Jack Holmes, president of one of the largest trucking companies operating on U.S. highways, keeps an eye on the sea, where container shipping lines are struggling to stay afloat financially. Container lines lost some $6.5 billion in 2011 amid frenzied rate cutting. Maersk Line, the largest container carrier, lost about $602 million last year.
In contrast, UPS’s Supply Chain & Freight division, which includes Holmes’ UPS Freight and UPS Freight Truckload, increased operating profit 19.4 percent in the first quarter of 2012 to $166 million. The division’s revenue rose 1.3 percent year-over-year to $2.2 billion in the quarter, while UPS Freight’s LTL revenue rose 2.4 percent to $588 million.
“In what is typically the most challenging quarter for the industry, UPS Freight broke even,” Chief Financial Officer Kurt Kuehn said in an April 26 conference call with analysts. “Tonnage declines were offset by higher revenue per hundredweight and improved productivity.”
UPS Freight, a $2.3 billion carrier, increased revenue almost 15 percent in 2011, according to SJ Consulting Group estimates, making it the nation’s fourth-largest LTL carrier after YRC Worldwide, FedEx Freight and Con-way.
No trucking company is an island, however, and when a ship’s bell tolls, it echoes loudly in LTL terminals. “Everything that gets loaded on a ship is going to end up on a truck here in the U.S.,” Holmes said in an interview at last week’s NASSTRAC 2012 Logistics Conference. “If there’s less on the ships, there will be less on the trucks. There are a lot of ships at anchor, and ocean vessel operating companies are trying to figure out how to survive another year. Their strategies will obviously impact trucking.”
Raising ocean rates, for example, will drive up supply chain costs, putting more pressure on what a shipper can spend on the land leg of a trans-Pacific trip. That in turn puts pressure on truck pricing and the margins of companies such as UPS Freight.
“There’s been so much pressure on their (ocean carriers’) bottom lines. Their strategy seems to be to go after rates to get more healthy,” said Holmes, who also spoke on an LTL executive panel at the shipper conference in Orlando. That pricing strategy is familiar to LTL carriers that have raised rates substantially since a 2009 price war.
Whatever ocean carriers do, “whether it’s six weeks or two months later, at some point there will be an impact on the trucking business,” Holmes said. “On top of that, there are port strategies that shippers and ocean carriers are considering regarding shifting freight from the West Coast to East Coast” when the Panama Canal completes its expansion in a little more than two years. UPS Freight, Holmes said, is thinking ahead to prepare. “Understanding how our networks match up to what shippers’ needs are is a constant challenge.”
UPS Freight is one of a growing number of U.S. trucking companies driving down to the docks for freight, not only to better connect with overseas supply chains but also to tap changing U.S. distribution networks that move imports inland and get exports overseas.
For example, Thomasville, N.C.-based Old Dominion Freight Line is expanding its U.S. drayage operations and global expedited less-than-containerload services, bolting export- and import-oriented services onto its core North American LTL business.
UPS also has an international air and ocean freight forwarding arm, headed since March by Vice President Jeff McCorstin. UPS last month launched an expedited heavy freight ground service between the U.S. and Mexico using its forwarding network.
Journal of Commerce Economist Mario Moreno expects “very modest” growth in containerized imports through the second half of the year, following a 7.3 percent uptick in March. Holmes sees those imports “as a great opportunity” for UPS Freight. “Typically in the past, freight would arrive at a port and go to some inland destination for deconsolidation,” he said. “What shippers are asking for now is the ability to deconsolidate (and transload) as close to the port as possible. By doing that, you reduce expense, because some product will move from the port on different modes.”
UPS Freight, with its LTL, truckload and intermodal portfolio and connections to the UPS ground package network, is well-positioned to place that freight where it needs to be, rather than be passed over for another transportation provider, he said.
“When a shipper says, ‘I’m going to change my distribution center model into or out of the ports,’ it doesn’t mean that we don’t do that business any more. It means that maybe one mode we use did that business, and now it’s an opportunity for the other mode.”
Truckers have been pursuing inbound U.S. imports for decades, though it often enters their networks a good distance from the ports, at distribution centers. And a good portion of LTL freight, especially in the Midwest, is grounded in domestic manufacturing.
But as trade lanes shift and as near-sourcing brings more manufacturing and distribution sites to Mexico, trucking companies must alter their networks to adapt.
“Shippers are trying to understand where the opportunities may come with the Panama Canal expansion,” Holmes said. “We have an obligation to ensure that where they see opportunities, we have capabilities. So understanding the ports of Norfolk, Baltimore and New York, with their ability to handle these super container vessels, is important to us.
“It appears they’re going to have more volume coming through those ports,” he said. “The question is, what is that volume, who are the companies associated with that volume, and what will their needs be once it comes to the port? If it’s time-sensitive material, there will be one set of needs. If it’s not time-sensitive, it will be another set of needs.”
That foretells a sea change in the LTL, truckload, drayage and intermodal networks surface transportation companies will design and deploy over the next few years.
Richmond, Va.-based UPS Freight has its own set of land-based problems. Shipment volume dropped 2.3 percent in the first quarter, though yield, a measure of pricing and surcharges, rose 4.5 percent. “We are seeing some moving patterns” in the LTL market, Kuehn said in the conference call. “Some players in the market are getting more aggressive. So we’re trying to find middle ground right now.”
Holmes chalked up some of the drop in tonnage from a year ago to mode shifting. “Shipping patterns used to be less dynamic, more predictable,” he said. “Now shippers are finding the way they used to do business doesn’t apply any more, the old model doesn’t work. Instead of smaller shipments that are more time-sensitive,” the traditional LTL shipment, “they want bigger shipments that are less time-sensitive. It’s all about the inventory level shippers are comfortable with. Any time there’s noise about the economy, the question is how much will inventory levels shrink down.”
And as international sourcing and supply chains react to each economic twinge, the effect will be amplified and ripple its way to tractor-trailers across the U.S.