Fuel Costs, Union Contracts, Economy Loom as Major Concerns in New Year
By Daniel P. Bearth, Staff Writer
This story appears in the Jan. 7 print edition of Transport Topics.
Don’t be surprised if the year ahead looks a lot like the year just ended, with some additional worries for freight carriers.
A year ago, many trucking executives and industry analysts expressed concern about the effects of housing and auto production on the demand for truck services.
Those concerns continue for freight carriers, but they also have new ones.
Fuel costs moved sharply higher in recent months, putting pressure on trucking industry profits and raising fears of inflation and a slowdown in consumer spending.
Labor contracts between the Teamsters union and less-than-truckload freight carriers and autohaulers expire in 2008, as does a contract between operators of West Coast ports and the International Longshore and Warehouse Union.
And it’s an election year, which raises the additional prospect of a political shift in Congress and in the regulatory agencies that oversee transportation.
Meanwhile, the economic outlook remains clouded.
“There’s a lot of concern that this could be potentially a prolonged downward period,” said Stephen Brown, an analyst for Fitch Ratings in Chicago.
Fitch predicts economic growth of only 1.7% in 2008, with weak demand in housing and retail industries expected to have a drag on demand for truck freight.
Spending on consumer goods, which account for as much as 60% of trucking revenue, could turn negative in the first quarter, said Ken Hoexter, a research analyst with Merrill Lynch & Co., New York.
“It appears that the trucking market has not yet hit bottom and may, in fact, have another leg down into early 2008, as the sector is heavily exposed to slowing U.S. consumer spending,” he said.
With soft demand and increased competition for freight, most analysts expect to see continued pressure on freight rates and an increase in the number of trucking bankruptcies in the year ahead.
The head of Daimler AG’s lending arm said a weakened U.S. economy likely will reduce demand for loans to buy new commercial trucks.
“New business might be a little bit lower or comparable to 2007,” Klaus Entenmann, head of Daimler Financial Services Americas, said in an interview with Bloomberg News.
Thom Albrecht, managing director of research at Stephens Inc., Richmond, Va., sounded more optimistic, saying that, based on historical trends, truck tonnage is likely to turn positive by the second quarter of 2008.
“Since 1974, the longest tonnage slump has lasted 21 months. Given that we are 15 months into the slump that began in August 2006, tonnage should be nearing a bottom,” he said.
Investment analysts expect a banner year for mergers and acquisitions as smaller carriers get squeezed by rising operating costs, especially for fuel, and larger carriers seek to bolster freight volume and broaden their service offerings.
“The pace of M&A activity in the transportation and logistics industry has not abated, and we anticipate that it is going to continue as a result of the current global environment,” said Kenneth Evans Jr., a transportation and logistics sector leader for accounting firm PricewaterhouseCoopers.
Evans said global shippers are asking for more services from fewer suppliers. Also, according to a recently published survey of global transportation and logistics transactions, Evans said deals involving truck and rail carriers are rising.
The survey also found that strategic investors account for an increasing share of deal volume, as private equity firms and other financial investors face greater challenges in raising money because of an increase in subprime mortgage defaults.
Regardless of economic conditions, Mike Ianelli, an executive with the financial advisory firm Lincoln International in Chicago, said he expects to see continued flow of acquisitions by large freight transportation service providers.
“Consolidation is a fairly inexorable, big trend,” he said. “Fuel, global trade, increasing environmental and safety regulations make it more difficult for smaller companies to compete. It’s a bigger trend than the economy.”
Although residential construction activity is expected to continue a decline that started in 2006, some of the drop-off in home building will be offset by increased spending on public works and highways, according to estimates by McGraw-Hill Construction.
Heather Jones, a construction economist for FMI Corp. in Ral-eigh, N.C., said she predicts a 9% jump in nonresidential construction and a 7% rise in nonbuilding structures, which include utilities, streets and highways and waste disposal projects in 2008.
“Nonresidential construction is booming and will outpace residential construction,” Jones said. “However, it is not enough to offset the loss from residential and total construction [in 2007], which will see the first decline since 1991.”
Manufacturing bears watching. Auto sales were at a nine-year low in 2007 at just over 16 million units, and the latest estimates are for sales to dip under 15 million units in 2008.
