Most CEOs and trucking owners are unanimous in their assertion that freight rates have to go up in 2016. They also seem fairly confident that, barring any unforeseen circumstances, fuel prices will remain comparatively stable, and the low Canadian dollar will continue to boost exports. But the driver shortage issue continues to plague the sector and there’s no panacea in sight.
“Drivers exiting the industry are doing so at a greater pace than the ones that are entering the business,” says Wendel Erb, president of Erb Transport Group of Baden, Ont. “So the only way to keep the ball rolling is to give wage increases to retain the ones you’ve got. And then there’s the cost of training new drivers. In fact there’s an added cost every time we institute another training program-someone’s got to pay for that.”
Erb also thinks that the spiraling cost of replacing equipment will also put upward pressure on rates. “Since most of our new equipment is sourced in the US or paid for in US dollars, we’re talking a 20% increase in the cost of our capital acquisitions,” he says. “You can take a year off from buying equipment but you can’t do that every year.”
Vaughn Sturgeon, president and CEO of Atlantica Diversified Transportation Systems of Moncton, NB, agrees with Erb that rates must increase-the only question is by how much. “Freight rates, like freight volumes, are a bit choppy, but for the most part have moved up in 2015,” he says. “It’s hard to say exactly where rates are going but I think they will need to rise to the high single digits over the next few years to cover costs of new equipment and driver increases—1-2% will not cut it.”
With numerous terminals in Alberta and western Canada, Rosenau Transport has been adversely affected by the economic downturn in the oil patch. President Carl Rosenau expects business to remain flat for most of 2016, but is hopeful for a rebound in the last quarter. “Everybody is looking for a discount,” he says. “But the tractor that used to cost $150,000 is now costing $190,000. You can ask (customers) for an increase of two or three percent, but you sometimes have to settle for one or two percent.”
Although it’s difficult to predict what a change in government could mean for the oil patch, it could be more bad news. The Liberals are suggesting they would curb fossil fuel subsidies, and they are seeking to limit the Canadian Exploration Expenses deduction which may further dampen activity in Canada’s oil and gas sector.
“I wish the price of crude would go up, for Alberta’s sake, but I’m not sure we’ve hit the bottom yet,” adds Rosenau. As a result, his company is looking for new opportunities outside the oil patch. “A few weeks ago we were all about farming and oil, now we’re starting to get into mining and forestry. Farming is still pretty steady but we’ve got to think outside the box. We’re considering contracts right now that we never would have considered years ago.”
However, one bright light on the horizon may be the newly-minted Trans-Pacific Partnership deal which has just been signed but not yet ratified. Although the terms of the agreement have yet to be made public, it encompasses 40% of the world’s economy and includes many of the fastest growing countries. The TPP seeks to remove trade barriers and should benefit Canadian manufacturers, especially those that have been negatively affected by protectionist barriers put in place by some US states.
Sturgeon of Atlantica Diversified thinks that the TPP will probably be good for the trucking sector overall. “I haven’t seen any details but generally these trade deals create more trans-border moves which should increase volumes. For the most part these volumes are strong now, and this should further strengthen these lanes. It should also put more rate and capacity strain on these trans-border moves.”
The low Canadian dollar has brought some opportunities to the somewhat dormant manufacturing base and should continue to do so. “We have seen a lot more exports coming out of Ontario and Quebec lately” according to Mark Seymour, president and CEO of Kriska Holdings of Prescott, Ont. “The low dollar makes our exports more attractive, and I’ve noticed a bit of a swing in the balance of freight moving from north to south. I think we’ll see more activity in this area if the dollar remains the way it is.”
Seymour also thinks that the lower price for crude has been positive for the average Canadian, and will be good for trucking in the long run. “The low oil price is bad for Alberta but good for the Canadian consumer. Cheaper gasoline prices leave people with more discretionary spending and boost consumer confidence.”
Sturgeon agrees that the low Canadian dollar has its upside, but suggests it can be problematic at the same time. “The low dollar and the lower fuel prices will be a mixed bag. Lower fuel benefits are passed on almost exclusively to the shipping community and the lower dollar will help that community when exporting into the US. So in the macro sense, it should create more volumes to the US but also create an imbalance coming back into Canada with lower volumes moving this way,” he says.
“We saw that in the early 2000s. So that will be a challenge and force higher rates southbound than exist currently. For the most part, rates in general will need to trend up as for the most part carriers see a net higher cost structure as equipment costs escalate and driver payrolls increase-especially for US-qualified drivers.
“For us at Atlantica Diversified I do think there will be some growth,” adds Sturgeon. “I think it will be cross border and/or international. I don’t think there will be significant growth domestically for a few years. But cross-border probably along with some multi-modal aspects should pick up.”
Jean François Paget, general director for Transport Herve Lemieux of Montreal, has no difficulty finding loads going to the US. But the problem, as it is in the rest of Canada, is finding drivers to do the work. “Customers used to call us and ask for our rates. Now they call and ask if we can do the job. This summer was the worst for recruiting drivers since the recession of 2008-09. We’re losing capacity because of a lack of qualified drivers.”
Dan Einwechter, owner and CEO of Challenger Motor Freight of Cambridge, Ont., sees tightening capacity as an opportunity to forge a closer bond between shippers and carriers. “Going forward, things are going to tighten up. We see more of a dialogue developing rather than two parties brow-beating each other. Some customers are more interested in developing partnerships than they were ten years ago. Not just a partnership, but they are looking to lock-in for the long term.
Einwechter believes that mergers, acquisitions and consolidations will continue, not just with carriers swallowing up each other, but in all aspects of the supply chain. Mark Seymour of Kriska sees acquisitions as the way forward to achieve growth and find additional drivers. “Mergers and consolidations are going to be the first course of action when a company wants to grow. Adding capacity organically is so difficult.”
Sturgeon agrees with Seymour and Einwechter, and thinks that acquisition opportunities are out there. “We see more and more smaller firms looking for exit strategies and recognizing that scale is needed to compete.”
In summary, challengers are many for the trucking community in the coming year. But Wendel Erb thinks that lean operators who carved out a place for themselves after the downturn of 2008/09 are in the best position to go forward. “Nobody in the trucking business is making any great margins,” he says. “But everyone who survived the last downturn has learned how to truck with low margins.”