4.0 FINDINGS

4.1 Basic Cost Findings

4.2 Gravel and Winter Operations

4.3 Longer Haul Trucking In Canada

4.4 Canadian and US International Corridors

4.5 Owner Operator Trucking Options

4.6 Use of Rail Intermodal For Line Haul Trucking

4.0 FINDINGS

This report section sets out in summary form, the results from applying the methodology and information gathered for 2005 Operating Costs of Trucks In Canada, as described in Section 3, to the hauling case studies for year 2005.

Note that readers seeking more detailed specific component cost information about the case studies will need to refer to the specific regional or corridor hauling case analyses -- available under separate cover.

4.1 Basic Cost Findings

All costs tabulated in the following are in cents per kilometre.

4.2 Gravel and Winter Operations

Gravel Road Operations

Operating costs are higher for trucks operated on gravel surfaces than for paved roads. Factors that influence these costs include specific surface conditions of the road and the driving skill used to operate the route.

In earlier editions of Operating Costs of Trucks In Canada, all the base case scenarios were evaluated for both paved and gravel route scenarios. In these evaluations, the following adjustments to cost for paved route scenarios were determined:

• Driver Costs: 8% - 12% increase over paved road operations. This usually reflects payment at an hourly wage, rather than by the kilometre -- reflecting greater travel time associated with lower speeds (even 8 kph slower for good quality all weather gravel roads).

• Repair Costs: 20% increase over paved road operations - for both tractors and trailers. The need for maintenance is more common than for paved surfaces, as service, parts replacement, and oil and lubrication are needed more frequently.

• Tire Costs: 70% increase over paved road operations - for power units pulling trailers; 65% increase over paved road operations - for trailers. This factor can vary depending on the nature of gravel surface, driving habits of the driver, and type of tire operated on the vehicle.

• Fuel Costs: Over an operating year statistically there was not an appreciable difference in fuel consumption of vehicles operating over gravel and paved roads - assuming the equipment is identical. Expected loss factors associated with additional “wheel slip” on gravel surfaces are apparently compensated by lower speeds of operation on the gravel route.

Winter Trucking Operations

In earlier editions of Operating Costs of Trucks In Canada, key factors associated with a winter only trucking operation were noted as:

• A 20 percent climb in fuel consumed per kilometre output reflecting a combination of reduced traction, increased accessory demands, and increased idle / warm up times.

• A 30 percent increase in per kilometre tire costs on the power unit reflecting reduced traction and costs for winter tires.

• A 20 percent increase in per kilometre repair costs on the power unit.

Applying these factors in detail to the Canadian case studies, prior editions of this study developed a set of Winter Trucking Unit Cost Adjustment Factors (Cw) by which basic annual average costs from our case studies could be factored using the formula:

Winter Cost = Base Case Cost x Cw

where:

e.g. - For a five-axle bulk liquid unit in Alberta (160,000 kilometres/year on paved), the average annual 2005 operating cost is 160.4 cents/kilometre (10% margin).

The "winter-only" cost would be 160.4 cents/kilometre x 1.064, or 170.7 cents/kilometre.

4.3 Longer Haul Trucking In Canada

Longer trip distances and more loaded miles increase trucking productivity. In Canada, because of population / industrialization patterns, most business activity takes place just north of the Canada-US border. Hence the most important long distance hauling corridor is the East-West corridor -- roughly paralleling the Trans Canada Highway / Yellowhead Highway routes.

As noted previously in Sections 2.3 and 3.3, in addition to intra-regional case studies, we also modeled inter provincial east-west hauling corridors in Canada for a variety of hauling distances between 160 km and 3200 km in trip length, namely:

Although the intra-regional cases reflected non-sleeper equipped vehicles, for longer distance corridors, power unit tare weight and purchase price reflected a sleeper equipped power unit and, for longer distance trips, wages were reflective of a “team driving situation”.

The following results were obtained for these case studies in 2005.

4.4 Canadian and US International Corridors

Western Corridor Analysis

Evaluations shown in 4.3 for long haul Canadian corridors are repeated for the Canada - US Western region involving hauls between B.C./Alberta and US western states of California, Oregon, Washington, Nevada, Montana, Wyoming, Colorado, Arizona, and New Mexico.

Computed unit costs, assuming a BC based trucker, are as follows:

In event that this same corridor was hauled by a US Western based trucker, the unit costs (in Canadian dollar equivalent) would be:

Note that for this corridor, the US and Canadian based truckers are roughly on par in terms of cost competitiveness.

