Mr. Ross: Here at Stifel, John Larkin and I follow 34 names in all freight transportation sectors - mainly rail, truckload, LTL, air freight logistics, barge, intermodal. Specifically, my niche for official coverage is air freight logistics, parcel and LTL, less-than-truckload.
TWST: How is the sector doing right now? What is your outlook for 2010?
Mr. Ross: I would say things are certainly continuing to improve. The freight markets, from an absolute-volume kind of tonnage standpoint, bottomed in the second quarter of 2009 and have been consistently growing off that bottom. Demand is continuing to improve. Inventories are not being de-stocked any more; they are actually still being restocked. The extent to which the restocking is underway is unclear. Some investors think we are in the early innings, some think we are the late innings and some think we are in the middle, so that's up for debate. But the bottom line remains that more is getting shipped this year than last year, this month than last month. And that is helping to tighten supply and demand, and is also helping somewhat the pricing picture.
But the pricing picture is different across different sectors. In the more protected areas, less competitive markets, such as the parcel market - where you essentially have UPS and FedEx, and then the U.S. Postal Service - or in the rail industry - where you just have basically two rails in the East, two in the West and two in Canada - pricing is holding much firmer and has through the downturn. On the other end of the spectrum is the still highly fragmented truckload market, where we see price decreases continue, not as bad as they once were. Contract rates are still going down on a year-over-year basis. Spot market prices are picking up from unsustainable low levels, as volumes improve and there are not as many trucks out there to haul the freight. So we think pricing's going to continue to get better.
On the LTL side, that industry is also still plagued by overcapacity. While pricing is not getting worse, it's not getting better as fast as carriers would like. On the international side, we have seen international growth continue to outpace domestic growth from a transportation perspective, although international volumes also were hard hit by the downturn back in 2008-2009, and there were overcapacity issues on both the air and the ocean side. Currently, there are some manufactured capacity constraints in ocean shipping that have increased rates off the bottom. But over the long run, there is plenty of ocean shipping capacity to handle all of the containers and freight moving between continents. It's just mostly parked in the South Pacific. International air cargo capacity has been somewhat limited, too, which has allowed for good rates for the asset-based carriers but squeezed forwarders' margins, as they are unable to immediately pass along those cost increases to their customers.
Tickers included in this excerpt: BNI, DPW, FDX, JBHT, NSC, R, UPS, WMT
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