This Week

David Outperforms Goliath Among 3PLs, Brokers

Smaller logistics operators and freight brokers outperformed their larger counterparts in the third quarter, but a less-than-robust recovery is squeezing profit margins at all 3PLs, the Transportation Intermediaries Association said in its latest 3PL Market Report. The report shows intermediaries with less than $3 million in annual revenue increased sales and shipment volume over the second quarter, while larger logistics operators reported flat of slightly falling sales and volume. 
The average profit margin at all 3PLs surveyed by TIA dropped 1 percent to 17 percent in the quarter, indicating a recovery still stuck in neutral or in very low gear. The larger 3PLs — those with $3 million to $10 million and more than $10 million in revenue — also reported a “modest contraction” in truckload billings. “It appears that the clients of the 3PLs appearing in the larger size categories may be moving loads from TL services to other types of services,” said the TIA, which held its annual meeting in Anaheim, Calif, last week. Rate discounting also played a role. “Downward pressure is being placed on prices and having a relatively larger impact on total TL dollars billed,” the TIA said. Truckload shipments accounted for 80 percent or more of the revenue generated by the 3PLs surveyed. Rail represented the next largest source of revenue, particularly for larger operators. Use of rail increased as shippers looked for “low cost shipping alternatives,” the association said. The number of LTL shipments rose from the second quarter, although total billings declined 5.8 percent.

ABF, Teamsters in Concession Talks

Less-than-truckload carrier ABF Freight System is deep in talks with the Teamsters union to win concessions similar to those the union gave financially troubled competitor YRC Worldwide, including an overhaul of the company’s pension system, the carrier said. “We are in a dialogue with the Teamsters, and, hopefully, we will reach an agreement soon,” ABF Chief Operating Officer Wesley R. Kemp told reporters at last week’s annual Transcomp and Intermodal Expo in Anaheim, Calif. Kemp said the carrier expects to win wage concessions similar to the givebacks that lowered wages some 15 percent at YRC, the nation’s largest LTL operator. ABF also wants to restructure the company’s pension system by switching to a profit-sharing arrangement to match the savings YRC is gaining from an 18-month hiatus from contributing to Teamster pension plans. He said the company has no deadline for an agreement and that talks have been “productive and cordial.”

An ‘Elongated U’ Means Modest Rate Hikes

The freight transportation industry will see a recovery next year, but it will be painfully slow and will generate only modest increases in freight rates, Wall Street analysts say. Jason H. Seidl, director at Dahlman Rose, is looking for an economic recovery with a long ride on the bottom, what he called an elongated “U,” with growth dragging until employment picks up and consumer confidence improves. “The consumer has to come back,” Seidl told the annual transportation conference sponsored by the Intermodal Association of North America, the National Industrial Transportation League and the Transportation Intermediaries Association in Anaheim, Calif. There have been some positive developments of late in the ocean, rail, trucking and air freight industries. “The level of freight is weak in absolute terms, but, sequentially, it is moving up month to month. We are actually getting a bit of a peak this year,” JP Morgan’s Thomas R. Wadewitz said. But retailers’ inventories had gotten so low this year that they had no choice but to restock in time for the holiday shopping season. “Inventory destocking was (down) almost to a dangerous level,” said John L. Barnes, managing director equity research-transportation at RBC Capital Markets. “That’s where some of this was coming from . . . This is a very mixed bag. Things can change daily.” As freight volume grows next year, there may be occasional bouts with tight capacity, but the analysts expect carriers to reintroduce laid-up capacity quickly. No matter what the transportation mode, carriers in 2010 are expected to push for increases in freight rates, but success will be measured in incremental gains over 2009 rates.

Retail Sales Climb

Retail sales in October registered a month-over-month gain of 1.4 percent and pushed year-over-year comparisons in the August-October period into positive territory. But compared to last October, seasonally adjusted sales of $347.5 billion were down 1.7 percent, according to the U.S. Census Bureau. Total sales for the August-October period were up 1.5 percent from a year earlier. According to the National Retail Federation, retail industry sales were flat seasonally adjusted from September and fell 1.3 percent year-over-year. The industry group forecasts a holiday sales decline of 1 percent for retail industry sales in November and December. “Though the October numbers show some signs of optimism for retailers, the industry is still not out of the woods,” said Rosalind Wells, NRF chief economist. “While categories like apparel, sporting goods, books, music and personal care fared well, housing-related categories such as furniture and home improvement continued to struggle.”

