Two steps forward, one step back

Although some shippers may find it hard to believe (see chart below), the railroads took some major financial hits in 2005 that will continue to plague them in 2006. For instance, the Union Pacific (UP) (www.up.com), which was already struggling with network performance issues, incurred $31 million in hurricane-related costs. Fuel costs outpaced recovery efforts, and UP reported $214 million higher costs in the third quarter of 2005 but recovered only $180 million in surcharges.

"Turnarounds of complex networks that stretch over tens of thousands of miles ... are not completed quickly or smoothly," reports equity research firm Morgan Stanley (www.morganstanley.com). "We believe UP will likely continue to take two steps forward and then one step back."

But despite slow progress on service issues, UP expects 10% to 15% of its older contracts to come up for renewal in 2006 and it will take that opportunity to increase prices as much as 20%. And it's that uneven balance — increased costs accompanied by decreased service — that is causing some shippers to see red (see "Mailchute," p. 14).

Intermodal transportation has been the darling of the rail story, with 14 consecutive quarters of growth. Asian imports are credited with much of the continued growth, but a contributing factor is tight truckload capacity.

Truckload carriers continue to report very tight capacity despite reports that volume growth has started to slow. The trend for freight is still up while the ability to find drivers may actually be more constrained by relief efforts following hurricanes Katrina and Rita. As Tom Escott, president of Schneider Logistics (www.schneiderlogistics.com), points out, the question in recruiting and retaining drivers is economics and lifestyle. The industry looks at where wages stand relative to the construction industry, and currently construction has a better wage package. Increased demand for construction in the storm-ravaged areas of the Gulf could exacerbate this problem. Efficiency is an issue for motor carriers as they face wage inflation, fuel cost increases, rising insurance rates, lower productivity under new Hours of Service (HOS) rules, and higher cost/lower efficiency engines starting with the 2007 truck model year. Pre-buys of trucks to replace tractors before the engine requirement goes into effect have only replaced trucks, not added to net capacity, according to industry sources.

Herb Schmidt, president of truckload carrier Contract Freighters Inc. (www.cfi-us.com), points to a 3% productivity loss under the new HOS which will require his company to add 75 trucks just to stay even. On the driver issue, he says he could keep 700 additional trucks busy if he had drivers for them.

On the waterfront, shipyards are near capacity building massive containerships to handle trade that has focused mostly on China. Larger vessels will begin to drive changes through the maritime industry as they find fewer ports that can accommodate the new class of super containerships. The larger ships will bring about an increase in feeder services to hub ports where the draft and landside capacity exists to handle the larger ships.

Consortia of carriers such as the New World Alliance are extending agreements to maximize their landside and trans-oceanic efficiency. This can be increasingly important as operations shift to feeder and hub arrangements and given the limited capacity of the Panama Canal. As with other modes, the key is capacity.

Air freight volumes have also been on the rise in international lanes, while domestic U.S. volumes have stagnated. Carriers are adding freighter capacity and airframe companies are stepping up programs for freighter conversions. There is some hope for progress in "open skies" talks which could also benefit international air freight.

Less-than-truckload (LTL) volumes may have been declining for national carriers, but they have been able to employ some of their excess capacity to haul freight that had been moving in multistop truckload shipments. Regional LTL carriers, especially Con-Way Transportation, have been able to gain share from the national carriers if not also from some truckload diversions.

Labor issues are boiling up, led by problems at airlines. Combination carriers such as Delta, Northwest and United may dominate the headlines with labor disputes, but other segments of transportation are vulnerable. Pilots at UPS and FedEx are pushing issues with management. On the ground, the International Brotherhood of Teamsters (IBT) has targeted Overnite Transportation ( recently acquired by UPS) for organizing efforts. IBT has also teamed with a group of international trade unions which are, together, targeting integrators DHL and TNT.

And on the broader logistics front, acquisitions continue to shake out the industry — the latest big deal is German railway Deutsche Bahn's purchase of BAX Global to supplement its Schenker forwarding operations. FedEx and UPS are rumored to be eyeing an acquisition in Europe following Deutsche Post World Net's successful bid for Exel.

Apparently, high earnings have not priced transportation and logistics services companies out of the market. After a busy year or two of consolidations, the tide hasn't yet gone out on this trend.