As Volumes Pick Up, Shippers See Economy Gaining Traction
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By RICK BROOKS and DANIEL MACHALABA
Staff Reporters of THE WALL STREET JOURNAL
For the first time since the economy began slowing three years ago, many of the country's largest transportation companies are seeing signs of a broad-based recovery that appears to have staying power.
The turnaround is coming in sectors that handle the vast bulk of goods transported domestically: railroads, trucking and package delivery. Their performance is considered a leading indicator of future economic growth, because many of the items they carry are used as raw materials in industrial production and for replenishing inventories. The companies, which closely monitor their biggest customers' own future expectations, say they are seeing increased demand across a broad swath of industries, from manufacturing and chemicals to retailing and lumber.
United Parcel Service Inc., which carries roughly 5% of U.S. economic output at any given time, Tuesday said it expects domestic shipment volume to accelerate during the next few months, including the company's strongest growth in the important Christmas season since 1999. Burlington Northern Santa Fe Corp., the second-biggest railroad in North America, posted its third quarterly revenue increase in a row and projected an even-larger percentage gain in the fourth quarter compared with a year earlier. The company is adding locomotives to handle increased volumes.
Yellow Corp., a leading trucking company expected to report earnings later this week, said it has seen freight demand from manufacturing customers rising since July. This was followed by an increase in retail shipments in August and last month.
"We have seen the pickup in shipments for long enough that we believe the recovery is under way," said Bill Zollars, Yellow's chairman, president and chief executive.
Yellow is taking steps that were all but unthinkable during the downturn: hiring more workers. Other trucking companies also are boosting pay to attract more drivers.
The transportation companies' experience appears to be supported by broader economic data. The Federal Reserve says manufacturing production has risen in four of the last five months and is up 1.2% since its April low. However, it is still unclear how durable the expansion will be. Production rose for eight straight months beginning in January of 2002, for instance, then faltered.
Some parts of the economy, such as technology, don't yet appear to be generating significantly higher levels of shipping volume. And some freight carriers have their doubts about a widespread recovery. Robert Young III, president and CEO of Arkansas Best Corp., a trucking company in Fort Smith, Ark., said earlier this week that his company is "encouraged" by positive signs, but added: "We have yet to see much change in terms of freight moving in trucks across the country."
But the increasingly upbeat outlook from some of the economy's biggest workhorses is a sign that a recovery is taking hold at a growing number of businesses that postponed or canceled shipments of raw materials and finished goods during the economic slowdown and the war in Iraq. The rebound is leading to greater confidence among freight carriers that they will be able to gain pricing muscle and even expand their delivery networks during the next several months.
"It's been ... three long years since I've had anything upbeat to say about the economy," Scott Davis, UPS's chief financial officer, told analysts in a conference call. But now the Atlanta-based company is starting to ride a wave of "pervasive strengthening pretty much throughout our customer base," he added.
Transportation companies say the recovery appears to be gaining the most steam in the manufacturing sector, which helped to fuel growth of about 10% in UPS's domestic next-day air shipments in the third quarter. UPS ships parts and other items needed to keep factories running. UPS also said its third-quarter growth in export shipments from the U.S. was the largest in three years. International delivery trends are improving around the world.
Burlington Northern said delivery volume also is growing for industrial and consumer products, while agricultural shipments are strong for the first time in years, reflecting demand for wheat, corn and ethanol, which is used as a gasoline additive. The railroad also is seeing strong increases in lumber shipments, a bullish sign for future house construction.
UPS had been reluctant to suggest the economy was improving ever since the company goofed by predicting in early 2001 that the downturn would be just an "economic speed bump." In the third quarter, its overall delivery volume rose 3.3% from a year earlier to 13.3 million packages a day. That includes a 3.2% increase in the U.S. to 12 million a day, exceeding UPS's own forecast made in late July of 2% to 3% growth. In the current quarter, UPS predicts its domestic shipments will climb another 3% to 4%.
As freight volumes rise, many carriers are expanding capacity. Burlington Northern, which operates a rail network located mostly in the two-thirds of the U.S. west of the Mississippi River, plans to accelerate delivery of 65 new locomotives into the current quarter from early next year, largely to meet increased freight demand. The Fort Worth, Texas, company will acquire 350 more locomotives next year, an unusually large number, in response to higher volumes, to take advantage of federal investment incentives that remain in effect through 2004 and to get ahead of more-stringent pollution-emission standards in 2005.
Yellow, based in Overland Park, Kan., expects to boost its number of drivers and dockworkers by about 15% as it heads into the year-end shipping season, partly because it needs extra workers to handle the volume pickup triggered by the improving economy. The carrier hasn't had to expand the size of its trucking fleet or terminals because it is operating at only 90% of its capacity, despite recent growth in demand.
Demand for space on trucks is outstripping the supply at Schneider National Inc. by as much as 10%, the highest level since 1998, said Scott Arves, the closely held firm's president of transportation. But as the economy picks up speed, it is getting harder for some carriers to find enough drivers. Faced with the possibility of a worsening shortage, a number of trucking companies already have boosted driver pay, including J.B. Hunt Transport Services Inc., Lowell, Ark. Schneider will address pay issues early next year, Mr. Arves said.
Stronger shipping activity also is giving transporters pricing power. Truckload carriers, which carry full loads from individual customers, for example, are boosting rates by about 4% this year, said Donald Broughton, an analyst at A.G. Edwards & Sons Inc. While some analysts think UPS is offering more discounts to major ground-delivery customers than it has in the past to win shipment volume from rival FedEx Corp., it is generating enough new business to offset the price breaks.
Improving results at many carriers come despite higher costs for fuel, which is a big chunk of transportation companies' operating expenses. Burlington Northern Santa Fe said fuel costs rose 21% to $260 million in the third quarter from a year earlier. The company's net income grew to $203 million, or 55 cents a share, from $192 million, or 51 cents a share. Revenue increased 3.8% to $2.40 billion from $2.31 billion.
UPS's net income climbed 28% to $739 million, or 65 cents a share, from $578 million, or 51 cents a share, a year earlier. The latest quarter included a boost of three cents a share from a reduction in income taxes and the sale of an aviation-technology unit. Excluding the one-time items, this year's third-quarter earnings were at the top end of the company's own target range of 58 cents to 62 cents.
UPS's revenue rose 7.2% to $8.31 billion from $7.75 billion, the largest increase since the third quarter of 2000. For the current quarter, UPS said it expects profit of 65 cents to 70 cents a share. In last year's fourth quarter, UPS had net income of $1.5 billion, or $1.32 a share, including a big tax credit and other items. Excluding these, earnings in last year's quarter were 59 cents a share. |
