Question 1: Why is the transportation industry cyclical in nature?
The transport industry can be described as cyclical in nature owing to the fact that it is particularly sensitive to the ever-changing cycles of business. This is because the transport industry reacts according to the mannerisms of the general economy of a particular nation at a given time period.In simple terms, when the economy is buoyant, then the demand for transportation services is equally strong.There are numerous factors of the economy that make the transportation industry obtain its cyclical nature from the business or economic cycles. They include:
Seasonal Changes in Demands for Goods and/or Services
Owing to the fact that all industries depend on transportation as part of the value added process for every goods and/or service within the market, the demand for certain major goods and/or services significantly influences the demand for transportation services and as such give rise to the cyclical nature of the transport industry (Streissguth, 2011). One such commodity is tourism. Tourism is seasonal and as the demand for tourism fluctuates according to the seasonal tourism calendar, with notable peaks and low seasons. At the peak of the tourism calendar, transportation industries experience a boom in business with the opposite occurring at the low season.
Changes in the General Economy
The general economy influences the ability for individuals and businesses to utilize or demand transportation services. During the changes, the economic cycle, of the economy, the demand for transportation services changes accordingly. As such at the economic upturn, the transport industry experiences a boom and vice versa.
Changes in Prevailing Interest Rates
The prevailing interest rates usually affect the response of the transport industry to the cycles of the economy (Xie, 2011). When the prevailing interest rates increase, then the cost of transportation increases owing to the increase in the general costs of support service industries that are associated with transport. Such industries include the oil industry.
Question 2: In terms of capacity, what steps can transportation companies take to avoid or at least mitigate the negative effects of economic downturns like this most recent one?
In order to avoid or mitigate the negative effects of economic downturns, transportation companies can take certain steps that entail capacity. These steps include and are not limited to:
Leverage their existing assets to their greatest capacity
This is the appraisal of all the internal and external assets that the business holds and how these assets are being utilized (Walsh, 2011). By maximizing the impact of the company’s current investments, it can evade the costs associated with new transportation expenditures while fully utilizing the current company assets. The appraisal will include:
- Is the fleet being completely utilized?
- Are the orders being combined in the most profitable way?
- Are the freight loads full?
Developing collaborative supplier relationships
Utilizing web based technologies, the company can partner in a closer way with suppliers (Alberta, 2007). This is achieved through electronic sharing of information pertaining to purchase, order, shipping, tracking and delivery of goods. This is usually done in real time. This helps keep business even during economic downturns by creating supplier loyalty.
Develop Risk Management Strategies
The transport industry is rigged with numerous risks that are usually insured against. However, most companies do not consider economic risks as a considerable risk against business (Walsh, 2011). It is crucial that these risks are accounted for to cushion the company against economic downturns. This can be achieved by diversifying investment to association with supplier companies that produce goods that are not seasonal. Transportation of such goods may not generate much income as compared to the cyclical industries, but they will ensure the company maintains a considerably stable income during economic downturns.
Alberta. (2007). Transportationn Industry. Edmonton: Government of Alberta.
Streissguth, T. (2011). The role of Industry. Detroit: Greenhaven Press.
Walsh, C. R. (2011). Airline industry: Strategies, operations and safety. New York: Nova Science Publishers.
Xie, F. &. (2011). Evolving transportation networks. New York: Springer.