Transport and logistics: Losing traction

The SmartCompany Dun & Bradstreet Industry Growth List for the transport and logistics industry shows a sector fighting to hold its ground.

While the downturn hit the transport industry about six months later than most sectors, the slowdown in domestic and international trade is now buffeting transport and logistics companies.

And while many transport companies are breathing a sigh of relief thanks to lower petrol prices, new challenges are emerging. The Government’s big list of infrastructure projects, which the industry welcomes, is tipped to create competition for skilled workers.

Companies are responding by using the downturn as the perfect opportunity to retrain employees to prepare for the eventual recovery.

The downturn, particularly in the maritime sector, but also the drop in exports and imports is now taking a toll on businesses that rely on trade.

The transport and logistics industry is one of Australia’s largest, contributing $90 billion to the economy each year – about 14.8% of GDP – and employing about one million people.

As the Industry Growth List (see top 10 below, and the full list at the end of this feature) shows, it is a sector that includes a wide variety of companies, from smaller groups such as Michelton Investments, Paloga and Fracht Australia, to billion-dollar companies such as Toll Holdings and Queensland Rail.

The total revenue for the 2008 financial year is $106.7 billion, compared with $72.9 million – an impressive 46.4% increase, given the sector’s notoriously thin margins.

The average revenue level of companies on the list comes in at a massive $1.7 billion, compared to last year’s $203 million, mainly as a result of acquisitions of smaller companies by larger groups in the past few years.

Perfect one week, dead the next

United Group Rail chief executive Dean Jenkins says he remembers exactly when the downturn hit the company.

“It was the third week of October last year. Within a week, the market turned. One week we were talking about market leads and how we were going to keep up with demand, and then we were talking about how we’re going to deal with the economy – it was amazing.”

The group constructs rail locomotives and carriages for private enterprises and public transport, with clients including large miners such as Rio Tinto and BHP.

It has also provided rail construction and maintenance for the Victorian Department of Transport, RailCorp in NSW and Queensland Rail.

The company ranks 17th on the list, with revenue in 2007 of $2.5 billion growing to $3.4 billion in 2008, but Jenkins says the next two years will see the group struggle to maintain growth.

“We’ve been booked in this financial year for quite some time, so we’ll sit within expectations this year but next year will be difficult – we aren’t going to grow how we’ve done for the past little while.”

Jenkins says while the rise in public transport patronage has given the company plenty of maintenance work, the downturn in the mining sector has really hit them hard.

“The mining side has suffered over the last 12 months, along with everyone else, the drop in iron ore and coal prices impacted the capital programs of many of the big miners. As that impacts people selling mines, it affects us selling rail cars to those people.”

Jenkins says the downturn has completely changed the way the company organises itself, and that it has to “consolidate and rethink”.

“Instead of a growth-focused structure, we are now very much focused on reducing our overheads,” he says. “We focused the business to a cost focus rather than growth focus.”

The Government’s infrastructure projects won’t help them now, Jenkins says, but should benefit the group in the next five years and give them opportunities for growth when the economy recovers.

“The infrastructure expenditure will shift freight on to rail from roads, and the expenditure in Victoria will ultimately flow through to us,” he says.

In the meantime, Jenkins says the company is hanging on due to increases in public transport patronage, and more activity in those areas will hold them over until the miners begin to recover.

“There’s an argument to suggest that at times like this public transport increases, we’ve got over half our revenues related to passenger transport and recurring maintenance. By no means will we grow, but we are hanging in there.”

Slamming on the brakes

Despite last year’s strong growth, Amanda Thomas, director of research and policy at the Transport and Logistics Industry Skills Council, says United’s experience is commonplace. The industry has halted acquisitions in response to the downturn, and is simply holding ground.

“The industry was growing by bigger companies acquiring smaller companies, but I haven’t seen any acquisitions for six months so I think people are consolidating right now,” she says.

“That is consistent with what is happening internationally – acquisitions are just not happening. Everyone’s trying to manage what they’ve got.”

But Thomas says further competition could appear in a recovery and that many are training employees for when the Government’s infrastructure projects begin construction.

