“Slow U.S. economic activity and fuel price increases hit us and our customers during the quarter. Even though economists do not predict a recovery until 2009, we anticipate that the second half of 2008 will generate modestly better results than the first half, assuming business conditions do not worsen.” -Kurt Kuehn, CFO, United Parcel Service.
Things are tough, no doubt about it. Fuel costs are through the roof, while freight volumes remain stagnant or down. It doesn‘t help that the oh-so-smart whizzes from financial sector are finally showing how truly stupid they‘ve been with the whole mortgage-back securities debacle, with Wachovia but the latest big banking concern to own up to its “misjudgments” - to the tune of nearly $9 billion in losses for the second quarter this year.
Freight companies, though, seem to be muddling through all of this. It‘s not pretty, however: tons of truckers have closed up shop (almost 1,000 since the start of 2008, including big names like Alvan Motor Freight and Jevic Transportation). Yet those that remain seem to be making the best of it, digging in until better days return.
“Although operating conditions in the second quarter were challenging, we firmly believe the long-term growth fundamentals for our company and for our industry are very favorable,” said Scott Davis, chairman and CEO at United Parcel Service. “We are helping our customers manage through this difficult period while doing everything we can inside UPS to adapt to current conditions.”
Big Brown reported a 6.7% revenue increase in the second quarter but an 18.3% decline in earnings to 85 cents per share, compared to $1.04 per share during the same period in 2007. Increasing fuel costs and a stagnant U.S. economy caused the earnings decline in both UPS‘s U.S. domestic and international package segments, said Davis, though in contrast, its supply chain and freight segment posted a substantial improvement in profitability.
From April through the end of June, UPS delivered consolidated volume of 959 million packages, essentially unchanged from the second quarter last year. Revenue rose to $13.0 billion and revenue per piece increased 5.9%. Yet results were negatively affected by a 67% increase in fuel expense, a reduction in premium product volumes, and weakness in U.S. imports.
The slow U.S. economy caused average daily volume in the U.S. to decline 1.3% in the quarter and also contributed to a more pronounced reduction in premium products than in the previous quarter, with volumes dropping 0.7% for ground shipments. These factors, along with the rapid increase in fuel cost and the impact of the two-month lag in the application of the fuel surcharge, were responsible for the declines in second quarter operating results, UPS said. International results were also negatively impacted by higher fuel costs, declining U.S. import volume and slower growth in premium services in the major regions of the world, the company noted.
UPS Freight LTL revenue grew 7.2%, but shipments declined 2.3% as a consequence of the stagnant U.S. economy. However, its supply chain services segment saw revenue increase almost 11% with operating profit climbing more than 50% - driven by the continued strong performance in UPS‘s forwarding and logistics businesses.
Kurt Kuehn, UPS‘s CFO, noted that while the company is projecting profits for the second half of the year on the order of $1.78 to $1.98 per share compared to $1.72 per share for the first half of 2008, comparisons to last year‘s results would be more difficult in the third quarter and moderate in the fourth. “We are taking the necessary steps to control costs, add value for customers and grow our business while adjusting to the realities of today‘s challenging environment,” he added.
Trucks sales are, of course, choppy as a result of all of this. “The dramatic increase in diesel prices, coupled with declining housing starts and auto production, impacted U.S. and Canadian Class 8 truck sales in the first half,” said Dan Sobic, senior vice president ay Paccar, parent company of Peterbilt and Kenworth. Paccar projects that Class 8 industry retail sales for 2008 are expected to be in the range of 150,000 to 165,000 units.
The truck market in Europe, however, looks a little brighter. “The European economy, especially Central Europe, continues to experience moderate growth,” noted Aad Goudriaan, president of DAF Trucks, another Paccar subsidiary. “Industry truck sales in Europe above 15 tonnes are expected to set a record of 350,000-360,000 units compared to 340,000 in 2007.” He said DAF is increasing production by 5% in September to meet strong customer demand.
Back on the home front, though, it‘s definitely going to be slow going for a while for truckers - and no one is looking through rose-colored glasses at the months ahead.
“Though this economic decline has not been as deep as others in the past, it appears to be lasting longer,” said Robert Davidson, president and CEO of Arkansas Best, the holding company for LTL carrier ABF Freight System, in its second quarter earnings statement. “As a result, ABF will continue to carefully manage labor costs and equipment levels to match available freight in our system until economic conditions show meaningful improvement.”