Survivor Trucking

Here’s a few short-term predictions: It’s going to be a nice summer — weather-wise — but more than a handful of general freight carriers in your neck of the woods will be going bankrupt.

If you have a rep for buying up other fleets, your phone will be ringing off the hook, if that hasn’t started already. Just a hunch.

And if you’re the sort of carrier that relies heavily on hiring an owner-op-based driving force, you’re probably not going to allow your HR manager to book too much consecutive vacation time in the coming months.

As oil hit record highs of $120-plus per barrel and at-the-pump diesel costs subsequently soared, more than a few reports are hitting the street of trucking companies and lease operators hanging up their keys.

Sure, like local dump-truck protests, that happens every time fuel spikes, but there’s something different in the air this time.

Maybe it’s the projections that gas and diesel could soar past $1.50 a liter (they’re just about that in parts of Atlantic Canada and remote areas of Quebec) — news that can easily break the spirits of a trucker who’s forking over nearly $1,000 bucks to fill up today.

Or perhaps it’s that carriers still haven’t been able to compensate on their ORs for an American buck that’s worth about 15 cents less than it was at this time last year. Plus, there’s a real possibility the battered U.S. economy hasn’t even bottomed out yet.

Even right now, many of these carriers are clawing and scratching at the hull of other sectors in a last-ditch effort to not fall overboard.

While small carriers are more often accused of chasing freight, the current market conditions aren’t size-sensitive as much as they’re sector specific, says Rick Way of 28-truck Wayfreight Services in Guelph, Ont.

In his part of Southern Ontario, he says it’s mostly the bigger auto parts haulers that are scrambling for loads in unfamiliar lanes. “Any time there’s a carrier with huge capacity poking around, it’s going to have some impact. They’re the first ones to buckle because they have such huge capital investment and they have to keep trucks moving,” says Way, who adds that despite the issues, he’s still managed to get some modest increases from his niche customers.

ORs ‘haven’t been this bad in all the years I’ve been
pricing,” says David Sirgey of FCA.

Western Canada is far enough removed from the auto ripple effect, but the region’s got its own issues. A surging energy sector in Alberta and northern Saskatchewan is keeping domestic trucking robust for the most part, but other export-dependant segments like logging and pulp and paper are in pretty bad shape.

“Those [sectors] traditionally generate heavy volumes,” says Clayton Gording of Winnipeg LTL carrier, Reimer Express. “When those [loads] diminish those carriers move into other markets, and that affects everybody. We’re feeling the impact of that.”

As for the supply-side effect on rates, “it hasn’t been this bad in all the years I’ve been pricing,” says David Sirgey of the Freight Carriers Association of Canada, a group that determines fair market rates and fuel surcharges for fleets.

If truckers aren’t charging enough for accessorial services and fuel surcharges, they simply won’t be around much longer. And that’s just to make them whole again.

With the cost of fuel and the exchange rate easily pushing many carriers five points above the 100 OR threshold, where’s the profit even after semi-successfully recouping of fuel, border, and wait-time costs?

Unfortunately too many carriers would rather try weathering the storm than sending their sales people to find out — fearing they’ll get talked into discounts, which is a far cry from negotiating an increase.

Shippers, many of which have their own problems to deal with these days, are holding on tight to their buying leverage. Managers who are normally focused on other departments are coming out of the woodwork looking for ways to cut costs — and transportation is one of the first targets.

“There’s huge pressure for businesses to reduce costs — especially in the U.S. — and if they can drive some of that cost out of their freight, they’ll certainly do it,” says Gording. “And the timing is bad because there’s excess capacity in many markets. So for carriers it’s a double whammy because they’re getting it from competitors who will do anything to get [the freight] and the manufacturer which is most anxious to drive down cost.”

In a recent Quarterly Shippers Survey of 200 companies, N.Y.-based transportation market analysts for Bear Stearns reported that three out of four shippers are taking advantage of overcapacity in the truckload and LTL markets.

“Anecdotally, we believe shippers’ Requests for Proposals [RFPs] in the market during early 2008 will look similar in scope to the record number of RFPs conducted in first-quarter of 2007, as we believe shippers continue to try to take advantage of the soft environment to lock in flat to down rates in both TL and LTL,” wrote the report’s author Ed Wolfe. “We also heard of several large shippers seeking to lock in two-year TL and LTL contracts rather than the typical one-year contract.”

Fuel costs are hurting truckers, but experience makes
shippers wary of how surcharges are collected.

That’s typically true, confirms Gording. Not all shippers are pulling down rates, as many would rather accept flattish or even modest increases on lanes where they can keep respected existing carriers in business.

The flip side is that service providers will be expected to hold the price when volumes pick up later in the fall peak season and in early ’09. In some agreements, shippers have been getting away with negotiating lower surcharge schedules or capping their existing surcharges.

Although surcharges are now accepted as a permanent fixture to transport life, Bob Ballantyne says many shippers are suspicious of them.

“In some cases the carriers are double-dipping,” says the president of the Canadian Industrial Transportation Association, an Ottawa-based shipper group. “They may be looking at base-rate increases which have an element of fuel costs built in, and then they bring in a fuel surcharge on top of that. There is certainly uneasiness among shippers about that. So the question is how to we reconcile volatile fuel prices in a way that’s fair for carriers and shippers?”

Agreeing to long-term surcharge limits in return for steady work may seem appetizing now that your competitors are working for nothing or being forced to give back freight. But it could come back to bite you if fuel’s going to shoot up to levels the talking heads on Wall Street are predicting.

David Sirgey — whose firm at press time was recommending fuel surcharges of 14.4 percent for LTL, 30 percent for TL and 40 percent for heavy-haul — generally advises against contracts with a fixed price for an extended period of time. Still, he understands the pressures carriers are under today, and says for the most part, carriers are more adept than they were a decade ago.

“Years ago, much of the industry would go into a pricing war, raise their OR to 102 and try to weather the storm,” he says. “That is still occurring, but at least now more carriers are choosing to park their trucks. Truckers are getting smarter.”

Rick Way agrees things could be worse. Bankruptcies and closures and a downturn in the truck-buying cycle have actually kept capacity tighter than what it could otherwise be right now.

“The market has shrunk to the extent where equipment is sitting now. The driver shortage has eased up allowing some firms to, shall we say, ‘cull some deadwood.’ Some of those things aren’t all that bad.”

True. And at least you’re not an American trucker.