Fleet Management

The First Lesson of Recession: Survive It

January 14, 2010

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The Great Recession has affected freight transportation in many ways but most of all it has provided a lesson in survival.

"We did what most businesses did in order to survive - things that in our 25-year history we've never had to do," said Pat Quinn, co-chairman of U.S. Xpress. Such as: pay freezes, pay cuts from five to 20 percent and laying off non-driving personnel
(Photo courtesy of Corcentric)
(Photo courtesy of Corcentric)
, as well as more familiar moves such as reducing fleet size and adding more owner-operators.

Quinn was offering the trucking perspective at a discussion this week of what the global economic crisis has taught the freight transportation business. The Washington, D.C., session was hosted by the Transportation Research Board.

What's the Damage?

Paul Bingham, managing director of World Trade and Transportation Markets for IHS Global Insight, put numbers to what is already well understood - that this has been the worst recession in 60 years. The 6 percent falloff in world gross domestic product pales against the 13 percent drop in global industrial production, he said. The result has been double digit declines across the board for freight flows: "Everybody that touches international freight has been hurt by the decline in demand."

The result has been a systemic change, Bingham said. "Things will look different coming out than they did going in." China, for example, which has lost export business but did not fall into recession, is going to emerge with even greater market share than it had before.

Recovery, which has been aided by government stimulus, will be slow and will feel even slower due to unemployment, Bingham said.

Global retail giant Walmart, which has the technology to closely track the consumer's pulse, sees even more emphasis than usual on price as well as shopping patterns driven by necessity. Walmart Vice President Kelly Abney said shoppers are arriving at the store at midnight on the day their paychecks are deposited and buy necessities only, in the economy size - indications that they are living close to the margin.

Interestingly, Abney said, sales of flat screen TVs are up. "People are taking 'stacations' - watching Disney movies at home instead of going to Disneyland," he said.

These changes have had a significant if by now familiar effect on Walmart's transportation: smaller, more frequent shipments to manage smaller inventories, an emphasis on freshness in groceries, and improved packaging. Walmart worked with one pillow vendor to increase its count from 3,200 to 5,300 pillows per trailer, a change that resulted in 1,800 fewer truckloads last year, Abney said.

Truckload will remain Walmart's core transportation option, he added. Intermodal is a small but growing option, particularly refrigerated rail for moving produce from West to East, and the company sees possibilities for coastal short-sea shipping.

Recession's Effect on Rail, Air

It was Deborah Butler, executive vice president of planning and chief information officer for Norfolk Southern Corp., who gave the meeting the phrase, The Great Recession. From Norfolk Southern's perspective it merits the description because of steep falls in auto production, housing and import volumes, all major drivers of rail freight, she said.

Business was down almost 19 percent last year, requiring the company to lay off personnel, put rail cars and locomotives into storage and reduce capital investment, she said. "The good news is that we made less money in 2009 than in 2008 but we did make money."

She said business is starting to bounce back, and that among the opportunities for Norfolk Southern is its Crescent Corridor Project, which envisions federal support for upgrading the rail network between New Orleans and New Jersey to attract freight from the highways.

FedEx's air freight business took a big hit last year - it dropped 18 percent - but recently has begun to come back, said Rakesh Shalia, Manager of International Marketing. "It will take three or four years to return to 2007 levels, but then will grow strongly," he said.

The Changing Freight Environment

Several major trends emerged during the crisis, Shalia said. Customers are rethinking their supply chain strategies, moving plants closer to home and away from Asia, and looking for more speed and flexibility in their inventory management. Also, FedEx is seeing the beginnings of new trade patterns that will fuel more air cargo growth: high-tech, high-value goods moving from places like Vietnam, increased global sourcing and selling, and more ecommerce.

His outlook: "We see the emergence of green shoots. Durable goods orders and housing are up. That doesn't mean the recession is over but it may be that the worst is behind us."

For global shipping, however, the recession has been a catastrophe and there is little sign of recovery yet, said Stephen Carmel, Senior Vice President of Maritime Services at Maersk Line. Eleven percent of the world's container capacity was laid up last fall, and it's going to get worse this year, Carmel said. "Estimates are that we will see a stemming of the hemorrhage in 2010, but we don't expect profits until 2012."

He predicted that the shipping industry will undergo major restructuring over the next decade, with consolidation moves and changes in ship management. "We're a long way from being out of the woods. The recession has damaged the industry irrevocably. I think it's a fair bet that the industry 10 years from now will look nothing like it does today."

U.S. Xpress' Quinn said the consumer, who drives purchasing and therefore freight, went under a rock in 2009 and only now is starting to peer out. October was disappointing but November and December exceeded expectations and things look good so far in January.

"So maybe things are looking up."

Last year was tough, though. Freight volume dropped 18 to 20 percent and it was very hard to make changes quickly enough to keep up, Quinn said.

One lesson from the recession is to be diversified, he said, referencing U.S. Xpress's brokerage and dedicated fleet service offerings. "I thank God every day that we were not solely a flatbed carrier." Flatbeds serve the manufacturing and housing sectors, down last year in the neighborhood of 40 percent or more.

The Year Ahead

Quinn foresees continued difficulty for the industry this year. Fuel prices are rising and surcharges recover only about 80 percent of that cost, due to empty miles and forced idling in cold weather. There were 370 trucking bankruptcies in the second period of 2009, and 405 in the third, he said.

The industry faces a major hurdle in February when carriers must write a check for their annual licensing under the International Registration Plan. For U.S. Xpress, that's a $12 million ticket. "Traditionally many carriers have gone to the bank and borrowed that money to buy their license plates," he said. "It's an open question as to whether banks will help (this year)."

He worries also about possible changes in the hours of service rule. The Federal Motor Carrier Safety Administration is reviewing the rule and could wind up cutting daily driving time. "This could have a huge impact on productivity," he said.

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