Taking a deep breath

Oct. 23, 2008
“Today the financial crisis coupled with volatile oil prices poses demanding new challenges for international transport systems. a healthy global economy requires a strong and sustainable transport sector competitive transport services operated ...

Today the financial crisis coupled with volatile oil prices poses demanding new challenges for international transport systems. [Because] a healthy global economy requires a strong and sustainable transport sector [and] competitive transport services operated securely and sustainably are essential for growth and development.” --Jack Short, secretary general, International Transport Forum

All is not well in the world of transportation - much less for the world in general. Everyone‘s getting whipsawed by a variety of calamities all at once, first a housing downturn, followed by a freight falloff, then skyrocketing fuel prices, and finally a financial sector collapse. To say it‘s not a pretty picture is to win the understatement-of-the-year award.

That being said, though, it‘s certainly not time to start thumbing through Revelations while laying out sackcloth and ashes fordaily business attire (though it‘s certainly necessary for more than a few Wall Street tycoons). If you as a trucker - large or small - have made it this far, through all that‘s gone before, you should be able to weather the rough road ahead, which is predicted to last well into 2009.

“The world has experienced significant turbulence in financial markets, and we expect this will slow world economic growth over the next three or four quarters,” said Jim Owens, chairman and CEO of Peoria, IL-based Caterpillar Inc.

“While we are encouraged by the coordinated response by governments and central banks around the world and believe the actions they've taken will restore global liquidity, the depth and duration of economic decline and the timing and strength of the recovery are very uncertain,” he noted. “Our current outlook for 2009 calls for sales and revenues to be about flat with our full-year 2008 results.”

Everyone is taking a hard look at how the economic turbulence today impacts transportation in the near term. The International Transport Forum, for example, plans to address these issues at its global conference in May next year in Leipzig, Germany under an appropriate banner: “Transport for a Global Economy -- New Challenges and Opportunities

Transport policy makers from 50 countries are going to meet key leaders from industry, the research sector and civil society to discuss the challenges of globalization for the transport sector and consider what transport can do to respond to the needs for global economic and social development today. Key issues include what the present economic crisis means for globalization, what impact high transport costs have on the economy and how the global credit crunch will affect transport investment programs, says Jack Short, the forum‘s secretary general.

“The question of a further liberalization in the transport sector in order to meet the needs of a steadily globalizing economy needs to be discussed as well as improvements of the connections of seaports and airports to inland - rail and road - infrastructure,” he explains. “At the same time the environmental and social implications of globalization are concerning more and more people and they expect answers.”

U.S.-based transportation firms are already battening down the hatches for the rough days ahead. United Parcel Service for one is already cutting pack spending to husband cash in advance of a further decline in freight volumes.

“We‘ve taken steps to effectively manage our costs and enhance service levels in an environment that proved substantially worse than we initially anticipated, with significant slowing toward the end of the quarter,” notes Kurt Kuehn, UPS‘s CFO.

“Our focus on service, revenue management, cost reduction and our sound financial position will help us manage through these tough business conditions,” Kuehn says. “We‘ve implemented a range of initiatives to ensure our network operation matches demand.” That includes reducing UPS‘s 2008 capital expenditure budget by $200 million, with further reductions planned for its 2009 capital spend as well.

“Based on economic forecasts, we anticipate a challenging environment for a number of quarters going forward,” he adds. “We believe the U.S. consumer will be very conservative with spending this year.”

Commercial truck sales - already under pressure in the U.S. from the changeover to more costly emission control technology - are also projected to suffer further declines in several major markets.

“Industry truck sales in Western and Central Europe above 15 tonnes are expected to be comparable this year to the 340,000 units sold in 2007,” says Aad Goudriaan, president of DAF Trucks, the European division of Bellevue, WA-based OEM Paccar.

“After robust growth for a number of years, the European economy and truck markets are now slowing. As a result of the recent slowdown in customer demand, DAF will reduce its build rate during October and anticipates the 2009 commercial vehicle market will reflect the slower economy,” Goudriaan notes. “European industry truck sales in 2009 are difficult to predict due to economic uncertainty, but they could be at a level of 260,000-300,000 units.”

It‘s less rosy in the U.S. market, according to Dan Sobic, executive vice president at Paccar. “Declining housing starts and auto production have impacted U.S. and Canadian Class 8 truck sales throughout 2008,” he says. “Industry retail sales are expected to be approximately 150,000 vehicles this year [and] are projected to improve slightly in the second half of 2009 and are expected to be in the range of 170,000-210,000 as fleets replace vehicles after several years of lower purchases.”

Still - aside from all this gloom and doom - many U.S. carriers are finding freight and posting profits. True, most of the truckers making money are big fleets, but it nonetheless it shows there‘s business - and money - to be had out there in the freight world, despite the choppy economic waters. “Several of our major customers are reporting increased third quarter income due to good freight traffic and lower fuel prices.” Paccar‘s Sobic says.

Indianapolis-based Celadon Group provides a good example. By closely managing freight selection, they were able to obtain a small increase in loaded rate per mile, which was augmented by a significant reduction of non-revenue miles. That led to an approximately 1.5 cent per mile increase in average revenue per total mile (excluding fuel surcharges). Now, while average miles per tractor decreased as a result of a slow economy and choosing to eliminate loads that failed to meet the carrier‘s fiscal requirements, average freight revenue per tractor per week (again excluding fuel surcharges) remained essentially constant with the same quarter last year, despite the very weak freight environment.

“In periods of weak demand, cost control is exceptionally important, particularly fuel expense,” says Steve Russell, Celadon‘s chairman and CEO. “For the past year we have employed numerous tactics to improve fuel efficiency and lower costs. We have reduced the top speed of our tractors, improved tractor aerodynamics, added auxiliary heaters, implemented a strict tractor idling policy, renegotiated bulk fuel purchasing arrangements, and counseled our drivers in more efficient driving patterns.”

I think Clifton Beckham, president and CEO of USA Truck in Van Buren, AR, sums it up the best - it‘s going to be a tough few quarters, but if carriers can control their costs, they‘ll be able to weather the current economic storm until better days arrive.

“These past few weeks have been quite fluid and our ability to predict the near-term future is murky at best. We believe freight demand is likely to deteriorate further over the next few quarters, and that less freight, inflated equipment prices and tightening credit will further shrink industry capacity,” Beckham says.

“Falling fuel prices are the only material factor we see that aids industry-wide capacity retention, and we do not expect that to be sufficient to outweigh the negative factors for underperforming and undercapitalized competitors,” he stresses. “We realize that the U.S. economy is enormous, and that a tremendous amount of freight must be moved even in a slow-growth or even slightly contracting environment. Thus, improving industry fundamentals may emerge next year for those trucking companies that weather the difficult times and survive to compete.”

About the Author

Sean Kilcarr 1 | Senior Editor

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