With the dramatic first quarter results in the record books — Swift Transportation saw profits fall 74%; U.S. Xpress Enterprises endured a loss of $2.6 million in earnings and UPS saw net income drop 13.5% compared to the same quarter in 2006 — carriers are looking toward the rest of the year with guarded optimism and concern.
Amid softened freight volumes and lowered shipments of corrugated boxes (often a precursor of freight activity) one bright spot may be the Department of Transportation's “Transportation Services Index,” which rose in March in the largest month-to-month increase in three years.
Although the report is preliminary — and will be revised in four months — it showed that the output of services by the railroad, air, truck, pipeline and local transit sectors rose 1.6% in March, to 111. The index was also up from 110.9 in the same month a year ago. The increase came after two months of declines and was only the fourth increase over the past year.
The index is watched particularly closely by trucking stakeholders because trucking comprises about two-thirds of the seasonally adjusted weighted index, which began in 2000 with a baseline of 100.0.
Notwithstanding the positive bump in the index, carriers will face an uncertain rest of the year. In its May 1, 2007 Transportation/Logistics report, stock analyst firm Robert W. Baird noted: “Overall, our stance on the transports has been consistent through 2007, and we remain cautious on the transport stocks due to the numerous near-term headwinds including a weaker freight environment, moderating economy, softer demand, and pricing pressure (specifically in the trucking market).”
Pricing pressure has been tough for carriers and will remain so for the rest of 2007. Weaker demand brought increased capacity and shifted leverage to shippers, although consolidation among less-than-truckload carriers helped their position compared to the truckload sector.
With the recent rise in capacity, shippers have been exercising more negotiating clout over fuel surcharges as well, forcing carriers back to the bargaining table. Added Baird analysts: “… as the new contracts layer in with minimal pricing gains, we expect further pricing pressure.”
One of the positive effects of decreasing freight volumes has been a decline in driver turnover among the hard-hit truckload carriers. According to an American Trucking Associations (ATA) survey, driver churn at large truckload carriers dropped 13% last year, the first decline since 2001. For less-than-truckloads — which generally have been able to maintain pricing power, partly because of consolidation — turnover rose about 13%.
AS TRUCKING GOES…
As is so often the case, the health of the trucking industry may be an early indicator of the nation's overall economic well-being. With falling home values and rising gasoline prices, the American consumer, which represents two-thirds of the U.S. economy, may cut discretionary spending in half, according to a Bloomberg survey of 65 economists taken between April 30 and May 8.
For the entire year, the economy is projected to grow at a rate of only 2.1%, the lowest level in five years. In fact, according to the Department of Commerce, during the first quarter of the year, the economy grew at an annual rate of just 1.3%, the smallest gain in four years.
Bolstering the negative view of consumer spending was a report from retail giant Wal-Mart that April sales dropped 3.5% at its U.S. stores that have been open at least a year. As the world's largest retailer, Wal-Mart's sales are closely watched as an indicator of consumer spending habits across the country.
Still, at the Bear Stearns annual Global Transportation Conference in early May in New York (see “Fleets talk to Wall Street,” pg xx), carrier officials appeared mainly upbeat about the rest of the year as they tightened their seatbelts for the bumpy ride ahead.