Mixed signals

Mixed signals

Looking to transport markets for signals about where the economy is headed as 2006 comes to a close can be perilous business. The markets are moving in very different directions depending on the transport segment. FedEx and UPS have announced the largest parcel rate increases in more than a decade, while international air cargo, container shipping and domestic U.S. trucking markets are weak. North American rail is quite strong, with rates rising across the board, particularly for intermodal.

More than anything, the story right now is one of significantly different economic and transport-specific factors coming to bear on specific segments of the transportation industry, creating a myriad of conditions rather than anything approaching a clear overall picture.

Take parcel, for example. Although holiday retail sales are forecast by the National Retail Federation to grow by 4.7 percent versus 6 percent last year, reflecting overall slowing in the U.S. economy, parcel carriers are being more aggressive on pricing than they've been in years. The rate in-creases of 4.9 percent announced in recent weeks by UPS and FedEx are the largest in a decade, and the effective date of Jan. 1 is more than a month earlier than increases typically took effect several years ago. Slowing retail sales growth doesn't concern these companies. They see double-digit increases in online sales growth - JupiterResearch forecasts online sales growing at a 12 percent cumulative annual rate between 2005 and 2010 - and the carriers know that growth can't happen without them.

"The increase is in part an attempt to build the higher costs from fuel - and other things - into the foundation costs for shipping parcels," said Paul Page, editor of JoC sister publication Traffic World. Page provided this information before a CNBC interview I did last week. "More important is the FedEx Ground and UPS response to online shopping. The fact is, many Internet retailers take their contract rates from FedEx and UPS and mark them up for the consumer. The difference for the retailer can be pure profit. As UPS and FedEx see growth in online retailing, they want to be sure they get not only their slice of that market but also their fair share of the revenue."

Another point is that DHL, a small but growing competitor in the U.S. market, has signaled that it is not interested in building market share through discounting. It also recently announced rate increases.

A similar situation exists today in North American rail, where only a few competitors dominate a rapidly growing market. A major factor in 2007 will be the impact of sharply higher rail rates charged by the railroads to ocean carriers and 3PLs to move containers and domestic equipment. With intermodal volumes growing, railroads intent on boosting profits are hitting customers with 20 to 30 percent increases as contracts expire. This will change how shippers ap-proach the mix of rail versus truck.

The situation is dramatically different for domestic full truckload and less-than-truckload carriers. The number of companies in the sector is larger, and the impact more closely tracks larger trends in the economy.

"It appears (trucking) pricing is increasing but at a much slower rate than over the past two years," Page said. "But we are hearing anecdotally that LTL truckers are bringing rates down as much as 20 percent, particularly in markets such as the upper Midwest, where they are seeing far weaker demand from manufacturers. The LTL companies are also being hit by growing competition from the truckload carriers, which, after three years of tight capacity, are seeing far lighter demand and are trying to get some revenue into vans by pulling away some of that LTL business. This is partly, perhaps even mostly, a result of the declining automobile manufacturing and housing construction market in the U.S."

Air cargo is not much better, also reflecting a supply-demand imbalance. In October, according to the International Air Transport Association, global airfreight volumes grew at a 2.3 percent annual rate while capacity was up 4.8 percent on the same basis. "Any reasonable conclusion is that there is empty space out there looking for business," Page said.

Ocean is in a similar situation, with rates on key east-west trades weak in 2006, although there are signs of a turnaround. There is one similarity across all modes: All asset-based transport providers are trying to escape from under the cloud of cyclicality. That's easier said than done.

Peter Tirschwell is vice president and editorial director of Commonwealth Business Media's Magazine Division. He can be contacted at (973) 848-7158, or at ptirschwell@joc.com.