighboring Quebec, it’s much of the same. One executive from a 300-truck, southern Quebec carrier who’s currently trying to renegotiate contracts, didn’t mince words:

“The rate war has begun. To maintain their market share, some big fleets have started to cut the rates and it’s very difficult to keep your rates when others decide to cut,” he tells us. “Shippers smell blood and all you hear, all day long when they call you, is all about prices. Our sales are down by 20 percent over the last year … because we need to keep rates at a good level.”

Without labeling carriers of different size and stripes, Bradley admits there’s a return to the “price wars we saw in the past.”

He can’t possibly see, however, how the current softness in linehaul rates is sustainable. The qualified driver shortage is expected to boil over in the next five years and put a major squeeze on capacity, while more truckers could exit the industry or sell assets as they succumb to major hikes in fuel and new equipment costs. “I have to caution (shippers) from expecting the return to the kind of bottom-of-the barrel pricing that plagued our industry for so many years.”

Still, the capacity situation continues to remain spotty east of Manitoba. Van rates may be falling, but capacity in specialized sectors less susceptible to short-term market swings like refrigerated, tanker, and even flatbed is still tight — as CN customers witnessed in February during the recent two-week rail strike. Carriers in the latter two sectors generally didn’t need to step down from their rate platforms during the disruption.

Nick Vandermeer, operations manager of International Freight Systems, a 160-truck fleet that does a lot of flatbed along the Highway 401 corridor, said he was contacted to move car frames, but declined.

“It depended on what they wanted to pay. If they want to pay rail rates, well, they better wait for the rail to come back.”

West on the Trans-Canada, into Alberta, the trucking market isn’t discriminating against certain sectors. In and around Calgary, van truckload, LTL, and specialized shipments show no signs of slowing while struggling to keep up with the province’s booming freight demands.

“There’s no shortage of work here,” says Wayne Pedersen, president of family owned Pedersen Transport, a regional LTL and TL carrier in Claresholm, Alta. “The issue, instead, is not getting left behind.”

The road ahead is wide open there. It’s just that it’s riddled with potholes.

Increased traffic congestion is outpacing swollen infrastructure, making it difficult for truckers to get around in dense areas, and thereby interfering with production. Then there’s the drivers, or lack thereof.

“The human equation is nowhere near to being solved. Hiring decent people is like watching them in a dryer — they just go around and around, chasing wages.”

Still, there are worse problems truckers could have.

“I’ve had (shippers) admit to me they’re now dealing with carriers they don’t like and are not proud of, but they just can’t ignore their rates,” says Rick Way. “What am I supposed to do?”

Is hauling apples out of the question? Even in Alberta?