The contemporary business environment is dynamic and very competitive; thus, every business organization aims at establishing and maintaining a competitive advantage. Transportation is one of the cyclical industries in the dynamic global business environment. A cyclical industry is always sensitive to business cycles (Drobetz, Menzel, and Schröder, 2016). The transportation fee is directly dependent on global oil prices. When global oil prices increase, the cost of fueling goes high; thus, the investors in the transportation sector are forced to increase the transportation fee. High transportation fee leads to a few trips from people due to economic strains; hence, the transport sector makes less revenue and small profit margins. When the global oil prices reduce, the fueling cost reduces and consequently, the transport investors reduce the transportation fee. When the transport fee is low, it encourages people to make more trips, and the industry gets higher profit margins.
Apart from the fluctuation of the global oil prices, transportation industry depends on the interest rates in the economy as well as the performance of other industries. When commercial banks offer high lending interest rates, it becomes very costly to procure new transport vessels, and this discourages new investors in the transport industries making the sector to have slow growth. When the interest rates are low investors are encouraged to invest in the transport sector enabling the industry to perform well. The transport sector also relies on the performance of other business sectors, such as tourism. For instance, during the summer tourism is always at the peak and this encourages trips across the world, making the various modes of transport busy. Investors increase transportation fees due to the high demand in transportation, thus realizing high profit margins. When tourism is on the low season such as during winter, there are very few trips which lead to fewer flights and low transportation fees, causing small profit margins in the transportation. Therefore, the transportation sector is cyclical since it is susceptible to several external factors.
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Since the transportation industry is cyclical economic downturns are bound to happen. Economic downturns negatively impact transportation organizations since vessels are underutilized. The are several steps that transportation companies take, in terms of capacity, to avoid or at least mitigate the adverse effects of economic downturns like this most recent one. The first step is conducting trend analysis. Transportation firms need to have a comprehensive understanding of the pattern followed throughout the cyclical transportation phases (Cronrath, 2017). This will enable the firm to determine when the transportation industry is on the rise or is heading downward. They can predict the expected sales based on the trend, thus prepare adequately.
The firm then has to compare its capacity and the downward trend in the transportation cycle. The transport capacity required by the firm should be equated to the capacity handled by the firm during the lowest moment in the transportation trend. This will enable the firm to determine the minimum and the maximum number of vessels required during the low economic period and only those vessels will be maintained. Maintenance is a costly practice, and during such low seasons, the transport firm should be able to operate the lucrative routes to avoid incurring losses. The other step is to use a third party logistics provider for transport services. Third parties become very beneficial in the transport sector, especially during an economic downturn since they bring tax advantages if the release method is used as well as brings more innovation and creativity. The third party will increase business ratio, thus cutting down the company costs. Therefore, transportation firms should understand the cyclical transportation industry and put the measure in place to deal with the economic downturn.
References
Cronrath, E. M. (2017). The Airline Profit Cycle: A System Analysis of Airline Industry Dynamics. Routledge.
Drobetz, W., Menzel, C., & Schröder, H. (2016). Systematic risk behavior in cyclical industries: The case of shipping. Transportation Research Part E: Logistics and Transportation Review, 88, 129-145.
