In keeping with the complex nature of the crisis, the impact on the European road freight sector has been multi-faceted. There have been supply-side problems of various types as well as a general background of falling demand, punctuated by violent upswings in demand in various sectors. As ever, the speed of the crisis has led to a high degree of opacity in terms of quantitative information. Indeed, one of the characteristics of the crisis is a lack of coordination between different actors on the supply chain and elsewhere; for example, customs processes, driven in great part by a lack of information. This illustrates how a great amount of information on major supply chains is discrete.
Assets
This crisis has seen the re-emergence of the theme of asset ownership versus non-asset ownership. When looking at the road freight sector it is important to understand its structure and nature of the distribution of assets.
In Europe most truck assets – generally tractor units as opposed to trailers – are held by small companies with less than eight vehicles or by individual owner-drivers. The economics varies from country to country but frequently these assets are held on a lease from either the truck manufacturer or a leasing company. Generally, this accounts for in excess of 80% of trucks.
The medium-sized road freight companies and especially the large road freight networks use these smaller providers to provide the bulk of their tractors. Often the largest providers will just contrate on owning a trailer fleet. Their key asset is the network of cross-dock hubs will facilitate their ‘less-than-trailer load’ network. Note there is a distinctive market differentiation between ‘full trailer load’ (FTL) and ‘less than trailer load’ (LTL).
A key commercial question will be how much power has been thrust into the hands of asset owners or have assets just become an increased liability.
Demand fluctuation
Around the second week of March, demand for road freight began to fluctuate wildly. The nature of this fluctuation was distinct:
Demand levels collapsed particularly early and violently in Italy.
France and then Spain followed around one week later.
Germany demand falls were modest with industrial and automotive customers in the vanguard which the reverse of the trend seen in Italy.
UK and parts of Scandinavia followed, although even within Scandinavia there were noticeable differences.
Central Europe suffered from knock-on effects from other regions with lower, less violent falls in domestic demand.
Generally, demand has fallen but there were very significant differences in sectors.
Automotive: An early casualty due in great part to existing softer demand, despite efforts in economies such as Italy to sustain production. By the third week in March, production had largely come to standstill. This will have been serious for the large LTL network providers as they are heavily reliant on the automotive sector to provide a ‘base-load’ for the network. That said, the impact on aftersales has been slightly less, although still huge.
Other industrial: Better than automotive, demand has fallen but less catastrophically than automotive. The effects have been less severe on road freight networks and some segments, such as parts of chemical/ pharma production, have experienced sustained demand.
Hardware/clothing: Impact here has been very significant with indications that by the end of March, volumes were down by over 50% on a continental level and far more than this in Italy and Spain. Note, this has been complicated by supply issues especially for products sourced in China and South East Asia and dependent on container shipping.
Grocery: This has been the most notable area for road freight, with violent jumps in demand; doubling within a few days in some cases. This has varied from economy to economy, with the UK and the Netherlands, in particular, seeing ‘panic-buying’. The situation in France, Italy and Spain has swung from panic buying to collapse very rapidly, with falls in demand and violent changes in the behaviour of the supply chain often due to disruption in accessing supply. The question here is, how effective has been the redeployment of capacity from other market segments into grocery?
Energy: Oil products delivery has remained stable but is assumed to have decreased sharply in line with the economy and especially the fall in demand for transport. It is worth noting that the redeployment of transport assets in this area is difficult.
Shipping Containers: The wild swings in demand and availability caused by collapsing demand, congestion and – possibly – violently recovering demand.
Construction: Generally, construction activity has fallen substantially, although not as much in Northern Europe. However, it should also be noted that certain parts of the construction sector have seen very significant leaps in demand as governments respond to medical infrastructure needs.
For road freight providers this has created a volatile situation. Bearing in mind most medium-sized and all large providers will have a mix of customers, they have concentrated their response on moving road freight capacity away from shrinking areas such as automotive and into grocery.
Supply-side problems.
There have been very significant and unusual disruptions. They might be divided into two groups; direct and indirect.
The direct interruptions to supply include legal restraints on the ability of drivers to work, either within their own country or in other countries. Bearing in mind that in Europe a large proportion of drivers come from central and eastern Europe but work in western Europe, the ‘repatriation’ of people around the region has been a problem. However, it should be noted that the shortage of drivers in certain areas of the market has led to temporary relaxing of working-time regulations around driving. This illustrates that the market is characterised not so much by shortage as dysfunction, with drivers and trucks unable to redeploy in time.
Indirect supply-side problems have been caused by issues around congestion. In turn, many of these problems were caused by emergency policies around borders. Greater customs regulations caused very substantial congestion on, for example, the Polish-German border, with a ‘traffic-jam’ of 40km appearing on the 24th This was caused by the mixing of passenger cars with trucks as people returned to their home countries. Whilst this has ended, the greater customs paperwork and inspections have remained, causing smaller delays. Towards the end of March, this problem became acute at the border between Turkey and Bulgaria. Reports by April 2nd suggested that delays were exceeding 2-3 hours. These issues have the effect of stripping-out capacity from the market. Such effects are seen across Europe.
By the beginning of April, major LTL network providers were reporting that:
Capacity for major networks is running at >90% across the whole of continental Europe
The main problem is border congestion. This is across the whole of Europe.
Prospect
By the beginning of April, the crisis in Northern Europe was easing, with certain nations announcing a pathway out of emergency measures. The situation for transport is less chaotic than in March, however, this is likely to change. Expect:
A collapse in demand in certain markets that previously were experiencing emergency conditions e.g. grocery retail.
Prices are likely to jump in other areas such as consumer durables or clothing as the market recovers violently and retailers look to replenish stock.
Some industrial markets, such as automotive will recover less quickly.
Larger road freight providers will continue to reallocate capacity from sector to sector.
Road Freight Providers commercial performance
This will prove a testing-time for road freight providers, however, it certainly should not be seen as entirely negative in commercial terms. There are significant opportunities to make money. Key issues in performance will be:
Ability to manage contractual relationships with both customers and suppliers
The flexibility of management structures in responding to changing market conditions. This applies not so much for operational issues, which many road freight providers are quite good at, but also for commercial agility.
The effectiveness of the asset mix in the business model.
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