“They don’t want to be in the labour market competing for good employees. Many employers are seeing this as a time to not offer more money but offer more opportunity for development, training, multi-skilling employees, so they can do more with the same”

Thomas says that while the industry itself has not seen any major redundancy announcements, transport and logistics depends on other industries and thus unemployment has a flow-on effect.

“It seems that companies are managing or eliminating casual labour and doing things like overtime bans, putting more flexible shift arrangements in place so people can keep job security, and they keep going. They’re reducing the financial burden that way.”

“There are approximately 1.2 million people that in some way participate in transport or logistics everyday. The fact they drive a truck in the mining industry means they’re a truck driver, so unemployment in mining flows on. The flow-on effect in aviation was felt immediately, particularly in international tourism.”

Thomas also says that some companies are now offering large discounts after a long period of avoiding them altogether.

“Without naming names, some companies have promoted themselves as never competing on price but now they are back in the market competing and dropping their price. From what I remember the maritime industry quoted that it wasn’t unusual for a vessel to drop from $250,000 to $60,000.”

But she says that overall the industry is maintaining growth and should survive the downturn relatively unscathed due to the Government’s infrastructure projects.”I think the global financial crisis will be weathered a little better than if the infrastructure projects didn’t occur. I think we’ll see some sectors pick up very quickly and others will be slower. Luxury services like international travel might be the last to come.”

Travel hit hard

The travel industry, particularly air travel, has undoubtedly been one of the biggest losers in the downturn. Suffering from low passenger volumes, executives and analysts say airlines have been lowering prices to a point that is simply unsustainable.

So how does Airport Link Company, the group that owns and operates the train line between Sydney airport and its metro rail connections, survive when it is dependent on the traffic from those struggling airlines?

Chief executive Tim Anderson says the solution is to look outside Sydney and educate other cities about what their service can offer, in an effort to get more travellers flowing through airlines and subsequently Airport Link’s trains.

“As a Melburnian recently moved to Sydney, I think there is a lack of knowledge from other states. I see the challenge we’ve had is to explain to interstate people what our airline link can do,” he says.

“I think that in the present environment we’ve got an opportunity to be cost effective for travellers who are looking to save a little bit from taxi fares.”

The company, which reached 28th on the list, recorded $39.7 million in the 2006-07 year, which grew by 18% to $47.2 million during the 2007-08 year. Anderson says the service has about six million passengers per year, and is continuing to grow.

But the railway has been troubled since its launch nine years ago for the Sydney Olympic Games.

The first company to run the track fell into receivership, and Airport Link has been dealing with both a struggling tourism industry and attacks on its ticket prices.

Last week Scott Lennon, partner at PricewaterhouseCoopers, told the Sydney Morning Herald that high prices were “scaring people away”, but Henderson defends the current cost structure.

“We think our ticket prices are comparable and cheaper than other airport connections in Australia. We’re unsubsidised by the government. Our cost structure is higher, so we think our services provide good value for money.”

Meanwhile, Anderson says the company is not worried but that “we monitor the situation” regarding lower traffic volumes in the tourism industry. Ultimately, he says, there isn’t much they can do except promote convenience while travelling.

“We’re optimistic. We’re essentially susceptible as a feeder to the airport, to passenger flows. But we’ve been pleased with our growth in the last couple of years. There are still enormous volumes of people going in and out of Sydney airport, (and) new airlines starting there.”

He says while the economy may not be fully recovered yet, the introduction of low-cost airlines and deals may help businesses and individuals to travel more, and see them through the downturn.

“Quite a bit of our traffic is business traffic and VFR (visiting friends and relatives). Sydney-Melbourne is one of the biggest city pairs in the world, so we have solid traffic coming into the city with the markets we serve,” he says.

“I think that aviation, tourism and transport are generally enormously resilient industries, and that people will continue to travel. The upside for travel into Australia is very significant, particularly with the introduction of low cost carriers and bigger aircraft such as the A380.”

Compiled by Dun & Bradstreet using information from its commercial database of more than 2.7 million companies.