This situation, which differs from the two other Canada – US corridor comparisons, is significantly caused by higher component costs for trucking in the B.C. lower mainland region than for other Canadian regions. Note that this same economic difference has resulted in Alberta based carriers dominating Canadian East – West trans-mountain corridor hauling, at the expense of higher cost B.C. based fleets.

While the high B.C. truck operating cost situation has been noted in prior editions of Operating Costs of Trucks In Canada, for this year the significant value gain of the Canadian dollar to US currency has made costs in B.C. directly comparable to US truck operating costs.

Central Corridor Analysis

Evaluations shown in Section 4.3 for long haul Canadian corridors are repeated for the Canada - US Central region involving hauls between Ontario, Manitoba and US Gulf Coast States of Texas, Louisiana and all intermediate points.

Unit costs, for a Canadian based trucker are as follows:

By comparison, a US based carrier would have the following cost structure:

For this corridor, the specific unit costs are lower for the Canadian based operator than for his US counterpart, reflecting the impact of exchange rates and specific cost component differences between the two countries.

Eastern Corridor Analysis

Evaluations shown in Section 4.3 for long haul Canadian corridors are repeated for the Canada - USEastern region involving hauls between Quebec and the Maritime Provinces and US Southern States of Florida, Alabama, Georgia and all intermediate points.

Unit costs for the Canadian based operator on these routes are as follows:

By comparison, a US based carrier on the same corridor, would have the following cost structure.

The (substantial) cost premium of a US over a Canadian operator is due primarily to the Canada / US exchange rate as well as the competitive comparison of New Brunswick based operators (and cost levels) to those of North Eastern US (New York / New Jersey).

4.5 Owner Operator Trucking Options

In this service option, the motor carrier firm provides all administrative services (including marketing, operations management, documentation, accounting, invoicing, etc.), generally "dispatches and manages" the haul from it's field branch locations, and (usually) provides the trailer unit to use for the haul.

In a less common hauling situation, the owner operator also is responsible for providing the trailer to be used for the haul. For example, many "produce haulers" provide both a power unit and a refrigerated van trailer and this type of arrangement is also sometimes seen for flat deck equipment. As noted previously, the more usual service option is where the owner operator provides the power unit and the carrier provides the trailer.

The power unit (and driver) is a sub-contracted service, independently owned, and hired by the carrier to provide tractor service in connection with the haul.

Advantages to the carrier in using this type of service option, as opposed to a company owned unit and a company driver are as follows:

• Fleet capacity flexibility. The carrier can more readily adapt to short term increases and decreases in traffic volumes, without maintaining an excessive capital investment. If the owner operator is successful in obtaining additional work that is complementary to the carrier's activity -- efficiency benefits accrue to all concerned.

• Simplicity. Often, use of owner operators will diminish the need for many administrative and maintenance functions. Some companies are known to operate selected "branch terminals" with 100 percent owner operator power, thereby eliminating the need to provide maintenance and other services that might be required to operate a small fleet in that market location.

• Cost productivity. Many owner operators are more efficient than company driven units because the operator has a greater "stake" or "incentive" to keep utilization high. These "savings" can make for a more efficient operation. Further, the owner operator has a direct incentive to care for his unit.

Difficulties or disadvantages to use of owner operators include:

• Non-Standardization. It is more difficult, if not impossible, to provide "standard" equipment and service using owner operators compared to company power. The market is generally in a state of flux that sees owner operators move about between assignments with various carriers. In some situations, owner operator equipment is to a company "standard" -- even down to being painted in company colors. These are usually the exceptional situations.

• Service Reliability. When a company driver "resigns", the carrier needs to locate a replacement. When an owner operator "resigns", a replacement driver and truck must also be found. Thus, in situations where high service availability / reliability of dedicated transport equipment is required, the "basic fleet" should generally consist of company units, with an additional percentage that can be owner operator. This provides a useful "gauge" for the company units' cost efficiency performance, yet assures dedicated customer service by the "core fleet".

• Customer Contact. For hauls where considerable driver-customer contact is required (eg. driver provides order taking and other "sales/service" functions), it is usually better to have a carrier employee act as representative for the firm, than to have a "sub-contracted" driver-owner do these functions.

Owner Operator Compensation

The "price" for owner operator services is somewhat more complicated than is the "wage market" for drivers as depicted in Chapter 3.

