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OUTLOOK 2005

by Seth Skydel, Victor Goertzen, and Jim Park
Untitled Document There are plenty of reasons to pop the champagne corks this year, folks. Looks like we're in for a banner year. But there's an odd mix of optimism and foreboding in trucker's eyes these days - like walking into a car dealership and finding the chariot of your dreams at an unbelievably low price, while knowing somehow that your credit rating isn't quite up to the challenge.

Freight volumes are solid and likely to improve in the New Year, capacity is tight - meaning the supply of trucks isn't what shippers are used to - and intermodal capacity is at its limit. Truckers are in the driver's seat for the time being, but can we pull off the coup needed to finally get rates up to where they deserve to be?

"From what we've seen," says Kurt Burmeister, director of North American field sales and service at ArvinMeritor, "freight volume is up, including cross border shipments. In fact, there's some good news to report on several economic fronts that will mean more goods need to be transported across North America in the coming quarters."

Burmeister notes that manufacturing volume is rising, too. "Manufacturing activity generates freight. In general, industrial production is growing and exports are on the rise again. At the same time, import levels are also up. In both cases, regardless of the economic impact, those goods have to be hauled throughout the continent, which is good news for truckers."

ArvinMeritor closely monitors all market segments to determine where its trucking customers will be seeing gains in freight carrying demand. In particular, Burmeister notes that there is increased logging activity in both eastern and western regions of Canada, as well as more paper being produced and shipped.

"Freight volumes from many segments are getting better overall," Burmeister adds, "and we expect it to be that way for next two to three years. One leading indicator to watch, for instance, is construction. Higher demand for lumber, building supplies and aggregates means more truck activity. In addition, vehicle and component manufacturers are realizing higher order volumes, which means they'll be buying more steel than in the past, so hauls of that commodity will go up as well."

Also forecasting a positive 2005 is Peter Toja, President of Economic Planning Associates, a Smithtown, NY-based consulting firm with extensive trucking industry experience. "In 2005, we expect continued growth in demand as an expanding economy leads to greater traffic flows and improvements in trucking revenues and profitability," he says. "At the same time, an expanding economy, along with growth in merchandise trade, especially among the NAFTA countries, will support a rise in truck and trailer demand."

Reflecting on the Canadian economy, Toja notes that Canadian GDP has expanded at a robust rate. "Consumer spending in Canada is expanding at a healthy pace, construction activity, particularly in the residential sector, is advancing strongly, and manufacturing activities are on the rise," he notes. "In addition, with extremely lean inventories and both domestic demand and exports expanding, we expect further growth in Canadian manufacturing activity into 2005."

With all that good news coming down the pike, we have nothing to worry about but getting it across the border.

"Security delays at borders are certainly going to be an issue," Burmeister admits. "Those delays can affect hours of service (HOS) in terms of productivity and vehicle utilization. The U.S. and Canadian governments are talking about ways to speed up cross border traffic, but until they find ways to do so while meeting security requirements, the delays are likely to continue."

While Toja remains highly optimistic about the short- and long-term demand for freight carrying capacity, he is also quick to point out other pressures that are impacting trucking operations. Among them, for example, are stricter legislation involving drivers hours of service, sharply higher fuel costs, and rising insurance premiums.

Burmeister agrees that fuel pricing will continue to impact North American trucking. "One of the challenges that owner-operators and fleets will have to address," he says, "is higher fuel costs. While there is freight to haul, the price of fuel - with or without surcharges - is going to cut into profitability."

Profits and Losses
Profit, after all, is what this is all about. It's clear that demand isn't going to be an issue, so the question is: can trucking somehow turn this tremendous opportunity into sustainable profits?

David Bradly, CEO of the Canadian Trucking Alliance (CTA) is guardedly optimistic, suggesting two issues are likely to dominate the industry agenda: border security and HOS.

