With pressure on margins and economic performance, how does the European trucking industry balance its contracted capacity promises?
How you manage airline seats; hotel beds and restaurant tables have a similar approach to optimizing trucking capacity.
All four have one thing in common, that their capacity is perishable. It needs to be utilized and sold on a daily basis – it can’t be saved for tomorrow. All have a business model that is based on the highest possible utilization.
Does this sound familiar?
- You arrive late for check-in at your hotel to be informed that all beds are occupied. Despite having pre-booked and pre-paid for your room, they then “walk” you to a nearby hotel.
- Have you been at the airport, queuing patiently at the gate only to be offered 500$ for taking the next flight due to overbooking?
- Have you showed up at a fancy restaurant with what appears to be many free tables, yet still you’re told that there is nothing available due to prior reservations?
Adapting to a new way of doing business
As a business, balancing capacity versus optimization is crucial to keep customers happy and for a strong financial performance. This is true for Airlines, Hotels, Restaurants, and for Trucking companies, all four industries are asset heavy and typically operate with low margins.
During the disruptions of 2020, the business landscape has changed. The behavior of companies has had to adapt to new norms.
In 2020 there has been less of an appetite to start new Airlines, Hotels and Restaurants. In such customer focused industries being allowed to welcome any customer is today a bonus. And we can expect significant changes to such industries and their operating models going forward.
How to sustain operating margins against fluctuating customer demand
Today, the European trucking industry needs to address its capacity utilization to be able to meet customer expectations and the needed operating margins to ensure sustainability.
A typical FTL trucking company is small and operates with perhaps 50% to 70% of their capacity on annual contracts and the rest on the spot market. Based on annual contracts renegotiated year-on-year, with many extended after a brutal negotiation.
Due to the deep fragmentation in the trucking industry we often see a significant imbalance in negotiating power. For example, a large shipper with many options, and a smaller trucking company with fewer options.
According to Euro-stat and other sources we can estimate that at least 15% of truck capacity is unused, but in many cases, this can be upwards of 30%.
Unused capacity has a significant effect on the price shippers (and ultimately consumers) have to pay for transportation. It also has an environment impact, and the unsold capacity strains an already tough financial performance for the trucking companies.
What are the key challenges to solve in order to reduce unused capacity (empty driving) in Europe?
- Digitalize our industry and our companies, in order to improve route planning and to optimize capacity usage
- Consolidation of larger regional companies where having 1.000+ trucks becomes the minimal sustainable size to compete, rather than being something as rare as a white rhino
- Create a better balance between contracted commitments and how much of this is actually realized
In order to reduce spare capacity some restaurants have started to require pre-payment for a table booking, airlines have for years stopped taking reservations without full pre-payment. Even if a first-class seat is fully refundable then you still have to pre-pay, and at a very high price premium.
We all understand that booking an airline seat or a hotel bed for free with no payment, is not good business. Making a reservation for 20 people in your favorite restaurant and not showing up is simply not cool.
Balancing actual versus forecasted demand
Girteka Logistics in 2020 will conduct around 800.000 FTLs. Our official contract commitment to shippers however has a significantly higher order of magnitude.
To summarize in a few words – we have a “great restaurant” at Girteka Logistics, but we can’t afford to continue to accept “table reservations” when there are continual “no shows”, time after time. The price of food in the restaurant is greatly affected, if we plan around a certain commitment but in the end, nobody utilizes it.
Similarly, the price of transportation increases unfairly when capacity is overbooked. More importantly, when a table is left empty, we also have to refuse another reservation, as a result we have spare, unused and non-revenue generating capacity.
Changing how we do business
The trucking industry norm, where a large international shipper with significant modern forecasting capabilities cannot accurately plan their shipments, is from an old world that should have been long abandoned.
In annual tenders, shippers typically demand capacity that exceeds their known requirements by up to 100% and sometimes much higher. During peak periods they demand this full capacity be made available at a moment’s notice, but there is no similar commitment from the shipper. In weak periods some then shop capacity on the lower priced spot markets.
When someone cancels a table at a restaurant at short notice, we often accept the excuse at face value. Sometimes, it seems like professional buyers from large companies, with access to detailed forecasting and planning, consistently overestimate their transportation needs in order to pressure marginal performance from smaller partners.
So, how do you think we can together modernize how we do business in the industry for the benefit of all trucking companies?