Transport: Putting The Pedal To The Metal
For the nation's beleaguered transportation sector, it's now full speed ahead. Demand for shipping by air and truck has never been greater: In the trucking sector alone, volume is expected to rise 5%, while rail shipments are expected to notch up 3.8%, and air freight follows along at more than 1%. Given this favorable backdrop, Paul Bingham, transportation analyst for Global Insight Inc. in Washington, expects gross operating profit for the transportation industry to climb 5.5% in 2005, to $208.5 billion, on top of the frothy 24% rebound in profits racked up in 2004. That has transportation executives feeling optimistic about 2005. "We think we're in a real sweet spot," says D. Scott Davis, chief financial officer for United Parcel Service Inc. (UPS )
For customers, though, it's another story. The trucking and rail companies that serve them are strapped for capacity, but instead of making necessary investments, they're content to bank their fattening profits. That's because execs in these industries can't forget the searing overcapacity and poor returns of recent years. Matthew K. Rose, CEO of Burlington Northern Santa Fe Corp. (BNI ), says that of the $1.9 billion Burlington earmarked for new capital spending last year, no more than $300 million went toward adding capacity.
The lack of spare rail cars is likely to worsen bottlenecks at major West Coast ports, where shippers complain there aren't enough rail cars to offload incoming shipments from Asia. But for now, rail execs are unrepentant. "I'm not going to put us in a place of having too much new capacity as long as our industry is underperforming," says Rose, who notes that many rail carriers still don't earn enough to finance further borrowing.
Trucking executives say they also have been unable to put new trucks on the road -- but not for lack of trying. Their problem is a chronic shortage of drivers. Many candidates get siphoned off by better-paying jobs in the homebuilding business. That has prompted trucking outfits, already pinched by higher insurance premiums, to push up salaries by as much as 10%. Schneider National Inc. in Green Bay, Wis., recently gave its 15,000 drivers average raises of $4,000, to as much as $45,000, and executives admit that driver salaries may have to top $60,000 in the next few years to attract the needed talent. "It's the worst imbalance I've seen in my 25 years," says Scott Arves, Schneider's president of transportation. He adds that his company is now turning away roughly 5% of customer orders because of the lack of drivers.
The net effect of this shipping imbalance is that many transportation companies are sharply jacking up prices. Arves, for one, predicts average truckload rates will rise as much as 6% to 8% in 2005. And whereas past price hikes often failed, industry executives say the latest rate boosts are sticking. Last year was "probably the best in the past 10 to 15 years in our ability to retain price increases," says William D. Zollars, chief executive of Yellow Roadway Corp. (YELL )
Shippers acknowledge that the current supply shortage is likely to worsen before it gets better. "In the past two years, the balance of power has shifted," admits Susan Alt, president of Volvo Logistics North America Inc. While some shippers say they're forming their own trucking lines, Alt has taken a more creative tack: She has found modest success at getting private fleets -- say, trucks delivering shipments for the major grocery chains -- to carry her shipments on their trips home, when they'd otherwise return empty. Given the current capacity crunch, shippers will do whatever it takes to get their goods on the road.
By Dean Foust, with Michael Eidam, in Atlanta