Carriers and the transportation media have laid out a compelling case as to why transport companies should be receiving rate increases in 2012.  As the Great Recession of the late 2000’s unfolded, shippers put significant pressure on their carriers to roll back their rates.  For many carriers, rates have not returned to pre-recession levels.  The driver shortage is putting upward pressure on driver pay.  Government regulations (e.g. CSA, HOS) are being cited as some of the causes for a shrinking driver pool.  Despite the recent easing in fuel costs, petroleum costs have also been on the rise this year.  The increased cost to purchase insurance and upgrade fleets are driving further cost increases.  Shippers are being told to accept the proposed rate increases to ensure they have available capacity if the economy begins to grow at a more rapid pace.

These are compelling reasons and the various Canadian and American rate indices suggest that shippers are consenting to rate increases.  What can shippers do to help mitigate these increases in their supply chain costs?

Here are a few suggestions.  In my last blog I outlined a number of steps that shippers should take.  These include looking inward at their current packaging, taking advantage of consolidation (e.g. combining small LTL shipments into larger shipments), modal conversions (e.g. over the road truckload to intermodal) and other related opportunities to reduce costs.

Every shipper should also look outward at the market rates for their freight.  An annual freight bid that goes to an extended range of carriers and logistics service providers is also a must to ensure the company is paying competitive rates.

The operating ratios of publicly traded transportation companies are easy to access.  While costs have certainly gone up for most transport companies, one of the “dirty little secrets” of the Great Recession is that many costs have gone down.  Many trucking companies parked equipment, reduced wages, changed their operations (e.g. switched some long haul trucking business to intermodal) and improved their efficiency.  In other words, they adjusted their cost base to correspond with their reduced volumes.  This begs the question of what level of increase should a shipper accept?

In the most recent Transportation Buying Trends Survey undertaken by Canadian Transportation & Logistics magazine, there is an interesting set of questions that pertain to fuel surcharges. Over 68% of shippers support the view that “fuel surcharges are necessary as long as fuel costs continue to be highly volatile.”  Slightly less than half of the survey respondents believe “carriers apply fuel surcharges correctly.”  Over 61% agreed with the statement that “fuel surcharges are a way for carriers to squeeze additional revenues from their customers to improve their profits.”  Over 55% of shippers support the view that “carriers should adjust their freight charges to market rates that include fuel surcharges and as a result simplify their billings.”

Perhaps the most interesting finding is that 25.8% of shippers have created their own fuel surcharge index.  Since I interact with both shippers and carriers in my daily work, I would like to weigh in on this topic.  This set of responses begs a few questions.  Should shippers be taking their precious time to create fuel surcharge indices and formulas?  How should shippers approach the topic of fuel surcharges?  What should shippers do to optimize their freight costs?  Here are my thoughts.

For shippers that use both private fleet and for-hire carriers, it is essential to be fully informed on all aspects of fuel costs and fuel surcharges.  Even for carriers that use exclusively third party carriers, there is a requirement to have some familiarity with the leading indices and the current surcharges being applied.  For Canadian and cross-border shippers, a subscription to the Freight Carriers Association of Canada’s weekly fuel calculation bulletin will provide you with one of the industry standards for LTL and truckload shipments.  For shippers that use intermodal service or are considering it in their freight programs, they should obtain a copy of the railway/IMC fuel surcharge formulas.  These differ (e.g. are lower) from the over the road surcharge numbers.

The next thing a shipper should do is to gain an understanding of the components of a freight rate.  One needs to understand that a carrier’s freight rate or tariff is based on several components.  There is the cost of pick-up and delivery, the line haul component, the cost for any special handling (e.g. residence, construction site deliveries, etc.) and of course, the fuel component.  For LTL and small parcel shipments, there are a number of other variables that come into play such as shipment weight, density, cube, packaging etc. 

Shippers need to understand that each carrier has its own mix of freight, its own fleet size and specifications (e.g. straight trucks, tandems, tridems etc.), its own head haul and back haul requirements in terms of both yield and volume and its own primary and secondary markets.  In other words, fuel costs and surcharges are a large piece of the puzzle but they represent one element of a carrier’s total cost structure.  At the end of the day, the carrier looks at each shipper’s freight and relates it to their costing model, business requirements, profit objectives and of course, market rates to determine their rate structure.

