| Freight network |
The domestic heavy freight transportation network is operating at capacity, says James Valentine of equity research firm Morgan Stanley. Demand for truckload and rail services is outstripping capacity, even before the industry reaches its traditional peak operating season. The less-than-truckload (LTL) sector is the only area not operating at capacity and, therefore, stands to benefit from increased volumes and pricing.
Though LTL is not the most efficient mode for large shipments, Valentine says the LTL sector is likely to be a short-term beneficiary of the tightness in capacity in other areas.
The primary driver behind the tight domestic freight network is a lack of capacity additions in the truckload market over the last four years. Morgan Stanley's Truckload Freight Index continues to sit at record high levels (the index measures incremental supply and demand and provides data covering the last 10 years). This is despite the fact the peak shipping season is over two months away, Valentine points out.
Railroads have been the traditional relief valve when capacity is tight in the truckload market; however, the railroads face significant increases in four of their five major commodity groups. The Union Pacific has even had to withdraw intermodal capacity in some lanes.
Morgan Stanley estimates there is 5% to 10% excess capacity in the LTL sector given that, among the large LTL carriers, only Con-Way Transportation has reported significant tonnage growth. None of the LTL carriers have disposed of a significant number of terminals since 2000, which suggests excess capacity exists in their networks.
Con-Way has also announced it plans to launch a new operating company, Con-Way Truckload, during the first quarter of 2005. The new company will serve Con-Way's three domestic regional LTL carriers by providing linehaul service on full truckloads of LTL shipments moving in transcontinental traffic lanes.
Overnite Transportation has been one of the biggest beneficiaries of the current situation, says Valentine. Overnite has a longer length of haul than other regional carriers. It also stands to benefit from the closure of USF Red Star in the Northeast.
USF has traded a short-term pain for a long-term gain by closing down its loss-making Red Star group. Red Star, which accounted for 10% of USF's revenues, lost $9 million in 2003. Closing it down puts freight coming out of the Northeast at jeopardy, but it also could cost USF freight volume from shippers moving goods into the region. USF will have to expand operations from within its remaining network to serve the area or acquire another operation with capacity in the Northeast.
The union issue is also a loaded question. In standing up to the Teamsters and closing Red Star, USF could risk retaliation at its Holland division, which is unionized and the company's largest LTL division. Morgan Stanley suggests the Teamsters could also press workers at Dugan to unionize; however, those employees may be reluctant to organize given the Red Star closure.
In the end, USF's position remains strong given the current LTL market, and the move to cut away its losses at Red Star could strengthen its position over time. LT
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