Transportation is an asset-based network-operating business. Historically, the industry draws attention to itself when the network experiences disruption because of weather, labor or congestion. In 2012, the assets themselves may become the center of attention. All three surface freight modes face transformative changes.
Ocean shipping has been the most dramatic. The industry’s lemming-like pursuit of new capacity has resulted in plummeting freight rates. Now there is evidence the assets’ underlying values have decreased, too. If this persists, the gap between owning vessels and chartering them will become huge.
Earlier this year, we saw attempts by bulk carriers to repudiate long-term charter agreements that once were significantly higher than market rates. Although these were unsuccessful, it served notice to asset owners who are at significant risk. To the extent that some owners are lines, breached loan covenants and bankruptcies may be inevitable.
The truckload industry has a different problem. It is estimated the industry experienced 20 percent capacity shrinkage during the recent downturn because of fleet downsizing (15 percent) and bankruptcies (5 percent).
Investment has been mostly limited to replacing assets rather than expansion. The industry is also suffering human asset loss through increased safety regulations that will reduce the number of eligible drivers and the amount of legal work they can perform.
The rail industry may soon come full circle from its 2007 National Rail Freight Infrastructure Capacity and Investment Study, which identified a $39 billion investment shortfall (of the $148 billion needed from 2007-2035). With Congress in political gridlock and unable to meaningfully address surface freight transportation funding, the railroads may find that eschewing public funds for private investment is the key to identifying reliable capital.
The national and global economies have always relied on adequate transportation assets for growth. This may be the year the well runs dry.