Shippers Struggle as Carriers Cut Routes

Ocean carrier cutbacks are playing havoc with the supply chains of retailers. “Changes in sailing schedules are killing us,” said Martin Bernstein, transportation excellence director at J.C. Penney. Bernstein said 25 percent of Penney’s routings this year have been affected by changes in schedules and reduced sailings. This scheduling uncertainty comes at a time when retailers have reduced the inventory they carry to cut costs and improve efficiency. Logistics officials at Nike said recently carrier cutbacks had hurt the shoe manufacturer’s ability to diversify its gateways. Although freight rates are low, J.C. Penney’s priorities are reliability of transportation service and predictability of rates because contracts with overseas factories are written six months before the merchandise is delivered, Bernstein said. “This is not an RFP (request for proposals) industry,” he said. “It has to be built on predictability.”

Transport CFOs Gloomy on Hiring, Economy

Financial executives at transportation companies are more pessimistic about the economy than their counterparts in other businesses, and few plan to hire workers in the next six months, a Grant Thornton survey reveals. However, even fewer expect their headcounts to decrease in the next six months, reflecting sweeping cuts that have already been made at transporters from ocean shipping lines to trucking companies over the past year. Only 22 percent of the transportation executives interviewed by the research firm said they would increase hiring in the next six months, compared with 24 percent for all businesses. But only 16 percent of the transport operators expect to reduce payroll in that period, compared with 22 percent overall. The research firm interviewed more than 800 chief financial officers and controllers at public and private firms, including 32 transportation companies. Only 38 percent of the transportation CFOs expected the economy to improve in the next six months. Overall, most CFOs were more optimistic, with 49 percent expecting an upswing. More than half the transportation executives, 53 percent, said they expected economic conditions to be about the same in six months, compared with 41 percent of all respondents. A majority — 69 percent — expected the prices they charge for their services and goods to be about the same as well, with only 25 percent of the executives at transportation companies expecting rates to climb, and they were slightly more optimistic than the CFOs overall who answered the survey. The economy will pull out of the recession in the second half of 2010, 41 percent of the transportation executives said, while 34 percent expect the recession to end in the first half of the year. Only 6 percent expected the recession to last into 2011 or longer.

Postal Loss Hits $3.8 Billion

The U.S. Postal Service is asking for a substantial price increase for its Priority Mail service, and it’s no wonder. The USPS last week said it lost $3.8 billion in its 2009 fiscal year ending Sept. 30, in what the chief financial officer called “one of the most challenging (years) in the history of the Postal Service.” Operating revenue dived $6.8 billion to $68.1 billion as volume plunged 12.7 percent to $177.1 billion pieces. And the loss came after $6 billion in savings from cuts in operating costs and a $4 billion reduction in required payments for retiree health benefits. The USPS is looking at even worse result next year, including a potential loss of $7.8 billion. The Postal Service this month said it wants a $3.3 percent average increase in the Priority Mail service that competes most directly with private parcel carriers. But it’s also one of the complicated price increases the USPS has ever called for, with provisions including cubic volume-based pricing and other moves to the commercial market that would mean a wide range in pricing for parcel shippers.

NTSB Chairman Takes Aim at Fatigue

Fatigue “is one of the most insidious issues in the transportation industry,” and more must be done to fight it, said Deborah A.P. Hersman, chairman of the National Transportation Safety Board. We establish a 72-hour prior history in every NTSB investigation,” she said. “Unfortunately, we find fatigue in more incidents and accidents than you would think.” Hersman said the NTSB has recommended the Federal Aviation Administration set hours-of-service rules for flight crews, aviation mechanics and air traffic controllers. Congress changed century-old rail employee hours-of-service rules in 2007, and the Federal Motor Carrier Safety Administration plans to propose a new HOS rule early next year. Companies as well as government need to do more to address the issue, she said, noting many transportation companies don’t have written fatigue policies or procedures that allow employees suffering from fatigue or sleep disorders to take time off and rest. Overall, transportation safety is improving, with highway fatalities, which account for 94 percent of transportation deaths, decreasing by 9.7 percent in 2008, according to NTSB statistics. But the public needs to be more aware of everyday transportation safety issues beyond high-profile accidents, Hersman said. “More than 100 Americans die each day on our highways, and for the most part, we’re oblivious to that death toll.”