Crunch time

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30 Sep 2008

The shock wave that hit financial markets this month reverberated across the transportation world, crumbling the optimism in many quarters that the shipping business was taking halting steps toward recovery. Instead of a hoped-for seasonal upturn, freight demand across the U.S. is taking a sharp turn downward, industry experts say, and the crisis in credit and capital markets is adding to the strains at carriers and their shipper customers.
One respected economist, Brian Bethune of the Global Insight research firm, said the U.S. is heading into recession with outright declines in the economy in the fourth quarter this year and the first quarter of 2009. And freight industry officials say the double impact of diminished demand and contracting credit threatens to choke off investment in transportation equipment while carriers and shippers wrestle over sliding prices and extended terms for payment.
The deteriorating credit market, according to experts, is triggering a battle for cash that for some carriers could become a battle for survival.
“Cash is really king now,” said Harold Friedman, a senior vice president at Data2Logistics, a New Jersey-based freight payment firm. “Your ability to get access to funds is going to be key to your ability to survive.”
The growing pain for carriers is hitting the transportation equipment market, where truck purchasing has come to a braking halt. FTR Associates, a Tennessee-based research and consulting firm that studies the freight transportation equipment market, is scaling back its forecast for truck purchases by more than 20 percent, said FTR President Eric Starks.
“From an equipment perspective, I don’t know that it can get much worse,” he said.
The implosion in the financial world that rocked Wall Street didn’t necessarily hit the freight transportation business directly. Transportation was not a large part of the portfolios of Merrill Lynch, which was bought up by Bank of America, and Lehman Brothers, which fell into Chapter 11 bankruptcy protection. Insurance giant AIG, bailed out by the federal government, has greater exposure as parent of International Lease Finance Corp., the world’s largest single owner of aircraft.
But the near-collapse of three major financial institutions also was a dramatic sign of the tighter market that transportation carriers, long seen as solid credit risks because of their predictable markets and valuable assets, face in getting backing for cash-intensive businesses.
“If you’re in the market for new capital, I don’t know where you are going to get it,” said Steve Neiman, a principal in the Tioga Group, a freight management consulting firm. “If you’re not generating a lot of cash, it’s going to be hard to get financing. Even railcar financing is going to be impacted.”
Neiman said a growing number of shippers, weighed down by inventory, are pressing the cash issue by seeking to stretch out payments. Payment schedules that had been set at 30 days are being stretched to 45 days and longer, he said, leaving carriers, particularly truckers, with receivables stacking up.
“People are slowing down payments where they can and days outstanding for receivables are going up,” Neiman said. “Carriers are not collecting payments at the same rate they had been. And if you are in a cash-intensive business and you are seeing your receivables extended, then you’re going to have financial trouble.”
Jon A. Langenfeld, transportation analyst at Robert W. Baird & Co., an investment firm, said transportation companies have already been living under tougher credit markets, with conditions deteriorating for the last six to 12 months for all but the most creditworthy borrowers.
“The availability of funding across all sectors has come under assault, given the lending practices that the financial institutions have been partaking in,” he said. “Well capitalized, strong cash-flow companies are not going to be affected as much because their need for capital is not as great.”
But logistics industry observers say companies that are under financial pressure, whether because of weaker demand, lower pricing or extended payments, will have to find more creative ways to make it through a cash shortage.
“The credit crunch makes liquidity and access to cash even more important to corporate survival for large and small firms that cannot simply pass costs furthers down the supply chain towards consumers,” said Anthony Ross, a professor at Michigan State University’s Eli Broad College of Business.
“If I were a shipper or carrier, I’d be treading very cautiously, because I don’t think we know what’s going to happen next,” said logistics industry veteran Clifford F. Lynch, a principal at CTSI, a third-party logistics provider.
“I would think that most transportation companies are concerned, particularly those that might be in tough financial shape, because if they’re looking for financial bailouts or private equity or any source, those sources are going to be looking long and hard at where they’ll put their money — if they’re putting it anywhere,” Lynch said. “If I were a carrier that was in marginal financial condition, I’d be concerned.”
The turmoil in financial markets came as the shipping economy was showing signs of stability and perhaps even some harbingers of recovery, even if carriers and shippers were looking at a flat peak shipping season. The 3.3 percent increase in gross domestic product in the second quarter was followed by small increases in the American Trucking Associations monthly truck tonnage index.
But several of the country’s largest less-than-truckload carriers reported soft or declining freight volume as the third quarter progressed. ABF Freight System reported a 6 percent decline in volume in August and even companies such as Con-way Freight that have reported volume gains say pricing has grown more competitive.
The closely watched Cass Freight Index reported by the Cass Information Systems freight payment company fell 11.3 percent in August compared to the same month a year ago, although even that sharp dive in shipments was something of a mixed signal on the shipping economy.
