It's a bit like one of those bizarre psychological tests: pick a letter of the alphabet, and reveal something essential about your personality. That, in essence, was the question posed to an audience and panelists at the annual meeting of the National Industrial Transportation League in Anaheim, Calif.
Specifically, which of the following letters best represents your outlook for economic recovery: a "V," for a sharp decline and quick rise? A "W," for a double-dip recession? A "U," for a more gradual improvement? Or an "L," for a crash followed by flat performance into the foreseeable future?
The audience of shippers, carriers, third parties and "others," monitored by way of an electronic scoring system, was nervously optimistic. More than half described their business activity as "mildly improving" since Sept. 1, 2009, while 26 percent reported no change, 10 percent saw significant improvement, and 9 percent said things had gotten even worse.
The Wall Street crystal-ballers on the dais weren't about to contradict them. Jason H. Seidl, director of Dahlman Rose & Co., LLC (www.dahlmanrose.com), described the prospects for transportation in the coming year as "probably an elongating 'U.'" He cited an encouraging projection of 5.6 percent growth for next year, while warning that real improvement won't materialize unless jobs spring back, consumers start buying again, and oil prices stay within reasonable levels. Easier said than done.
John Barnes III, managing director of equity research with RBC Capital Markets (www.rbccm.com), seconded the "U" scenario, while noting that the 3.5-percent rise in gross domestic product seen in the third quarter of 2009 "was not reflected in freight activity." That could be a harbinger of a double-dip recession in the economy at large.
Thomas R. Wadewitz, an air-freight and surface-transport analyst with J.P. Morgan (www.jpmorgan.com), was slightly more optimistic. Morgan, he said, is expecting another 3.5-percent rise in GDP for next year, but "there's room for an upside surprise." The pickup, he added, could be "greater than people anticipated."
About that third-quarter boost in 2009: was it a sign of real underlying economic growth, or just a flurry of peak-season activity? The analysts weren't sure. On the other hand, Wadewitz suggested, one shouldn't rule out the significance of any growth at all. "We are actually getting something of a peak this year, unlike the last few years," he said.
Some of the good news could be the result of retailers having finally exhausted inventories. Not every economist believes that to be the case, but Barnes does. "Nearly every company we talked to [has] got inventory down to unsustainable levels," he said. Meaning that a sudden rise in consumer demand could leave retailers without the product to satisfy it.
In the transportation sector, who's suffering the most? That's an easy one: the audience voted for less-than-truckload, followed by truckload, as the sectors most likely to suffer downward pricing pressure in 2010. (Container-shipping lines ran a close third.) Wadewitz wondered how so many smaller trucking companies have managed to hang on in the maelstrom. "Bankruptcies haven't come through in the way we anticipated," he said.
The result has been a capacity glut in trucking that won't disappear anytime soon. "We were shocked at how many [trucking] companies want to talk about fleet growth regardless of pricing," said Barnes. "I believe that any tightness in capacity will be very, very temporary." The actual outcome, he added, will be highly dependent on the fate of LTL giant YRC Worldwide, which is struggling to survive in the wake of heavy layoffs and multiple terminal closures.
Railroads appear to be in a good position to capitalize on truckers' woes. Barnes sees intermodal continuing to capture market share, despite cratering truckload rates. Seidl said the railroads have invested huge amounts of money in improving their systems to handle double-stack trains, especially in the East. Add to that the rise of a "green" mentality among shippers and carriers, which greatly benefits fuel-efficient railroads, and you begin to understand why Warren Buffett's Berkshire Hathaway Inc. is gobbling up all of the shares of Burlington Northern Santa Fe Corp. (See my earlier post on the topic, http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/will-buffetts-all-in-bet-on-bnsf-pay-off/.) "He's buying an asset that's going to kick off an incredible amount of cash," said Barnes.
And the silver lining for shippers? Assuming that manufacturers, distributors and retailers can stay in business, they're unlikely to be paying more for transportation in the coming year. A 26-percent majority of the NIT League audience declared themselves "pessimistic" about carriers' ability to raise rates in 2010, followed by "neutral" and "too early to tell," both at 24 percent. And let's not ignore that 9 percent who declared that they "won't even try." The best that carriers can expect in the year to come, Wadewitz suggested, is for rate levels to remain flat. "After the jarring pricing trend of this year," he added, "that would be a bit of a win."
With such a scenario in mind, expect corporate purse strings to stay tightly knotted. A whopping 61 percent of audience members said they didn't anticipate any increase in capital expenditures in 2010. As Seidl put it: "What do industries do best in a downturn? They find new ways to tighten their belts."
(Note: As in recent years, the NIT League conference was held in conjunction with the annual meeting of the Intermodal Association of North America, and the fall get-together of the Transportation Intermediaries Association. More on the event to come.)
- Robert J. Bowman, SupplyChainBrain
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