"The next few months will be critical in determining what the border will look like", he says. "There is a spate of new measures being introduced [in the near future] - U.S. Customs pre-notification, USVISIT, hazmat credentialing, and the transportation worker ID card. The devil, as always, will be in the details."

Bradley is also concerned about the soon-to-be-revised U.S. HOS regulations. The uncertainty over what impact the revisions will have on the industry - to be followed by the long-awaited new Canadian federal HOS regulations - is making long-term planning a challenge.

Speaking at the recent Ontario Trucking Association convention, Russell Gerdin, CEO of the very successful American truckload carrier, Heartland Express, said he expects black boxes will become a reality when the new U.S. rules are revealed early this summer, and he thinks the 11th hour of driving will disappear. Jim Staley, president and CEO of the Roadway Yellow Group says he'd like to see industry do a little negotiating on the issue, perhaps accepting black boxes as a trade-off to keep the 11th hour of driving.

Whatever comes to pass on that front, it's clear that American HOS rules are going to become more restrictive than they already are, further tightening capacity.

That tightening could be trucking's saving grace.

Bradley has said many times in recent months that shippers are becoming more accepting of rate increases and the application of accessorial charges, so there's already movement in the right direction, but is it enough?

While he wouldn't discuss particular rates, Gerdin's company, last year, reported an operating ratio of 76% - which drew congratulatory applause from other fleet owners in the room. By comparison, Canadian carriers consider themselves successful with a ratio 95%. The term operating ratio (OR), by the way, represents a company's operating expenses divided by its operating revenues - the lower the better. Gerdin called an OR of 95% ridiculous, saying, "You're just working. Why would you want to do this just to break even? An OR of 95% would get you fired at my company."

In examining Heartland's remarkable OR, it should be noted that Gerdin is among the top paying TL carriers in the U.S., with drivers earning as much as 50 cents a mile. Clearly, Heartland Express must be doing at least two things correctly: charging appropriate rates and managing the business very well. It's not earning its profits on cheap wages.

Ralph Boyd, general manager of the Atlantic Provinces Trucking Association says in the face of all the hurdles ahead, it's time the carriage industry did a better job of explaining to shippers what the real cost of moving freight is.

"With new regulations like cargo securement and HOS, shippers are going to have to work with trucking to keep the goods moving. We need to start doing a better job of convincing them what we're up against and urging them to cooperate," Boyd said. "A fair rate is needed for fair service. Our margins are among the narrowest of any industry in Canada, and frankly, there's just not enough there at the moment."

The question is, will carriers succeed in capitalizing on the so-called perfect storm of rising demand, shrinking capacity, and few alternatives to moving freight other than by truck?

Industry leaders like Stan Dunford of Contrans, and Rick Gaetz of LTL giant, Vitran, say we absolutely must.

At the same OTA convention session where Gerdin was speaking, Gaetz noted that this is the "right time to right the ship." He said carriers should not be satisfied with margins of four or five percent. Dunford noted that this is a perfect time bring rates in line with costs.

"It's a great opportunity for industry: if you don't take advantage of it now, you probably don't deserve to be here," he told the 500 fleet owners who had packed the room.

The Driver's View
There is an interesting disconnect between what can only be called an optimistic outlook for the trucking industry and how drivers view their prospects in the New Year. Joanne Ritchie of the Owner-Operator's Business Association of Canada (OBAC) says drivers and owner-ops seem downright pessimistic about the coming year. She notes that owner-operators are more aware than ever of the chasm between costs and revenue, but they don't express much optimism about seeing the situation improve.

"It hasn't sunk in yet that they have a huge amount of clout in this kind of market situation," Ritchie says. "The drivers and owner-operators have a role to play in getting carriers to pressure shippers for more compensatory rates. Like the carriers, they need to get a handle on their costs and present a case to their customers - the carriers - for improvements."

Ritchie says the worst thing that can happen in 2005 is for owner-ops not to become more selective about who they work for.

