The STS Focused on the Profound Changes Shaping the Canadian Transportation Industry in 2019

The Surface Transportation Summit celebrated its 10th anniversary at the International Centre on October 10. The event addressed the profound changes that have taken hold of the Transportation industry in 2018 and where they will likely lead us in 2019.

Paul Ferley, Assistant Chief Economist, Royal Bank of Canada, kicked off the day by highlighting that the US economy is operating beyond capacity. The U.S. is stimulating an already hot economy with tax cuts and low interest rates. As we look ahead to 2019, he noted that the level of future growth will depend on the actions of economic policy-makers.

Rising oil prices, still accommodative monetary policy and strong U.S. growth have moved the Canadian economy to capacity. The new USMCA (formerly NAFTA) trade agreement has created stability although with tariffs on steel and aluminum, and a president who can act erratically, this could change at any time.

The U.S. Federal Reserve’s objectives will likely be to try to moderate the level of activity. The concern is that President will try to boost an economy that is already over capacity. In Canada, a low dollar coupled with rising oil prices and ongoing increases in interest rates by the Government of Canada are expected to moderate growth.

Steven Laskowski, President, Ontario Trucking Association and Canadian Trucking Alliance, highlighted the worldwide rise of nationalism. He specifically identified that in the USMCA, there is now a cap on Canadian exports of auto parts to the United States. The nationalism movement will have an impact on the Canadian trucking industry.

The moderator for this track, Lou Smyrlis, Managing Director, Trucking and Supply Chain Group, Newcom Media Inc., stated that the strong economy has exposed a human resource problem in the transportation industry, namely the well publicized shortage of drivers and mechanics. Steven Laskowski responded by saying that there is a requirement for the Canadian government to rethink its immigration policies. Over the past decade, the objective of the policy has been to bring in people with strong skills and academic credentials to bolster Canada’s workforce.

It is becoming increasingly difficult to attract people to become long haul drivers. Mr. Laskowski noted that Texas and California are the top two states for long haul trucking out of Toronto. Young people are not interested in sleeping in their trucks or in motels or being away for extended periods of time. In the short term, the government must do more to encourage immigrants to come to Canada to perform these jobs.

Longer term, there is a requirement to make some structural changes to the trucking industry. Mr. Laskowski stressed that Canadians must make the necessary investments in safety, the environment and labour to build a healthy trucking industry. The government should be providing regulations that foster improvement in these areas; it should encourage carriers that are not meeting these requirements to make improvements or withdraw from the industry.

Mr. Laskowski also spoke about the impact of technology on the trucking industry and on supply chains. His message was that technological change is transforming the industry into a safer business and into a business that will change how and where products are manufactured. The takeaway from his observations: “If you aren’t changing, you aren’t growing.”

David Ross, Research Managing Director, Global Transportation & Logistics,Stifel Financial Corp. then addressed the U.S. market. He pointed out that the truckload sector represents seventy percent of the U.S. transportation industry. He observed that small fleets are growing more quickly than large fleets. He mentioned that while truck fleets are growing, “they don’t come with drivers.” Mr. Ross stated that for large fleets, 5 to 10% of their fleets are parked because they cannot find enough qualified drivers.

On the other hand, trucks are getting safer and more energy efficient. Some new trucks are achieving 9 miles to the gallon. He also spoke about the shift in the age of truck drivers. The average age of drivers has been moving progressively higher over the last few years. Forty percent of drivers in the U.S. are now over fifty years of age. Mr. Ross reviewed a list of the factors reducing and increasing truck capacity in the U.S. While there are some countervailing forces, the net impact of ELDs, HOS changes, CSA etc. have more than offset the positive capacity forces (i.e. miniaturization, LCVs etc.).

Looking at the demand side, Mr. Ross stated that we are in the “late innings” of this economic cycle. He referenced some of the key metrics that his company tracks (i.e. ISM index, retail to sales ratio) and expressed the view that the strong economy will continue for the next six months but at some point, it will begin to contract.

The spike in freight rates has been well documented. Mr. Ross identified the recent softening in rates in the spot market as shippers move to contract rates or dedicated fleets. Looking ahead to 2019, strong demand will still be met with a driver shortage that will continue to put upward pressure on freight rates. The more moderate growth in 2019 will probably result in rate increases in the high single digits versus the double digits of 2018. Intermodal growth will not be as strong since rail service is not good. Nevertheless, the railroads continue to capitalize on their monopoly/duopoly position.

He concluded his remarks with some suggestions on what shippers can do to address these powerful forces. He suggested taking a second look at the company’s supply chain. This includes packaging improvements, possible modal changes, longer contracts, guaranteed volumes, wider delivery windows, and even offering coffee and bathroom facilities for company drivers all make a difference. He stressed that “collaboration is key.” This should include providing better data-sharing and partnering with carriers/3PLs but also potentially with other shippers. 

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