Rational Exuberance

Ocean carrier executives must be looking at railroads and trucking companies and wondering if they got in the wrong business. That would certainly be a rational response.

While container ship lines are warning of the impact of the proverbial flat peak, earnings reports are coming out from surface transportation operators in the United States that show the results of strong management of network capacity and close attention to underlying financial performance.

In fact, CSX Transportation’s second quarter earnings report showed clear evidence of the softness in the U.S. economy that has triggered handwringing worldwide.

Overall volume was up only 3 percent, coal volume actually fell 3 percent and the merchandise volume of general carload commodities edged up only 3 percent. That hardly suggests a prosperous economic environment, but Michael Ward, CSX’s chairman, president and CEO, told CNBC he’s “not overly concerned about where the economy’s heading.”

That’s because he’s more concerned with where CSX is heading, and the company had a record quarter in that regard. That 3 percent gain in volume gave the company a 13 percent gain in revenue because “same-store” pricing grew 7.2 percent over the same quarter last year. Yes, 7.2 percent.

Of course, railroads are hardly comparable to other businesses. They’re as close to a monopoly as you’ll find in the transportation business, unlike the shipping and trucking businesses that cope with fragmented competition and seemingly nonexistent barriers to entry. Right?

Well, the first two big truckload carriers out of the box with second quarter earnings reports, Heartland Express and Marten Transport, reported profits grew 35.3 and 20 percent, respectively. That was well ahead of the gain in revenue at both carriers, and came as both reported tight capacity in the quarter.

That strong profit expansion in the container shipping world last year triggered a run on new ship orders, but you won’t find that in the trucking business. In fact, ACT Research says heavy truck orders overall fell 9 percent from May to June, after falling 40 percent in May on a month-to-month basis.

The signals on the water are troubling, by contrast.

Orient Overseas Container Line’s 6.5 percent volume expansion in the second quarter was in line with general forecasts for demand growth this year. But revenue grew only 1.4 percent over the second quarter of 2010 and the loadable capacity soared 18.3 percent, bringing the carrier’s load factor down 8.3 percent.

It’s no wonder industry analysts such as Johnson Leung of Jefferies are taking a dim view of the shipping industry these days, even though carriers are starting to pull capacity from major east-west routes just at the start of the peak season. That’s “a surprise,” he wrote in a report, “that we believe is a double-edged sword for stock trading.”

Leung told last month’s Journal of Commerce Shanghai Container Shipping Conference he rejects the idea carriers are behaving irrationally with their ship purchases and cut-rate pricing. They’ll lay up ships and pull strings, he said, when they pass the point where revenue no longer covers direct operating costs.

With some strings now consolidating, the message from carriers is that the line on operating costs is very close.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.

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