In order to understand "pricing", it is first important to know what is being provided by the owner operator and what is being provided by the carrier. This can vary from carrier to carrier, owner operator to owner operator, and also with the given haul / distance / commodity situation.

For example, in some instances the carrier supplies fuel and maintenance services to the owner operator at a reduced price (reflecting corporate discounts and preventive maintenance standards). In addition, the carrier or the owner operator may pay for the licenses, permits, and tolls incurred in hauling. Another question to be understood is "who provides what portion of the required insurance?" In some applications, the power unit must be provided with extra equipment such as blowers, pumps, hydraulic lift equipment. These can be either owner operator or carrier supplied and will be reflected in the "price". In other situations, the owner operator may have the option of joining and participating in a company benefit program.

After addressing the issue of "what the compensation covers", there are numerous "units of compensation" in common use. In a review of compensation agreements for a major carrier in Canada, it was found that the same carrier had agreements in place that required payment to owner operators using "$ per trip", "$ per hour", "cents per mile", "$ per unit quantity hauled", and "percent of haul revenue". Each of these was specific to a particular hauling market/product situation. In addition to "basic payment for the service", there were also a variety of "incentive" systems such as a flat payment per load for backhaul (to cover additional load / unload time delay involved) plus a "cents per mile" bonus for return miles with backhaul involved.

All of this information serves to illustrate the difficulties that will need to be addressed if a national "survey" of owner operator "costs" or "pricing" is ever undertaken to develop useful and reliable information about this segment of the industry.

If a reader wishes to make adjustments for the trucking cost examples in this report, the owner operator compensation amounts need to be substituted for the tractor power unit costs (and any other required cost lines included in the base case, such as insurance, or licenses, as applicable).

In conclusion, care must be taken in evaluating owner operator costs, and in comparing these with the base case situations presented in this report -- that tend to reflect fleet company operations, not the owner operator market. In doing any such comparisons, it is important to consider all cost components (such as licenses, insurance, transport, fuel, repairs, wage benefits/burdens) and who is responsible for each. Further, the owner operator compensation schedule must be known for the specific haul in question. It is not easy to generalize "costs" or "prices" for this market, as owner operator compensation schedules are variously set in terms of $/trip, $/hr, cents/mile, $/unit quantity hauled, or as a percent of haul revenue.

4.6 Use of Rail Intermodal For Line Haul Trucking

Aided by the advent of efficient double stack railway cars for moving domestic containers, railway intermodal transportation has gained significant popularity in competition with line haul trucking -- especially for longer distance corridors.

Key advantages from this service include:

• Transportation Cost savings: For longer distance corridors, railway intermodal service has proven itself to be very cost competitive -- yet it provides "door to door" service to shippers who often have no direct access to rail trackage.

• Integration with International Overseas Shipping: Many railway intermodal services start out as overseas ocean deliveries to Canada, followed by long distance linehaul to inland destinations, with delivery completed by truck at destination.

• Driver / Owner Operator Shortage: With significant shortages of drivers, compounded by the fact that many drivers prefer not to haul long distances (away from home overnight), rail intermodal is a strategic way for fleets to alleviate some of their capacity concerns by using the rail linehaul service to augment their driver pool capacity to move goods.

Given these factors, which have increased significantly in relative importance since 1985, Operating Costs of Trucks In Canada has for several years reviewed costs for direct trucking versus intermodal services for the following transportation corridors:

• Toronto to Montreal

• Toronto to Winnipeg

• Toronto to Vancouver

The following discussion compares these corridors in terms of time, distance and logistics costs.

Note that for all three corridors, it would appear that the “headway” (interval between scheduled train services) is 24 hours, that is – service is generally once per business day.

In the foregoing table, the estimated door to door transit times for intermodal services (shown as “best”, “average” and “worst”) reflect the following assumptions:

• The “best” door to door time that will be achieved is when the shipper knows the rail schedule and dispatches the load “just in time” to catch that day’s train. In the receiving city, it is assuming that the delivery unit “meets” the train and is loaded expeditiously. Assuming minimal queuing / delays at the terminal, this best time will equal the scheduled train transit time, plus the pick up time, plus the delivery time.

• The “worst” door to door time was estimated on the basis that the shipper dispatches the load and “just misses the train”. Hence, this column adds the train headway time to the foregoing scenario…in this case, an additional 24 hours. In this scenario, it is still assumed that the delivery city truck “meets” the train, once the shipment is en-route.

