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New dynamics reshaping freight forecast

New dynamics reshaping freight forecast

Slower-than-expected economic growth combined with lean inventories are just some of the new dynamic forces in play that could reshape the future of freight flows in the U.S. and abroad, according to a range of experts and transportation firms.

Slower-than-expected economic growth combined with lean inventories are just some of the new dynamic forces in play that could reshape the future of freight flows in the U.S. and abroad, according to a range of experts and transportation firms.

On the one hand, increasing freight volumes have exceeded existing capacity in many cases, which in turn is convincing many transportation companies that better days lie ahead.

FedEx Corp., for one, expects earnings for its fiscal first quarter (which ends August 31 this year) to be in the range of $1.05 to $1.25 per diluted, up 81% to 116% from the 58 cents per diluted share it earned during the same period in its previous fiscal year and up from 85 cents to $1.05 per diluted share predicted during the company’s further fiscal quarter, which ended June 16.

“Our revenue and earnings growth are exceeding original expectations, primarily due to better-than-expected growth in FedEx Express and FedEx Ground volumes,” said Alan Graf Jr., FedEx executive vp & CFO.

“Our package volume growth rates in our first quarter are continuing at a pace similar to our fourth [fiscal] quarter,” he added. “Resumed growth in industrial production and global trade is increasing demand for our transportation services.”

For the full year, FedEx expects earnings per diluted share to range between $4.60 and $5.20, up from $4.40 to $5.00, which reflects the current market outlook for fuel prices and a continued moderate recovery in the global economy.

Others, however, are more cautious. “We’re at another interesting inflection point in our outlook. While we don’t think we’ll see a double-dip recession, we do project the overall economy growing slower than we previously forecast. That means the downside risks are increasing,” said Eric Starks, president & senior consultant with FTR Associates, during the firm’s “The State of Freight” webinar last week.

On the plus side, Noel Perry, principal of research firm Transport Fundamentals as well as managing director & senior consultant with FTR Associates, said freight volumes are definitely on the upswing, with a growing capacity crunch helping truckers boost rates and margins.

After watching truck freight pricing plummet by 11% last year, excluding fuel surcharges, Perry said prices should recover roughly 10% this year and next because freight demand is exceeding current capacity so strongly.

However, the overall economic picture that is causing some concern. Based on its analysis, FTR is scaling back its U.S. gross domestic product (GDP) forecast to the 3%-3.5% range – a full percentage point lower than its previous estimate. The firm also thinks growth will remain “choppy” and not just in the near-term; this will become the nominal state of economic behavior.

“We’re entering an era of ‘slow’ economic recovery, one characterized by several quarters of slow uneven growth,” Perry said. “Economies just don’t recover in consistent ways – they jump around a lot more and while this is painful, it will be normal.”

He thinks that will also be strongly reflected in trucking industry financials from here on out. “The long term volatility of the economy is going to be six times that of the 1980s and 1990s,” Perry said. “And transportation demand is going to be five times more volatile, with extremes in capacity doubling.”

As a result, trucking earnings will be far more volatile as well -- and not necessarily match the economic picture. “Carriers have tried to maintain steady earnings and just can’t. That’s going to be the challenge in the future here,” Perry said.

Truckload carrier Werner Enterprises also sees similar dynamic forces at work in the freight market. “We continue to believe that more of the improvement in the freight market over the last six months can be attributed to a decreasing supply of truck capacity rather than rising demand, however both factors are helping the freight market improve,” the company noted in its second-quarter earnings report.

Werner benefited handsomely from those factors in the second quarter, as its operating revenues increased 15% to $463.5 million compared the same period in 2009. And its pure trucking revenues, net of fuel surcharges, jumped 5% to $326.5 million compared to the second quarter last year. Finally, Werner’s earnings also went up a healthy 63% to 29 cents per diluted share compared to 18 cents per diluted share in second quarter of 2009.

“Inventory restocking also appeared to improve demand in recent months, particularly with many of our large retail customers,” the carrier added. “Our brokerage data suggests that carrier failures have begun to slow in recent weeks due to an improving freight market. However, we believe that many carriers are aging their fleets due to the rising cost of new trucks and inadequate rates. In addition, we believe the challenges of complying with increased government regulations and a lack of available equipment financing are proving difficult for smaller, private carriers.”

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