Carrier Strategies During the Slowing Economy

In last week’s blog, I tried to capture what appears to be the sentiment of a majority of economists.  Their prediction is for slow growth not just for 2012, but also for several years after that.  In the next two blogs, I will outline some of the approaches taken by shippers and carriers to bolster profits during the upcoming slow times.  The following are a number of the strategies that are playing out among North American carriers.

Maximize Yields from the Current Fleet

The most successful carriers are getting back to basics.  They are allocating their assets where they can maximize fleet utilization and yields.  This has become very apparent in the freight bids conducted by our organization during 2011.

Carriers are focusing on those lanes where they have the best balance with the highest yielding freight.  They are being very careful about how much capacity they add.  By providing reliable, consistent service in these lanes, they are building their business by doing what they do best and where they can command the best price for their services.  Lanes that cause a carrier to go out of route, where backhaul freight is a challenge or where there are any impediments or deviations to their normal service (e.g. mall deliveries, pallet returns) are being passed over in favour of accounts that fit better with the company’s “sweet spot.”  I expect this deliberate, focused asset optimization approach to continue for the next several years.

Industry Consolidation

If volumes don't increase in the next six months, 15 percent of fleets will consider getting out of the trucking game.  That's according to Transport Capital Partners' (TCP) Third Quarter 2011 Business Expectation Survey.  Twenty percent of fleets with under $25 million in revenues would consider leaving, while 11.8 percent of fleets over $25 million in revenues would also think about leaving.

The number of carriers thinking about selling in the next 18 months also rose, said TCP, from 25 percent to 28 percent. This marks the highest percentage since TCP started the survey in February of 2009. Nearly 40 percent of smaller carriers are considering leaving the industry in the next 18 months, compared with 23 percent of larger carriers.

When one looks at the slow growth forecasts and then relate them to likely upward pressure on fuel costs, downward pressure on rates, intense competition, government regulations (e.g. hours of service, CSA), ever increasing emission standards that place pressure on equipment costs and rising driver wages due to driver shortages, “the business isn’t fun anymore.”  Then there is the issue of demographics.  For aging “baby boomers” who own truck fleets and don’t have a good succession plan, the option of leaving the business is an attractive one.

There is already evidence of industry consolidation. As an example, Celadon Group purchased a 6.3 percent stake in rival truckload carrier USA Truck for $4.7 million, raising the prospect of a merger between the competitors.  A merger with $386.9 million USA Truck would make Celadon a $944 million company and one of the 10 largest truckload carriers in the United States. It remains to be seen how much Celadon will be willing to increase its state in USA Truck.  Nevertheless, this move may signal a strategy that other carriers may employ to acquire what they deem to be value attractive under-valued trucking businesses in a low interest rate environment. For companies like TransForce that have grown largely through acquisition, one can expect to see more additions to their stable of carriers as this slow growth market plays out.

Adapt and Innovate

A key to survival will be the carriers’ ability to adapt to the evolving needs of their customers and innovate to achieve above average growth during a slow period.  This is manifesting itself in several ways.  Schneider Logistics has recently introduced a shared LTL service for high volume LTL shippers seeking to take advantage of truckload type pricing. 

In an effort to reduce energy consumption and improve service, CN has added 200 EcoTherm containers to their EcoTherm fleet. Now with nearly 500 containers, CN's EcoTherm fleet is the largest in North America.  CN's temperature-sensitive intermodal markets have been growing, according to the company, and the EcoTherm containers allow food and beverage customers to load the same volume of goods in the 40-foot container, without the need for blocking and bracing required in a 53-foot container.

The recently announced alliance between CP Rail and the Contrans Group, using “Rail Deck” equipment via an intermodal service to move flatbed freight (e.g. pipes) is another example of companies seeking to provide innovative, cost-effective services during slow times.  Certainly one would expect to see more marketing alliances since these allow companies to share assets and increase volumes without increasing capital expenditures and overhead costs.  One can also expect to see more carriers expand their dedicated fleet business as some shippers seek to concentrate on their core competence and divest their private fleets. 

Clearly fleet optimization and yield maximization, industry consolidation, adaptation to evolving customer needs, innovation and more dedicated fleet services are among the strategies being employed by carriers to maintain and build profitability during these slow times.