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Driver shortage is (economic) drag

Posted: October 10, 2018 by John G. Smith

CTA’s Stephen Laskowski (left) joins panelists in a presentation on economic issues at the Surface Transportation Summit.

MISSISSAUGA, Ont. – When Canadian Trucking Alliance president Stephen Laskowski took his turn at the mic during the annual Surface Transportation Summit, he was quick to refer to trucks parked against fences along nearby Dixie Road.

They’re not idled because of a lack of business opportunities, he stressed. It’s because of a lack of truck drivers. And the situation is expected to intensify as the trucking industry comes to terms with “massive” retirement numbers over the next five to six years.

The challenge is not limited to Canada, either.

The average driver in the U.S. is somewhere between 52 and 57 years old, added David Ross, Stifel Financial’s research managing director – global transportation and logistics. “That’s older than it used to be, and next year it’s going to be older than it is today.” Historically, the number of drivers has been evenly split between those under 35, those 35-50, and those over 50. In the last decade the demographics have shifted. Today just 20% of drivers are under 35, with the two older groups evenly splitting the rest, he said.

Solutions in Canada will require a new approach to immigration policies that are still focused on so-called professional workers, or even rethinking how long-haul freight is moved, Laskowski said.

In the meantime, the driver shortage continues to be an economic drag.

Trucking growth

Despite this challenge, a strong general economy continues to generate some new opportunities and business growth for those in trucking.

“Your sector, it is very cyclical. It does follow the business cycle,” explained Paul Ferley, assistant chief economist with the Royal Bank of Canada. He projects trucking revenues to grow 2.5% this year and 3.2% next year, compared to forecasted GDP gains of a respective 2.1% and 2%.

Stifel’s Ross expects truckload rates to rise 5-10% in 2019, excluding fuel. Even though he sees LTL rates moderating against the backdrop of a cooling manufacturing sector, they’re still projected to rise just under 5% in 2019.

Small fleets appear to be the most likely to realize the gains, with their revenue up 1.2% year over year in the U.S. truckload sector, Ross said. In contrast, large fleets with revenues above US $30 million have seen revenue drop 0.5%.

“Large fleets have been shrinking for some time, partially because they got too big and most of them didn’t make any money,” he added, noting how many turned to asset-light options like brokering trucks and warehousing.

He believes the current surge in Class 8 truck orders is less about chasing new business and has more to do with realizing technological improvements. “The economics of the new ones today are really compelling,” Ross said of the latest generation of equipment.

For its part, Ontario-based JD Smith is investing in replacement equipment, but not expanding the fleet. The focus, said CEO Scott Smith, is ensuring the fleet charges the right rates and continues to be seen as an employer of choice in a tight labor market.

While 2018 was a “good year”, JD Smith certainly felt the personnel-based constraints on growth, Smith said. Gone are the days when the business could simply reach out to find warehouse and fleet workers with ease. “It really has been a significant impact on discipline for the quality of the labor.”

But there is certainly business to be had for those who can combine the trucks and drivers.

Ross pointed to weekly rail carloads excluding grain and coal, up 6% year over year in September, as proof. That measure correlates well with trucking activity in the U.S., he explained. The industrial sector is healthy and growing as well and is expected to grow for another six months.

“We think there’s going to be modest truckload growth in terms of demand next year, really limited by driver supply,” he added. Yields expected to hit 12% this year will likely moderate to 5-7% next year, although he admitted some shippers think such projections are conservative. LTL tonnage was up 3.8% in the second quarter of 2018, and that’s good news for FedEx, which is gaining market share in the U.S. market segment.

While LTL and TL volumes in the U.S. slowed in August, they’re still up year over year. Flatbed and reefer activity are down year over year, but dry van activity is up 2.5%, Ross says. Spot market rates peaked in June but are still near 2014 levels.

“Some of the pressure in the spot market moved freight into the contract market,” he added.

Shippers looking for other strategies to control costs will want to consider modal changes, longer contracts, guaranteed volumes, wider delivery windows, and even offering coffee and bathroom facilities for company drivers, Ross said. Collaborating with carriers and even other shippers can help, too.

“We’re looking for solutions on how to contain our costs,” said Belmont Meats president and CEO Paul Roach. He stressed that his company recognizes the challenges of limited labor and tighter capacity, but is looking for ways to fill trucks more effectively.

Laskowski emphasized the need to monitor the technologies that are changing the supply chain. Investments in waterless agriculture is transforming old warehouses into grow houses, for example. That could lead to new customers with short-haul freight to move. “We need, as an industry, to stay on top of the technology of our customers.”

Said the Canadian Trucking Alliance chief: “If you’re not changing, you’re not growing.”

The general economy

Driving much of the current growth, of course, are strong economic conditions.

“Right now, the Canadian economy is viewed at capacity,” said Ferley, offering rising oil prices, strong U.S. growth and monetary policies as reasons. Current monetary policies are looking to keep growth around a moderate 2% next year. “There will be some growth, but our view is it will not be as rapid as what we saw in 2017,” he added. In that year, Canada’s 4% growth rate led the G7, in part because of recovering oil prices.

Limits to broader economic growth are not limited to the driver shortage alone. While the emerging USMCA trade deal has eased concerns about threats to scrap the North American Free Trade Agreement, the administration of U.S. President Donald Trump could still introduce other trade challenges, Ferley said.

Then there’s no mistaking other threats facing the U.S. economy, which has an undeniable effect on Canada. If central banks allow the economy to run too hot for too long, corrections might require more aggressive actions by the Fed, Ferley said. In the meantime, government debt and interest rates continue to rise, which could affect global financial markets.

Ferley also questioned the timing of U.S. policies like tax reforms and fiscal benefits against a backdrop of a strong economy that’s running beyond capacity. Debt levels have reached levels not seen since the end of World War Two. “It’s unneeded and it puts you in a more difficult position,” he said. The Fed may claim there are still pockets of capacity, but incorrect assumptions don’t always end happily.

Laskowski doesn’t expect U.S. nationalism to end in two years, either.

“This is an American movement. It is a political movement. It is a social movement, and it is an economic movement,” he said. The threat of tariffs remain and there is now a cap on growth in the automotive sector. “That’s a message to us as the trade community. ‘You will only grow so much, and it will not be at our expense.’”

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