The world of freight transportation is changing rapidly.  The signs are there and they are unmistakable.  Recognizing and responding effectively to these signals may help determine which shippers and carriers will survive in the years ahead.  Let’s examine the components of the new paradigm of freight transportation.

The Era is Cheap Oil is Over

The steep escalation in fuel prices this year is a harbinger of things to come for shippers and carriers.  This time there will likely be no major recession to bring energy prices down.  The sad fact is that 95 percent of transportation modes, passenger and freight, run on petroleum products and the likelihood of finding new sources of supply or of shrinkage in global demand is highly unlikely. In fact the use of petroleum in countries such as China and India is on the rise.

The result will be tighter truck capacity, greater use of intermodal rail services, the electrification of transportation systems, the relocation of factories and distribution centres and the slow shift to cleaner, cheaper fuels.  It will drive more LCV’s (long combination vehicles) or “turnpikes” and more triple trailer configurations.  This may be the impetus to harmonize our laws throughout North America to remove barriers to the movement of the most energy efficient vehicle combinations across our highways.   To curb use, many countries will have to begin looking at the Danish example of higher taxes on fuel inefficient vehicles and higher taxes on petroleum.  Get used to it.

The Driver Shortage is Real

This past week I had the opportunity to speak with some of North America’s leading truckers.  Other than the “head shots” in this year’s National Hockey League playoffs, the other number one topic of discussion on everyone’s mind is the issue of driver shortages.  I also had an opportunity to read what the Canadian Trucking Alliance labels “a new, eye-opening report” from the Blue Ribbon Task Force they established in 2011 to address the impending shortage of qualified commercial drivers in Canada. 

In this blog, I would like share a few thoughts on this hot topic.

The problem is real

There are some shippers who believe that this issue is manufactured by the trucking industry to help sell freight rate increases.  Let me assure my shipper friends that this is not correct.  Trucking companies all over North America are having difficulty attracting “qualified drivers.”  By this term we mean skilled professional drivers or people interested in becoming professionals. 

This shortage is being created by an aging workforce, lifestyle issues (e.g. having to spend time away from home), a lack of interest from women, the challenges of the work, the level and structure of the compensation and the fact that driving truck is not viewed as a profession.  The fact is that while there are millions of Americans and Canadians out of work, driving truck is not considered an option for most people.

At a recent Driving for Profit Seminar in Toronto, Lou Smyrlis, Editorial Director of Canadian Transportation & Logistics Magazine, led two trucking company investment advisors, Doug Nix, Vice Chairman of Corporate Finance Associates and Doug Davis, Independent Director, Pro-Trans Ventures Inc. through a discussion of how to buy and sell trucking companies in 2012.  Here is what they had to say.

From a buyer perspective, they encouraged companies to be proactive in seeking out prospective acquisition candidates.  Since so much about buying is timing, it always important to plant the seed and remain in contact.  While a trucking company’s leaders may not be ready to sell their enterprise in the second quarter of 2012, it is at least important as a purchaser to express your interest. One should also keep in mind that the purchase process itself can take six to nine months or more complete.

The buyer should carefully think through some key questions such as “why” make this purchase, what are the underlying business risks of a potential acquisition, do they have the investment advisor team in place to guide them through the process and do they have the “bandwidth” (management team) to manage the acquisition? In other words, can the company manage its current base of business while it is trying to assimilate new customers, new employees and possibly fit two cultures together?

The two advisors mentioned that they use a valuation multiple for an asset-based business of 3.75 X normalized EBITDA.  The word “normalized” is an important concept since this refers to what the earnings will look like when certain expenses or withdrawals that are taken out of the company by the current owners are removed from the income statement to better reflect what the business will look like on a going forward basis.

The purchaser must look at a number of variables in determining how to pay for the company.  The advisers related it to buying a home. The purchaser looks at what they can make in terms of a down payment and the level of mortgage they wish to carry.   Similarly, when buying a trucking company, one needs to consider the financial structure of their offer.  This involves an evaluation of cask payment, business loan and earn-out.  The latter is a common term that refers to principle of paying the seller part of the purchase price from monies earned by the business over a period of years.  If the sellers remain with the business after implementation and help maintain the income flow, they are rewarded with a business retention bonus for their efforts.