With U.S. economic growth turning sluggish, freight volume is suffering—forcing carriers to lower their profit projections for the rest of 2006 and into 2007.
“As widely reported by industry analysts, the economy has slowed significantly in the fourth quarter, resulting in lower volumes than we anticipated across all of our asset-based business units,” said Bill Zollars, chairman, president & CEO of YRC Worldwide.
That’s forcing the company to lower earnings expectations, dropping them to between 95 cents to $1.05 per share for the fourth quarter and $5 to $5.10 per share for all of 2006, down from earlier estimates of $1.40 to $1.50 per share for the fourth quarter and $5.45 to $5.55 per share for the year.
Zollars added that fourth-quarter tonnage is only expected to be down by a mid-single digit percentage for each of YRC’s business units this year vs. 2005. Although pricing has remained disciplined in the marketplace, it is below the company’s expectations, he said.
“While the extent of the economic slowdown is uncertain, our business units are aggressively managing costs to create the best possible results for our shareholders,” Zollars said.
“As business trends in the fourth quarter developed, it became clear to us that this year’s peak shipping season, which typically occurs during October and November, would present different challenges than in recent years,” said Robert Powell, chairman & CEO of Van Buren, AR-based truckload carrier USA Truck.
“Specifically, freight demand significantly below that of fourth quarter 2005 levels and a tight driver market have contributed to a 10% decline in miles per tractor per week quarter-to-date relative to the fourth quarter 2005,” he said. “Also, while we’ve maintained price levels on contractual business, base trucking revenue per total mile declined 1% quarter-to-date compared to the fourth quarter 2005 as reduced shipping volumes have forced more of our business into the spot markets where a very competitive environment has pressured prices downward. As a result … we have experienced sequential declines in most operating metrics since the third quarter this year.”
One of the biggest hits to the freight sector results from a dramatic reduction in North American automotive production. Ward’s AutoForecasts projects total output in 2007 at 15.65 million units, 1.1% down from 2006's estimated 15.83 million, itself a 3% decline from 2005. The first half of 2007 will also be slow with expectations of sluggish economic growth seen as the primary reason for the production drop.
“Heading into 2007, the consumer is facing a slowing economy, potentially less job growth, and flat to declining home prices,” said New York-based investment firm Fitch Ratings. “Consumer spending is expected to slow down in 2007, but it is not anticipated to fall dramatically. Yet the impact should be felt more in the appliances and home and hardware sector than in other areas.”
Fitch said that energy remains a “wild card” and could provide some volatility to margins as it ripples through the supply chain. However, the firm noted that global oil prices fell 22% between August and October this year and its expects global oil prices to continue drifting downwards over 2007, though at a much slower pace than in the recent past.
A survey by the Business Roundtable also finds chief executives of companies across the U.S. predicting slow to flat growth for the rest of 2006 and into 2007. “It shows that CEOs are expecting a period of slower growth compared with the first half of 2006, with no major up or down movement in the economy during the first half of 2007," said Harold McGraw III, chairman of the Business Roundtable.
He noted that on overall economic growth, CEOs are assuming 2.8% gross domestic production (GDP) growth in 2007, down two-tenths of a percentage point from the group’s third quarter 2006 survey.
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