• The value shown for “average” transit time, door-to-door, is exactly half way between the two values, previously listed.

Assuming a pickup and delivery time at each end of the rail journey of 2 hours (including delays/transfer time at the intermodal yard), we can see from the preceding analysis table that “on average”, the door-to-door trucking service is expected to be faster than rail intermodal service, simply based on “headway” and published transit times for the service – for all the corridors.

The shown tabulated door-to-door transit time for direct trucking was computed by Logistics Solution Builders using preferred roads on “all Canadian routings”. Note that mileage via the US is shorter, from Toronto to Western Canada, although border clearance delays and uncertainties mitigate against using this option. We further assumed a single driver obeying “hours of service” regulations. Just for comparison, a “team driven” truck should be able to transit from Toronto to Vancouver, over the same route, in a time somewhat under 3 days.

Thus, by neglecting the speed of travel of team drivers, and by assuming negligible “wait time” for transfer in the terminals, the foregoing analysis should be considered favorable to rail -- in reality, an “expedited truck service” would be faster than shown and an intermodal rail service would be expected to be “in transit” somewhat longer than tabulated in our three scenarios.

Rail Intermodal TOFC (Trailer on Flat Car) Evaluations

TOFC Service Group 15 costs (rail yard to rail yard movement) have been secured to aid the comparison between TOFC and direct trucking services for the three corridors. Service Group 15 is "exclusive" of costs for local trailer pick up and delivery to customer premises from the railway intermodal yards, that must be "added", together with "trailer ownership costs", to compute the total transportation costs "door to door". The Service Group 15 TOFC costs that were secured for the corridors in question are as follows:

All values in $ per trailer load one-way

Service Group 15 Cost For Corridor 48 Foot or 53 Foot Trailer

Toronto – Montreal / Montreal -- Toronto $775

Confidential Quotation (Carrier)

Toronto – Winnipeg $3,000

Winnipeg – Toronto $1,631

Confidential Quotation (Carrier)

Toronto – Vancouver $3,600

Vancouver – Toronto $3,600

Confidential Quotation (Carrier)

Using this information, together with long distance Canadian East-West trucking corridor information in this report, the economic cost of TOFC services can be compared with general freight trucking services.

In addition, assuming a pick up and delivery round trip time of 2 hours at each major delivery centre (for a low utilization truck), the hourly costs in the base case may be used to estimate local pick up and delivery costs to apply to the TOFC option. Hourly equivalent "trailer ownership costs" (depreciation and licenses) can also be estimated.

In addition, on the basis of estimated transit time, and the value of a trailer load shipment, applying “time value of money” and “required inventory” calculations, a full “logistics cost” borne by a shipper, for their supply chain, can be computed for using either TOFC or “door to door” trucking service.

Although the value of a shipment can vary widely, for purpose of analysis, Logistics Solution Builders made use of the reported average value of a highway shipment as determined recently by the Ohio Department of Transportation in a detailed commodity transportation survey, adjusted to Canadian dollars and adjusted for inflation (from the survey year 1998) using CPI. The value used by us for our calculations was $75,000 Cdn. for our representative sample trailer load of freight.

Time Value of Shipment Determination

The time value of money determination, under the foregoing scenario reflects two components of cost:

• The first component of cost is the dollar value of shipment ownership, discounted using an assumed annual interest rate for time value of money, divided by 365 to represent a daily cost of shipment ownership, and further divided by 24 to represent the ownership costs per hour associated with delays to a shipment. Essentially, this cost component reflects the time value of money tied up owning a shipment for additional time, in transit, between the source and destination.

(Hourly time value of money cost = Value of shipment x annual interest rate divided by (365 x 24) 8760 hours per year.

• The second component of cost is the dollar cost for additional inventory that must be maintained, at the destination, to “cover” delays in receiving “re-stock inventory”, if a slower mode of transportation is used for replenishing stocks. Essentially, this cost -- when restated back to a “per shipment” basis, is independent of the annual number of shipments involved…and it can be derived by dividing the value of a single shipment by the number of hours in a year (i.e.

(Hourly shipment inventory cost = Value of a shipment divided by (365 x 24) 8760 hours per year.)

The foregoing calculations are provided at the bottom of the following table, in terms of the hourly “time value” for a typical $75,000 shipment.

