Numbers game

Numbers game

The freight transportation industry has always revolved around numbers. With the increased focus of the financial community, the numbers game has become a never-ending source of interest.

Recently, it has been the source of speculation because of the divergence between the general economy and the economic life of the freight transportation industry. While the former is experiencing low interest rates and unemployment and a rising stock market, the latter is not universally enjoying good times.

This has given rise to whether we are experiencing a "freight recession" because we have seen several quarters of mixed freight volume and financial results. There seem to be several contributing reasons. Two major pillars of the U.S. economy, the automotive industry and construction, are weak, and freight volumes have decreased. With fewer new homes, the retail sector sells less furniture, electronics and appliances.

With construction down, many workers have returned to driving trucks. There has been a glut of trucking capacity, largely because operators rushed to acquire tractors last year to avoid the first year of new EPA-mandated engines. First-quarter results for major truckload carriers indicated market weakness for the first time in several years.

Carriers must lower rates to protect existing customers while they try to attract new business. Shippers, recognizing favorable market conditions, have greatly increased the frequency of "bid packages" - in essence, a survey of a carrier's prices to compare against others' - as a means to shop rates. One carrier recently noted a 300 percent increase in bid packages this year over 2006. These conditions reinforce the perception of the transportation industry as cyclical.

Ocean shipping, another traditionally cyclical sector, seems a little more blended. In the just-completed service contract season, West Coast port-to-port rates remained fairly elastic - carrier price action generates large volumes. Although the Transpacific Stabilization Agreement sought price increases of $300 per 40-foot container for this business, rates seemed not to increase much. Perhaps it is a victory of sorts that these rates did not decrease. It would appear that the release of vessel-utilization data is impacting the market by having transparent facts and figures (showing fairly full vessels) replace rumor and hearsay (of excess capacity).

Meanwhile, the TSA had pricing success with other services. With Panama Canal capacity tight and intermodal rates increasing, container carriers offering these services were able to retain price increases.

The intermodal segment faces a unique challenge. Many believe railroads are transitioning their business models from cyclical to growth, where volumes will grow along with price. Railroad results are being parsed to determine the impact of pricing, organic growth and new business on quarterly results. While many rail commodities do not have much modal competition, goods carried in trailers or containers produce a confluence of rail, truck and ocean competition.

The structural trans-Pacific freight imbalance and increasing rail rates have importers contemplating West Coast transloading. Taking advantage of inexpensive local rates, importers can transfer cargo from marine to domestic equipment. This is more than just freight rate arbitrage; there are inventory and timing benefits as well. Ocean carriers avoid an expensive intermodal round trip and can turn the equipment around faster.

In many cases, railroads retain the business as it moves in 53-foot domestic containers; however, this currently is not a given. As the truckload market continues to suffer, some carriers report that over-the-road trailers are now competing with double-stack in long-haul corridors for the first time in a generation. Beyond spot-market dynamics, this result seems to reflect a new intermodal caste system between legacy intermodal carriers and relative newcomers. The former have such a significant price advantage in their contractual cost that the latter often turn to truck for a service that is faster - and sometimes less expensive.

Of course, there are externalities that could impact the system's equilibrium. Oil prices as an input of transportation production cannot be dismissed. Increased outsourcing, or increasing trade friction with China, could impact global trade. Investor pressures also could have unintended consequences.

Regardless, we can expect the coming summer and its traditional peak season to generate a lot of numbers to watch closely.