Transport sector on a hard road

The transport industry is suffering under some of the worst conditions in recent memory. Higher fuel costs, lower turnover in the retail industry and the Queensland floods have seen companies large and small struggling to stay afloat.

But the SmartCompany Dun & Bradstreet Industry Growth List for the transport industry reveals there are some smaller companies succeeding, particularly those associated with the mining boom. Meanwhile, larger companies now have the scale to leverage better and longer contracts.

Keolis Australia, which owns a majority stake in KDR Victoria, Melbourne’s main tram operator, heads the list with $7.9 million in revenue and over 4,000% growth. Iit took over the tram network in 2009.

Truck transport group BCS Logistics comes in second with $2.6 million revenue, while logistics group Supply Force International is third with $7.8 million.

Total revenue on the list comes to $12.2 billion, while average growth comes in at 153.5%

While much of the transport industry is concentrated in shipping, analysts point out that many sectors including tourism contain transport and logistics companies as well – and they’re hurting just as much. The higher Australian dollar is continuing to put pressure on domestic tourism.

An industry of contradictions

Ian MacGowan, IBISWorld senior analyst, says the industry is one of contradictions.

MacGowan says rising fuel costs, low tourism numbers and ramping down of capital spending in the airline industries means transport is going to be under pressure for the short-term.

“There’s a positive future for the transport industry, but there are some significant challenges facing some operators more than others,” he says.

“Many have to deal with rising costs of fuel, that’s an obvious one, although luckily for many it’s not as bad as it was back in 2008. Operators have learned from that experience, and they’ve been able to manage the increases a little better.”

But the industry has been hit with bigger challenges than just rising costs of fuel – the floods and cyclones that ravaged the east coast in January did more than decimate the mining industry. Freight giants such as QR National were unable to transport over rail lines that were completely destroyed.

“These companies have faced challenges in not only lost revenue, but also because of getting rail lines back up to full-scale operations,” MacGowan says.

The result is transport companies, particularly in the north-easternmost parts of the country, are suffering badly. Anecdotally, many are having to severely downgrade their profits and in some cases lay off staff. 

MacGowan says companies on the east-coast are feeling the brunt of the impact, and are having to find new ways to survive.

“There are a couple of main approaches, and it does vary between the size of the company and their market power. But the first and most obvious one is the introduction of fuel surcharges. They’ve increased costs of transport and fuel as a result.”

Many of the larger companies are surviving due to their leveraging power. MacGowan says they are able to hedge their bets with long-term supply contracts, whereas smaller companies with only a few staff cannot afford that type of leverage.

“A lot of the transport sector is very broad and it encompasses products from companies like Toll Holdings, and even smaller companies like owner-operated truck drivers. They are a facing a lot of oppression right now because they’re on very tight margins.”

MacGowan also points out the airline industry is suffering from a double blow of higher fuel costs and lower domestic tourism, (which hurts local transport operators as well, including private-based providers of public transport and holiday destination transport provides).

“And of course tourist numbers affect this very much as well – with more people heading overseas that has a negative impact on tourism and domestic airlines.”

Many of these companies are small, without many staff, and so do not have much leverage with customers. 

But at the same time, McGowan says there is a lot to look forward to for the transport industry. Government investment in rail infrastructure will have flow-on effects for the trucking industry, while hospitality is also set for a recovery.

“The other benefit there is the growth in intermodal traffic, and more container traffic travelling on the rail network around Australia. That’s going to boost demand as well as new upgrades for the network. Trucking will also benefit especially because there will be a lot more freight.

“But in terms of cost pressures it’s similar across all sectors. The airline industry will continue to grow and we’ll see expansion among the domestic carriers, although perhaps not a significant increase.”

Trucking under pressure

It is these same cost pressures that are hurting medium sized companies such as Ron Finemore, a New South Wales-based trucking and road transport company servicing the retail and supermarket industries.

“Obviously fuel has really kicked off, and moved up, especially in the last month or so,” says general manager David Coleman.

“We’re seeing levels were they were in 2008 for the first time in a while, so there are definitely challenges associated with that.”

“You have to be able to recover those increases with customers, and the majority of our business is under contract so we do have fuel levy arrangements in place, but it does take a while to be adjusted.”

The company is featured 38th on the list, with $81 million in revenue. 

But Coleman says trading is tougher. Higher fuel pressures and stronger competition mean there are a number of companies competing for the same types of work at the same time.

“We’re caught in the middle once again, the trucking industry. It can be its own worst enemy sometimes, always willing to do something a little cheaper, etc.”

He also points out the industry is also under pressure from many of its suppliers to make sure employees are provided with better work standards all the time – a costly endeavour. 

“The challenge for us will be to maintain and improve our standards through safety and quality controls and still be able to win new business,” he says.

Given Ron Finemore is so exposed to the retail industry, Coleman says the company will be coming under pressure at all sides. He says the east coast of the country is particularly vulnerable, and smaller operators on this side of the country will feel the hurt.

“Certainly the market is talking about the two-speed economy at the moment, and of course we’re heavily exposed to that. Specifically in the eastern states we’re seeing negative growth in that industry.”

“Certainly with road transport, which has such low margins, you get a squeeze there.”

He says greater discrimination when choosing customers is needed, although he notes that smaller companies may not have enough leverage to pick the more reliable companies.

“You’ve got to pick your customers and find better prospects for others. Meanwhile, the corporate customers are getting more demanding in terms of delivery of service and safety standards. “

However, Finemore is able to provide itself with some stability. Being a company of some size allows it to create strong commercial contracts – complete with fuel levy arrangements – and source different fuel suppliers.

“We generally source most of our fuel from one of the key large fuel refineries, but in times like this you sort of look around and need to see what’s available elsewhere. We’ve opened up new lines of supply for where we get our fuel.”

“We’ve distributed our risk between a number of different companies, so we can source for fuel outside depots in Melbourne, or Sydney, or even Newcastle and Brisbane if the price is right.”

Overall, Finemore has come out of the financial crisis “pretty well”, Coleman says. “There have been a number that have just gone to the wall.”

Scale, he says, in order to leverage better contracts and terms, will see the company through.