Logistics Cost Comparisons of Intermodal TOFC and Direct Trucking Options

The following analysis tabulates the full logistics costs for the TOFC and direct truck options, respectively for these corridors, under the “best”, “worst” and “average” travel time assumptions for intermodal services door to door.

In the foregoing analysis, it would appear that TOFC is only cost competitive with trucking for the longer distance corridors (Winnipeg and Vancouver to Toronto) in the eastbound direction of travel for moving a $75,000 shipment door to door.

This results primarily because of the relatively high tariff for westbound TOFC movements from Toronto, coupled with the “time value of shipment” cost computed under our assumptions.

Note that in situations where the shipment value is less than the assumed $75,000 value, or where there are no additional inventories required on the part of the shipper or consignee (i.e. not for regularly occurring replenishment of a commercial process), the competitiveness of the rail intermodal services can be adjusted to be better than shown in the previous table by adjusting the “time value” entries shown in it.

Conversely, for a higher valued shipment (greater than $75,000 per trailer load), on a regularly occurring basis, the time value components would need to be adjusted upward, thus showing a greater advantage to direct trucking than depicted.

Graphically, the following two graphs illustrate comparatively, for Toronto originated, and for Toronto destined shipments, the over-all, direct transportation charges, and “time value costs” comparisons of the two alternatives.

In general, we see that TOFC is competitive with direct trucking in terms of transportation costs for the Toronto-Vancouver (both ways) and Winnipeg-Toronto corridors -- although time value costs tend to favour direct trucking.

In consultation with industry sources, it was noted that there is a preference to use containers rather than trailers for intermodal services on longer corridors because:

• Use of double stack railcars enables significant rail cost savings, reflected in a more competitive rate structure than for TOFC.

• Trailers shipped by TOFC service experience significantly increased maintenance costs due to premature anchor pin corrosion on the brakes, increased incidence of wheel bearing damage, damage to air bags on the trailer air ride suspensions, etc. arising from the service characteristics of shipping trailers by this mode.

• Carriers who are significantly involved in intermodal service (eg. TransX, Yanke, Vitran, and Canadian Freightways) now have developed significant volumes of intermodal transportation business, sufficient for them to maintain their own fleet of domestic intermodal containers.

Container on Flat Car comparisons, on the same corridors, are developed in more detail following.

Rail Intermodal C.O.F.C. (Container on Flat Car) Evaluations

Use of intermodal container on flat car service is increasing for domestic traffic in Canada. A significant stimulant is the introduction of “double stack” container services which, after provision for investment in new container handling infrastructure (capital) is estimated to represent a net savings for shippers of between 10 and 20 percent.

Figure 13 on the following page illustrates the line haul movement of double stack containers.

The Service Group 15 Intermodal COFC costs secured by Logistics Solution Builders for the corridors in question are as follows:

All values in $ per trailer load one-way

Service Group 15 Cost For Corridor 48 Foot or 53 Foot Domestic Container

Toronto – Montreal / Montreal - Toronto $775

Confidential Quotation (Carrier)

Toronto – Winnipeg $2,150

Winnipeg – Toronto $1,120

Confidential Quotation (Carrier)

Toronto – Vancouver $2,650

Vancouver – Toronto $2,585

Confidential Quotation (Carrier)

Using this information, together with long distance Canadian East-West trucking corridor information in this report, the economic cost of COFC services can be compared with general freight trucking services.

Figure 13: Double Stack Container Technology

Employing a similar calculation method to that described for evaluating door-to-door TOFC shipments, the tabular results of Logistics Solution Builders logistics cost analysis follow:

In this analysis, the longest distance corridor (Toronto to Vancouver) shows a distinct advantage to use of containerized intermodal services – both in terms of direct transportation costs and even when “time value” costs for shipments (in both directions) are included. The intermediate distance (Toronto to Winnipeg) is even very close after considering time value aspects of the shipments.

This illustrates why there is a significant market for shipping freight using this method over such distances. The introduction of C.O.F.C. services, in the “double stack” configuration, has greatly increased the “mode share” for this very efficient long distance door-to-door service.

Clearly, only very high value / expedited shipments would be moved by direct trucking for these distances.

An interested reader, can, through adjusting the value of the shipment used for the “time value of shipment” computation at the bottom, develop sensitivity to the comparisons tabulated.

Note also, when comparing the COFC results to TOFC, there are significant cost advantages for using COFC rail intermodal services.

Graphically, COFC and direct trucking door-to-door compares as follows: