Lou Smyrlis

Attending Scotia Capital’s transportation and logistics night this week I picked up on a valuable piece of insight I think all motor carrier executives, and the shippers who deal with them, will want to consider.

The night featured a Jays game watched from Scotia Capital’s private box at Rogers Centre overseeing first base but in reality it was a great excuse to bring together a menagerie of transportation industry leaders for a few hours. Scotia Capital proved to be a most attentive host keeping us all well fed with plenty of good stuff to quench our thirst too.

The guests I had a chance to chat with included motor carrier execs such as Dan Einwechter of Challenger, Doug Harrison of Calyx, Nasser Syed of Apple Express and Brent Jones of Wilson Transportation as well as Pat Loduca of Upper Lakes Group and John Kim, the new CFO of Cargojet.

Talk naturally turned to the state of the Canadian transportation industry and I must admit I watched but a few minutes of the game the conversation being as interesting as it was. But it was Elian Terner, director of investment banking at Scotia Capital, who I thought provided the most thought provoking insight.

For a couple of years now motor carrier executives have been hoping the excess capacity in their industry would be removed when the financial institutions finally decided to shut down the many trucking companies basically operating from week to week - the “zombie truckers” as they’ve come to be called. The line of reasoning was that soon as the recession was over and the equipment owned by these carriers hanging on by their fingernails was worth something again, we would see the banks getting a lot more aggressive in calling their loans. In other words the banks would play a major role in consolidating the industry.

This view had a great number of adherents and I must admit to being one of them. But there are two problems with it:

First is the sheer scale of the capacity that needs fixing. The number of small carriers in Canada increased by about 25% during the pre-recession years; there are about 2,000 small carriers that would need to shut their doors before we could return to the capacity levels Canada experienced at the start of this millennium. And that’s not counting all the capacity added on by medium sized and large carriers. They did not grow much in number but they did increase the size of their fleets.

The second problem with this line of reasoning is quite simple. If this is what’s going to happen, why hasn’t it started happening yet? The recession is over, we are several months into a fragile recovery and certain sectors are already showing strong growth.

Scotia Capital’s Terner believes we haven’t seen the banks play a major role in consolidating the industry because they don’t want to. They’re not in the business of trying to sell off equipment and terminals; if these companies can squeeze by, they just may very well let them.

As Terner emphasized, if motor carriers feel the need to consolidate their industry to cure the excess capacity woes that have placed such downward pressure on pricing the last two years, they’re going to have to take care of it themselves.

Motor carriers were squeezed by the recession like never before. With a tentative recovery in hand, how will they start to grow again in 2010? In this second part of my interview with Mark Seymour, head of the Kriska Transportation and a former chairman of the Ontario Trucking Association, we take a look at the hard road ahead.

CT&L: A large part of the reason why there was such downward pressure on rates is because available capacity was considerably larger than the demand for transportation during the recession. There were a lot of new entrants in the years before the recession that contributed to this excess capacity. Will there be enough barriers to entry during the recovery to keep capacity from growing out of control once again?

Seymour: I hope there will be enough barriers to entry for new players and barriers to growth for existing players. Typically, what would keep you from getting in or bigger is banks, finance and insurance companies. I think those institutions will have to repair some of the damage they’ve inflicted upon themselves and for anybody trying to get in now, that may prove to be much more difficult. But we also can’t discount the growth we saw from established players. There was just a lot of growth in the industry.

CT&L: Despite the difficulties of the past year, Kriska did manage to grow. Tell me about your acquisition of Clark Transport. What does it add to Kriska’s capabilities and why was it a good fit?

Seymour: Clark Transport was an eastern Ontario based company and their business was primarily in the temperature controlled market and it was a good fit for what we do from a customer perspective and a network perspective. It added quality people and quality customers and that’s what we look for with our acquisition strategy.

CT&L: About a year ago you also purchased TL carrier BMD Transportation. Why did that purchase make sense for Kriska and how has that purchase worked out?

Seymour: It has worked out very well. It’s the same principle, with an eastern Ontario based company with good people and customers and strong relationships. It added more scale to our company and was very complimentary to what we already did. Both BMD and Clark were merged immediately with Kriska because they fit so well; there wasn’t duplication in terms of terminals and customers and equipment. Anything that we do these days is with scale in mind. If you are doing something, it’s always in your best interest to do more of it and get more scale. It helps diversify our business as well.

CT&L: Why does there seem to be a preference to pick up fleets of this size rather than pursue much larger acquisitions?

Seymour: In my opinion, nobody can afford to make a mistake right now. The bigger the nut, the bigger the risk. Mergers or standalone share purchases can be very distracting. They can also be very disruptive to customers and employees, so you have to be very careful. So I think the smaller the acquisition, the less dramatic and risky it can be. But at the same time there can be benefits. To go into the market today and try to grab $3 million or $5 million of new revenue is very difficult. An acquisition, if you do it right and convince the customers you are going to do it right, brings you that. We believe we have to continue to look for such opportunities that are of low risk. If you don’t grow you are going to shrink.