The Incredible Shrinking Canadian Freight Carrier Industry

For many years, industry experts have been predicting a consolidation in the Canadian freight industry. During and after the Great Recession, the decibel level of these warnings increased as most trucking companies faced the challenges of reduced freight volumes, sinking rates and the difficulty of managing a business during recessionary times. In fact, the industry did shrink by an estimated fifteen percent during the downturn, not through acquisition, but through companies closing their doors or parking equipment.

As one looks back over the past five years, the Canadian economy has been recovering, albeit painfully slowly. There has been some growth in GDP and in jobs, largely in the west. During this same period, the Canadian freight industry has been consolidating and continues to consolidate. This has been driven by a host of factors.

There were and still are willing sellers. Many trucking company owners, particularly those in the baby boomer generation, without a succession plan, or with poor prospects for survival, saw the sale of their business as the most logical business option. For some, the challenge of hanging on during the Great Recession, took some of the appeal out of the business. That coupled with the option of creating a retirement fund was a desirable route to follow.

The post-recession business climate brought a host of challenges. Just as trucking company owners are getting older, so are truck drivers. Young men and women are not interested in becoming long haul truck drivers, dealing with crossing the Canada – US border, spending weeks away from their families, for $40,000 to $50,000 per year. The driver shortage, coupled with rising costs of fuel and equipment, low margins, increasing technological sophistication and regulatory changes, have made life much more difficult, particularly for small fleets with limited access to capital.

In addition, there were and still are willing buyers. Some of the larger trucking companies and conglomerates have been active buyers. Take a look at the websites of the large truckers to see the list of companies that have been acquired. The larger fleets have seized the opportunity to increase market share, to enter new markets, and/or to acquire new drivers, equipment and management talent. With TransForce’s acquisition of Contrans, we are now seeing a very large conglomerate devour a large conglomerate. What does this all mean for the Canadian freight industry?

The owners of the fleets being acquired are receiving some sort of retirement nest egg depending on the value of their businesses. It is questionable if some of these companies would have survived if they hadn’t been acquired. While some people are often released during or after an acquisition, many people were able to retain their jobs within a financially more viable structure. That is certainly a good thing. As we have also seen, companies making acquisitions can mix and match the pieces of the puzzle in creative ways to drive more synergy and value.

Of course, a very high percentage of mergers and acquisitions fail. These can be visible or invisible to the shipping public. If you look back at the list of companies acquired over the past five to ten years, you will find some names that are missing, either because they have been merged with another entity, or they simply failed due to incompatible cultures, the loss of key employees, weak business models, or a host of other reasons. In other words, there are pluses and minuses with all of this merger and acquisition activity. Some acquisitions work, many don’t.

What are the implications for shippers? Again, there are positive and negative aspects. The big players have gotten much bigger and stronger. Some performers, strong and weak, have been merged or realigned with stronger players to make them more viable, from both a financial and service perspective. The consequences of these M & A activities vary from segment to segment. While there has been consolidation in the truckload sector, and there will be more, this market is large and very diverse. There are thousands of truckload carriers, ranging from very small fleets to the major players. Even the biggest truckload carriers control a small segment of the market.

However, for the reasons outlined above, it is becoming increasingly difficult for the smaller fleets to survive. In addition to driver and capital issues, there is the matter of economies of scale. It is a challenge for small fleets to meet the capacity needs of large shippers. It is likely that we will continue to see more consolidation. This may result in fewer options and higher rates. To make this business more attractive for entrepreneurs, the regulatory and economic climate may have to change. Whether this will happen is questionable.

The LTL market is quite different. To properly serve this market, viable players must have terminal networks. Less than ten companies control this market in Canada. The same is true in the United States. TransForce’s recent acquisition of Clarke Transport, Vitran’s Canadian operations and QuikX/QuikTrax, within a very short time, has certainly changed the dynamics of this specific (east-west intermodal) market. It will be interesting to watch if the three western Canada (intermodal) businesses are integrated into one consolidated business.

The point is that for national LTL freight distribution and major regional LTL shipping as well, the number of options is quite limited. If any of the large LTL carriers (e.g. Day & Ross, Manitoulin, TransForce’s stable of LTL carriers) were to contemplate a merger with each other, one would have to wonder if this would be a tipping point for Canada’s Competition Bureau.

The courier market is similar to the LTL market. To effectively serve this market requires sorting and processing facilities. There are a limited number of national and regional players. Any further consolidation (e.g. the sale or Purolator to another big player) would certainly raise issues of competitive service options in Canada. Where do we go from here?

We can expect to see more M & A activity in the days ahead. While many players have come out of the market, there are still many left to buy and there continue to be willing sellers. Shippers must use due diligence in selecting modes and carriers. With capacity tight and expected to get tighter and with the industry consolidating, manufacturers and retailers must become very thoughtful and methodical in finding core carriers to support their supply chains. The rise of logistics service providers in the LTL space may be the best indicator that shippers are reaching outside traditional asset-based carriers to find companies that can creatively come up with competitive service and pricing solutions.

If you look at the sheer number of trucking companies that have been purchased over the past five years, we are witnessing a consolidating industry. As this continues, hopefully market and regulatory forces, if required, will ensure we maintain a competitive trucking industry in Canada.

What are your thoughts on the state of competition in the Canadian freight industry? As a shipper, are you able to find a satisfactory number of carriers with competitive service and pricing in the markets you serve? As a carrier, are you confident that your company will be able to survive on a going forward basis? What you like to see changed to improve the prospects for your fleet?

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