"There's plenty of evidence suggesting shippers are willing to work with carriers on rates and accessorial charges, but we've not yet seen much of a pass-through," she says. "We need to get more aggressive in demanding our share of the increases, and stop working with carriers who are not willing raise rates substantially or otherwise compensate us for the work we do."

John Earle is a petroleum driver based in Kamloops, B.C. who isn't optimistic about the possibility of wage gains in 2005. "I don't see big improvements in pay coming our way," he says. "We're about six bucks an hour behind where we should be, in fact I'm 80 cents an hour behind where I was 15 years ago as a Petro Canada driver working nights."

Mitch Robin, a company driver with a small Winnipeg-based carrier, on the other hand, sees the increasing demand for trucking services driving rates and wages up, if only as a means of attracting new drivers.

"Pay will have to go up, especially when hauling to the U.S., because we're starving for drivers," he notes. "I'm as busy as hell right now, and it's going to get busier, but with HOS, I won't be able to do much more. New drivers from the schools aren't staying in it for very long once they find out what it's like, so something will have to change."

John Richey is an owner-operator contracted to a small carrier in Manitoba also. His outlook for 2005 is rather bleak.

"More hassles and aggravation from the government, more waiting time, higher fuel prices, more owner-operators folding," he predicts. "When you have companies like J. B. Hunt out there, whose philosophy is to have 1000 trucks making $20 a day rather then ten trucks making $2000 a day, you just can't compete with that. It's going to remain cut-throat in 2005, and the little guys are going to lose the battle."

It's worth noting that J.B. Hunt president and CEO Kirk Thompson said in a recent interview that he fully expects driver pay to rise to (US) $65,000 per year or more in a short period of time. In October, J.B. Hunt reported record third quarter net earnings of $47.9 million compared with 2003 third quarter earnings of $32.7 million. J.B.'s OR for the third quarter in 2004 was 87.1%.

"So, what will it take to convince drivers and owner-operators that raises are there for the taking?" Ritchie asks. "Pay attention to what's going on in the industry - for starters. Get on side with the carriers who are serious about rate increases, and walk away from the ones who continue to jerk you around."

Wui-Seng Kon, a trucking industry analyst with investment consultant, Harris Partners, in Toronto, says if it costs more to pay drivers, so be it, the increases can be recovered through higher prices charged to shippers.

"As long as there is a shortage of capacity, then carriers will continue to have some pricing power," Kon says. "And it looks like they do, at least for the moment. You can see it in the financial results."

Back to capacity and wages for a moment. Most of the big shooters in the industry see the driver shortage worsening before it improves.

Notably, Paul Landry, president and CEO of the British Columbia Trucking Association. On a local level, he sees the skills shortage as the most significant issue of 2005 - particularly drivers and technicians. The B.C. Lower Mainland is facing a huge boom in major infrastructure projects, all expected to begin in the New Year.

"Those are going to draw very heavily on our talent pool, so we're going to have to solve that one," he said, noting, "According to economic theory, if you want more of something that is already in high demand, you're going to pay more for it."

2005 in 25 Words or Less
In a nutshell, 2005 will see the proposed Canadian HOS rules published in the Canada Gazette for final public comment; we'll have new cargo securement regulations to work with beginning in January with a period of soft enforcement extending until June; we'll see a new set of HOS rules published in the U.S. sometime early in the summer; everyone will continue fretting over low FAST enrolment rates for shippers and drivers while the U.S. Department of Homeland Security dreams up new ways of clogging the bridges and border crossings; Marine Atlantic will come under scrutiny, again, looking for ways to improve east coast ferry service; shippers that are not prepared to pay fair rates and respect fuel surcharges will have difficulty transporting their freight; and carriers will continue to be challenged with the driver shortage.

The final 25 words go to OBAC's Joanne Ritchie:

"2005 will be a year of challenge and opportunity for carriers, drivers, and owner-operators," she says. "A win for one should be a win for all."