Lou Smyrlis

For at least 18 months now I’ve been hearing about “zombie” truckers, motor carriers which are barely able to meet payroll from week to week yet somehow manage to hang on. Their continued existence maintains the capacity overhang that deflates rates since freight volumes during this recovery, especially in the LTL sector, are not growing as quickly as during prior recoveries. No doubt their desperation to secure any business that can keep them afloat for another week also contributes to depressed rates for the industry overall.

I’ve also been hearing for the last 18 months that until the lending institutions pull the plug on these severe underperformers the industry will continue to be mired in its over capacity/low pricing glut. Well folks, we may be waiting for a long time for that to happen.

Elian Terner, director, investment banking for Scotia Capital, was at our recent Carrier Workshop, sponsored by Peoplenet Canada and conducted in partnership with Dan Goodwill & Associates. Terner is a rising star in our industry and he provided his take on the industry’s future direction and what trucking executives must consider to best position their companies for the years ahead. You may not like what he had to say. Terner acknowledged that lenders have been reluctant to force delinquent operators into bankruptcy; used truck prices are still low enough lenders would not get much in return when selling off the equipment.

Would improved pricing for used iron change things? Perhaps, but as Terner pointed out, lending institutions don’t really want to be operating trucking businesses. “Generally speaking they’re not in the business of seizing assets. That’s not what they want to do. In many ways it’s better for them to keep the company alive,” he said.

So if the lending institutions don’t want to fix the industry’s problems then what? We should be doing what needed to be done all along; fix them ourselves.

1.For companies looking to grow organically, there needs to be a focus on limiting capacity. As Mark Seymour of Kriska Transportation recently pointed out at Transcore’s strongly attended users conference: “We are here to create a model we can live with for years rather than months.” That means not adding capacity unless absolutely certain of its long-term need and not getting trapped into other people’s pricing. Market share don’t mean a whole heck of a lot if you’re bleeding red while trying to achieve it.

2.For companies looking to grow by acquisition, Terner believes a number of attractive opportunities exist to acquire troubled carriers. “Consolidation will be a key theme for the trucking industry over the next several years…A highly competitive M&A market will be led by large firms focused on growth by acquisition and financial buyers with strong cash positions,” he says. But before that happens the companies in a good position to be acquirers need to get over their current cautious approach. Few seem willing to risk making a bad investment so soon after recovering from a nasty recession.

3.Company executives looking to sell need to get over their “wait and see” attitude. Those who may want to sell seem to be held back by the cold reality that their company is not worth anywhere near what it used to be. Also, many independently owned and operated trucking firms in the Canadian market do not have firm succession plans in place and in many cases no family members waiting in the wings and interested in becoming second or third-generation operators. Both those factors are pushing owners who could be selling towards a wait and see attitude. Yet, these are times when “wait and see” can have very negative consequences. That was made abundantly clear by the numbers provided by Terner. Consider that back during the industry glory days of 2002 to 2007, when trucking company valuations were going off the chart, we hit a peak of 10.7 x EBITDA. During the trough of the recession valuations dropped down to about 4.2X EBITDA, according to Terner. As he pointed out, can you imagine how much was lost by people who took a “wait and see” attitude because they did not properly understand the market trends and their company’s value? A return to peak valuations will likely take another 5-10 years, according to Terner and will require substantial sustained EBITDA growth.

Seems to me like there is no better time than the present for motor carriers to, as Terner put it: assess their strategic positioning and determine the best path forward.

I’ve been at this transportation reporting gig for going on 20 years now and I can’t recall a time when an economic recovery was being faced with so much trepidation, uncertainty and conflicting opinion about the future.

Our own research has been revealing this uncertainty for some time now. We find the majority of motor carrier executives, for example, being more pessimistic about freight volume growth and their ability to charge higher rates than their own customers. The uncertainty and conflicting opinion also surfaced at the two workshops we put on for shippers and carriers earlier this summer, in partnership with Dan Goodwill and Associates. I think I’ve lost track of all the different theories about the shape of the recovery and their assigned letters– V, W, U, L. Heck, there is even a √ (square root) shaped recovery scenario. There’s no shortage of economists worrying about a slip back into recession yet Carlos Gomes, senior economist at Scotia Bank and the opening speaker at both of our workshops, sounded awfully convincing in his assertion that the economic fundamentals are sound. Little wonder then how we ended up at our workshops with Dan Einwechter, the charismatic head of Challenger Motor Freight predicting come September “it is going be busy as hell” while fellow carrier panelists Peter DiTecco of Armbro Transport and Doug Munro of Maritime-Ontario Freight Lines did not see recovery for their industry for some time.

What gives? And, just as important, what does it mean for transportation and logistics?

Of all the commentary I’ve read this year, I’ve been most influenced in my thinking by Noel Perry, a partner with the FTR Associates freight forecasting group and author of The Challenge of Deep Economic Cycles.

Since 1980 the North American transportation and logistics industry was buttressed by relative economic stability which allowed both shippers and carriers to focus on their operations. After enduring four recessions from 1970 to 1982 the industry experienced only two from 1983 to 2007. But Perry believes the US economy (and therefore the North American economy overall) has entered into a pattern of high cyclicality, which will erode the economic stability our transportation system has come to rely upon.

Perry warns that it is time for the industry to clearly recognize this reality and begin its adaptations.

There have been a lot of bubbles burst the last few years -- consumer credit, home prices and financial risk taking – and the North American economy collapsed with them in 2008. Perry believes the reason we will be stuck in a period of rapid economic cyclicality is because there is a fifth bubble yet to burst: governmental debt, most visible in Europe but present in our largest trading partner as well. He figures creditors will prick that bubble sooner rather than later and the resulting shock to the governmental system will create “a wave of chaotic regulations, taxes and spending policies that will add another level of volatility to the transportation environment.”

The recoveries of the 1980s and 1990s lasted 25 and 28 quarters, respectively. That’s the environment both shippers and carriers have become used to operating in. But if we look across a longer time span, the reality is that the average for the rest of the recoveries is less than 10 quarters. If we return to a period of short cycles, as Perry predicts, the time for growth we’ve become used to would be cut in half.

And short recoveries are bad for transportation for a simple reason, as Perry explains: The benefits from an upturn take about a year to come in. It takes six months or more for the average manager to realize there has been a turn; it takes another six months for that manager to take advantage. Four lost quarters out of an eight- or 10-quarter cycle is a significant fraction. Operating in an economy with such high volatility requires shippers and the carriers who service them to respond much faster to changing market conditions than before.

Initially there may seem to be an advantage to shippers if carriers can’t move fast enough to reduce capacity when the economy cycles downwards. Savings in the range of 15-25% were common during the past year as the capacity overhang depressed prices. But if carriers are equally slow to add capacity during the upturn, the penalty the shipper pays for not securing adequate capacity is lost sales, product obsolescence and plant shutdowns.

High volatility will place an emphasis on analysis and planning. Carriers and shippers who do it, and do it well, will pick up on market changes earlier, respond to them faster, and developed relationships with each other that address the entire economic cycle rather than just the latest upward or downward phase.