The double-digit decline was actually the smallest year-over-year drop in shipments since May and the index in August edged up 2.8 percent from July’s shipping activity.
At the same time, the index on freight spending declined 3 percent from July to August, suggesting shippers saw some relief from the soaring transportation costs driven up this year by rising oil prices.
The August decline followed drops of 14.9 percent in July and 12.3 percent in June.
Still, although the month-to-month increase was the strongest for the shipment index this year, it did little to counter suggestions from carriers and shippers that they were girding for a weak fall peak shipping season. At 1.127, the shipment index actually was below the mark the index hit in January, traditionally the slowest shipping month of the year.
Large truckload carriers have responded by scaling back capacity. The Stephens investment bank estimated at the start of September that truckload capacity had declined 6 percent from last year, and industry experts expect capacity to grow tighter as smaller companies leave the market and large carriers rein in purchasing.
FTR had been forecasting 211,000 new trucks would enter the market this year and 244,000 trucks would come in next year, including 25,000 “pre-buys” in advance of tougher engine standards. Now the company expects something closer to 190,000 new trucks in 2009.
That is well below the 225,000 to 250,000 trucks needed to replace older vehicles, Starks said, and far from the 300,000 trucks FTR would consider a relatively good year for truck sales.
“We’re not expecting things to come back until the second half of 2009 at the earliest. We see below-trend growth next year, and nothing more (for growth) until 2010,” Starks said.
“Everyone was hoping the economic downturn was isolated in specific markets, that it was just a housing or automotive issue. But you can’t really tell yourself that anymore. The worst case is that it pushes us into a recession. But more immediately, is it going to keep people from getting the liquidity they need?
“At least some credit has been available to the medium-sized and large trucking companies. For the small business guys, the credit is not there. Now the question is, will it be there for the large companies? The biggest concern for industry, for the companies that ship the freight, is whether we can look forward to a return to some prosperous growth next year or is it more realistic to look at 2010 or even 2011,” he said.
In the daily market for capacity, the weaker demand still is keeping a lid on the ability of truckers to get cash from higher prices.
“Shippers are in the catbird seat as far as rates today and for many carriers that could add pain to an already painful situation. It doesn’t matter whether it’s parcel or LTL, across the board rates are stable to down,” Friedman said.
But he warns that in a year of mounting bankruptcies, low rates could accelerate the demise of many smaller carriers and leave an enormous capacity shortage when demand returns.
“The smartest shippers need to realize they can’t drive carriers out of business,” Friedman said. “We’re going through unprecedented times, and shippers and carriers need to recognize that. This financial crisis is going to plague carriers and shippers for six months to maybe 18 months. It’s going to be harder for carriers to raise cash, harder for them to renew loans. What you’re looking at is banks are going to put carriers under much greater review and be much more concerned about covenants in loans and what carriers are going to do to get a return on their money.
The broader market for transportation infrastructure also faces an investment squeeze as credit gets tighter.
Peter Ruane, president and chief executive of the American Road and Transportation Builders Association, said a tougher credit market will push investment firms to take a harder look at what supporters of private investment in transportation call public-private partnerships.
“I think the uncertainty this creates might slow down some public-private efforts,” he told the group’s annual conference on “Public-Private Ventures in Transportation” in Washington.
Coincidentally, one of the sponsors of the meeting was Lehman Brothers, and officials from the company’s transportation and infrastructure group said investment will go on despite the company’s filing for Chapter 11 bankruptcy protection.
“In general, deals are still getting done,” said Edward Fanter, a senior vice president at Lehman. “It’s just not as easy as it was last year. It’s more expensive, it takes longer to get done.
“Risk has been re-priced; things are more normal,” Fanter said.
But normal for many shippers and carriers doesn’t look very bright, particularly those most exposed to the troubled housing and automotive sectors.
“The number of unsold houses and repossessions is just huge,” said Wayne Johnson, director of logistics for American Gypsum, the fifth-largest producer of wallboard and a key shipper of goods for home construction. “It’s going to be bad throughout 2009.”
For the fiscal year ending March 31, American Gypsum’s wallboard revenue fell 33 percent from the 12 months before.
The company ships product principally by truck, and truckload rates remain soft due to overcapacity. But American Gypsum also uses rail for destinations outside regional distribution areas, and center-beam railcars are “parked all over the country” because of weak demand, Johnson said. “Even the railroads might consider dropping their rates,” he said.
CTSI’s Lynch said it will take time, however, for the impact of the tight credit markets to be felt at the purchasing level. “For the average shipper, for the average transportation manager, I don’t think this has sunk in,” he said. “I mean, we had to get to $4 a gallon for diesel before the high cost of fuel really sank in.” 
This story was reported by Traffic World associate editors William Hoffman, Ari Natter and John Gallagher and editor-in-chief Paul Page.

Source: Shipping Digest