While merchandise imports continue to increase, the decline in the value of the U.S. dollar abroad is helping to revive American exports.
This story appears in the Jan. 7 print edition of Transport Topics.
Don’t be surprised if the year ahead looks a lot like the year just ended, with some additional worries for freight carriers.
A year ago, many trucking executives and industry analysts expressed concern about the effects of housing and auto production on the demand for truck services.
Those concerns continue for freight carriers, but they also have new ones.
Fuel costs moved sharply higher in recent months, putting pressure on trucking industry profits and raising fears of inflation and a slowdown in consumer spending.
Labor contracts between the Teamsters union and less-than-truckload freight carriers and autohaulers expire in 2008, as does a contract between operators of West Coast ports and the International Longshore and Warehouse Union.
And it’s an election year, which raises the additional prospect of a political shift in Congress and in the regulatory agencies that oversee transportation.
Meanwhile, the economic outlook remains clouded.
“There’s a lot of concern that this could be potentially a prolonged downward period,” said Stephen Brown, an analyst for Fitch Ratings in Chicago.
Fitch predicts economic growth of only 1.7% in 2008, with weak demand in housing and retail industries expected to have a drag on demand for truck freight.
Spending on consumer goods, which account for as much as 60% of trucking revenue, could turn negative in the first quarter, said Ken Hoexter, a research analyst with Merrill Lynch & Co., New York.
“It appears that the trucking market has not yet hit bottom and may, in fact, have another leg down into early 2008, as the sector is heavily exposed to slowing U.S. consumer spending,” he said.
With soft demand and increased competition for freight, most analysts expect to see continued pressure on freight rates and an increase in the number of trucking bankruptcies in the year ahead.
The head of Daimler AG’s lending arm said a weakened U.S. economy likely will reduce demand for loans to buy new commercial trucks.
“New business might be a little bit lower or comparable to 2007,” Klaus Entenmann, head of Daimler Financial Services Americas, said in an interview with Bloomberg News.
Thom Albrecht, managing director of research at Stephens Inc., Richmond, Va., sounded more optimistic, saying that, based on historical trends, truck tonnage is likely to turn positive by the second quarter of 2008.
“Since 1974, the longest tonnage slump has lasted 21 months. Given that we are 15 months into the slump that began in August 2006, tonnage should be nearing a bottom,” he said.
Investment analysts expect a banner year for mergers and acquisitions as smaller carriers get squeezed by rising operating costs, especially for fuel, and larger carriers seek to bolster freight volume and broaden their service offerings.
“The pace of M&A activity in the transportation and logistics industry has not abated, and we anticipate that it is going to continue as a result of the current global environment,” said Kenneth Evans Jr., a transportation and logistics sector leader for accounting firm PricewaterhouseCoopers.
Evans said global shippers are asking for more services from fewer suppliers. Also, according to a recently published survey of global transportation and logistics transactions, Evans said deals involving truck and rail carriers are rising.
The survey also found that strategic investors account for an increasing share of deal volume, as private equity firms and other financial investors face greater challenges in raising money because of an increase in subprime mortgage defaults.
Regardless of economic conditions, Mike Ianelli, an executive with the financial advisory firm Lincoln International in Chicago, said he expects to see continued flow of acquisitions by large freight transportation service providers.
“Consolidation is a fairly inexorable, big trend,” he said. “Fuel, global trade, increasing environmental and safety regulations make it more difficult for smaller companies to compete. It’s a bigger trend than the economy.”
Although residential construction activity is expected to continue a decline that started in 2006, some of the drop-off in home building will be offset by increased spending on public works and highways, according to estimates by McGraw-Hill Construction.
Heather Jones, a construction economist for FMI Corp. in Ral-eigh, N.C., said she predicts a 9% jump in nonresidential construction and a 7% rise in nonbuilding structures, which include utilities, streets and highways and waste disposal projects in 2008.
“Nonresidential construction is booming and will outpace residential construction,” Jones said. “However, it is not enough to offset the loss from residential and total construction [in 2007], which will see the first decline since 1991.”
Manufacturing bears watching. Auto sales were at a nine-year low in 2007 at just over 16 million units, and the latest estimates are for sales to dip under 15 million units in 2008.
While merchandise imports continue to increase, the decline in the value of the U.S. dollar abroad is helping to revive American exports.
