Road to growth

Rising oil prices have put a big dent in the growth of the road transport sector and the industry is likely to bit hit further by traffic congestion and the introduction of carbon trading. The industry must consolidate if it is to thrive. IBISWorld genera

By Robert Bryant

Rising oil prices have put a big dent in the growth of the road transport sector and the industry is likely to bit hit further by traffic congestion and the introduction of carbon trading. The industry must consolidate if it is to thrive.

You only need to look at the protests by truck drivers around the world to know how hard the road transport industry has been hit by the sharp increase in oil prices over the last few years.

In a sector where competition is cut-throat and margins are paper thin, road transport operators – many of whom are small companies or owner/operators – have watched their profitability take a big hit.

Little wonder IBISWorld is tipping a big shakeup of the sector in 2008-09. The total number of enterprises in the road freight industry is expected to fall over the current period – small companies are expected to focus on growth through acquisitions while many of the non-employers (owner/operators) are expected to exit the market in 2008-09 due to high costs. Employment, which has increased steadily in the last four years, is expected to drop significantly in 2008-09.

IBISWorld estimates that this industry will grow at an average annual rate of 3.8% over the five year period to 2008-09.

While the earlier part of the current period has seen relatively strong growth as total tonnage hauled by road freight has increased, growth in 2008-09 is slowing due to higher costs. The profitability of major players is expected to remain positive in the current period while smaller owner-operator profits are set to be extinguished.

Looking forward, IBISWorld forecasts that this industry will grow at an average annual rate of 3.2% over the five year period to 2012-13. Revenue growth is expected to be moderate in 2009-10, slowing substantially in 2010-11, before continuing moderately for the rest of the outlook period.

Road freight’s main competitor is rail transport, which has lower transport costs per tonne. But this form of transport is limited as a substitute because it is approaching capacity and customers will have little option but to pay extra for road transport.

Despite increasing costs and a moderate outlook for revenue growth, profitability is expected to remain positive with the introduction of fuel surcharges and the consolidation of the sector, led by the biggest players such as Toll Holdings, Linfox and Scott Transport.

On top of the impact of higher oil prices, the road transport industry will also be hit by road congestion and the carbon trading scheme being implemented by the Rudd Government.

Key success factors for operators in the industry

• Market research and understanding. A good knowledge of market segments and an ability to understand client needs so as to deliver superior customer service.
• Production of premium goods/services. A good knowledge of market segments and an ability to understand client needs so as to deliver superior customer service.
• Having a high profile in the market. A large sales turnover because margins are small.
• Having a diverse range of clients. Diversity of the client base because shippers are frequently in a strong position relative to operators.
• Access to quality personnel management. Good personnel management and industrial relations capabilities.
• Successful industrial relations policy. Good personnel management and industrial relations capabilities.
• Output is sold under contract – incorporate long-term sales contracts. Long-term contracts are desirable due to strong competition within the sector. If a client is tied to a distribution system committing them to the operator’s facilities/approach, it may be difficult and costly for the client to transfer elsewhere.
• Experienced workforce. Operational experience, especially in loading and utilisation of vehicles and equipment.
• Optimum capacity utilisation. Operational experience, especially in loading and utilisation of vehicles and equipment.
• Ensuring pricing policy is appropriate. The ability to offer clients a cost and/or service advantage in order to increase market share.
• Effective cost controls. Tight financial control over costs and revenue, especially debt collection and overheads in order to plan cash flows.
• Superior financial management and debt management. Tight financial control over costs and revenue, especially debt collection and overheads in order to plan cash flows.

Products and service segmentation

Major market segments

Spread of industry locations by state/territory

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au