The goal of this three-part series has been to assess trends and determine how major supply chain participants, including downstream, upstream and transportation  are currently experiencing and viewing 2010 business levels, and how the general post recessionary recovery is manifesting itself among industry supply chains.

In Supply Chain Matters Q2 Global Supply Chain Snapshot-Part One, we observed lower-tier downstream industries and select companies that supply various other upstream supply chains. Supply Chain Matters Q2 Global Supply Chain Snapshot- Part Two reviewed selective sampling of global based manufacturers who tend to be the engines of global supply chain activities. In this Part Three posting, we will focus on sampling of major transportation segments to ascertain both Q2 and first-half of 2010 trends.

As in our previous two commentaries, a selective snapshot across the major transportation segments that support all levels of supply chain activities continue to reflect a positive upswings in Q2 transportation activities, but cautionary signs also prevail regarding a potential slowdown in momentum for the remainder of the year.  Ocean transport continues in crisis due to reduced demand and excess existing and new capacity.  U.S. railroads are well on their way to banner years, but idle capacity remains in that segment. Air transportation continues to grow, fueled by activity in Asia and critical parts shortages in electronics sectors. Previous severe cutbacks in overhead and labor costs continue bearing fruit in impressive profitability increases among the major air and surface carriers. Major global carriers continue to handsomely benefit from increased production and commerce activities within emerging regions such as Asia, particularly China.

Concerns for tepid consumer driven markets, the overhang of excess or reduced capacity in certain segments, uncertainty on fuel costs, and uneasiness brought on by increased air and ocean disruption events continue to be evident.  Earnings and shipment volumes for DHL, FedEx and UPS all continued benefit from their international shipping services from the Far East to European and North American destinations.

A snapshot of key transportation segments indicates the following:

International Air and Surface Freight

The International Air Transport Association (IATA) noted that shipper confidence rose to very high levels in April, with the key semiconductor industry sector expanding air shipments at a healthy 50 percent increased rate.  The Association, however, cautions that the potential end of the business inventory cycle will put a brake on air freight growth in the second half of the year. While international air freight volumes were down 0.5% in April as a result of European airspace closures brought on by the Icelandic volcanic ash plume, April’s volume was over 20 percent higher than a year earlier.  Domestic air freight volumes also expanded, but at half the rate of international.

DHL

  • Q2 revenues up 15.6 percent (year-over-year); First-half revenues up 9.9 percent
  • Q2 consolidated net profit up 95.7 percent; First-half profits quadrupled
  • First-half consolidated revenues by region: Americas up 20 percent; Asia-Pacific up 39 percent; Europe up 5.6 percent
  • Air Express first-half revenues up 14.1 percent: Americas up 26.3 percent; Asia-Pacific up 33.9 percent; Europe and Middle East up 13.2 percent
  • Sharp year-on-year increases in daily shipment volumes for Time Definite International services
  • Global freight forwarding up 24.4 percent
  • Supply chain services up 5 percent
  • Increased guidance on earnings for 2010 year-end

FedEx

  • Fiscal Q4 revenues up 20 percent
  • Fiscal Q4 operating income of $696 million vs. $849 million loss a year earlier; Fiscal year operating income increased 168 percent ($2 billion vs. $747 million last fiscal year)
  • Operating margin increased to 7.4 percent, up from negative 10.8 percent year earlier
  • FedEx Express Segment: Revenues up 23 percent; Average daily volume of packages up 23 percent, led by exports from Asia
  • FedEx Ground Segment: Revenues up 15 percent; Average daily package volume grew 7 percent year-over-year, driven primarily by B2B markets and FedEx Home Delivery; Operating margin increased almost 5 points to 16.3 percent
  • FedEx Freight Segment: Revenues up 30 percent; Narrowed operating loss to $36 million; LTL average daily shipments increased 34 percent but yield declined 6 percent due to effects of discounted pricing
  • Expects continued improvement in both revenues and earnings for upcoming fiscal year

UPS

  • Q2 total revenue up 13 percent (year-over-year) coupled with 7 percent increase reported in Q1
  • Q2 operating profit up 57 percent, coupled with 39 percent reported in Q1
  • In the first-half, generated more than 42.5 billion in free cash flow from operations
  • Operating margin increased to 11.5 percent vs. 8.3 percent a year earlier
  • Average daily shipment volumes up 3.4 percent in the quarter
  • US Domestic Package: Revenues up 7 percent; Operating profit up 57 percent;  Daily volume up 1.2 percent; Revenue per piece improved 6 percent primarily through higher fuel surcharges and increases in base pricing
  • International Package: Revenues up 23 percent; Profits up 78 percent; Average daily volume up 20 percent; Export volume increased 15 percent with Asia up 40 percent
  • Supply Chain and Freight: Revues up 21 percent; Operating profit up slightly
  • Raised full-year guidance for earnings and profit growth

J.B Hunt Transport Services

  • Q2 revenues up 22 percent (year-over-year) coupled with 17 percent increase in Q1
  • Q2 profitability more than doubled
  • Operating margin increased to 9.7 percent from 6.1 percent a year earlier
  • Noted that demand for transportation services has increased fairly dramatically
  • Intermodal revenues up 24 percent on 19 percent volume increase
  • Decreased size of tractor fleet

U.S. Railroads

The Association of American Railroads noted that in the second quarter of 2010 carloads were up 13.8 percent over year earlier levels. Carloads in June 2010 were 10.6 percent higher than June 2009, but the weekly average of carloads in June was down almost 4 percent from weekly volumes experienced in April, indicating a slowdown in shipment activity during Q2. However, the weekly average of intermodal trailers and containers in June was the highest volume since October of 2008. For the six months of 2010, carloads are up 7.8 percent over the comparable period in 2009.

An overview of commodity categories that were shipped by rail in Q2 indicates trending that shipments are decreasing for coal, agricultural and food products, along with chemicals and petroleum. Shipments increased in the quarter for metallic ores and metals and motor vehicles.  Commodities with the largest carloads gains in June 2010 over June 2009 include steel and other primary metal products, motor vehicles, and metallic ores.

Burlington Northern Sante Fe LLC

Now a part of Berskshire Hathaway and no longer publically reports detailed quarterly activity

CSX

  • Q2 total revenues up 22 percent (year-over-year) coupled with 11 percent increase in Q1
  • Operating profit up 36 percent coupled with 24 percent increase noted in Q1
  • Volume gains in most freight markets
  • Noted 7 percent increase in coal shipments reversing 13 percent decline in Q1
  • 2010 outlook remains positive

Norfolk Southern Corp.

  • Q2 revenues up 31 percent (year-over-year)
  • Profits rose 59 percent on surging volume growth
  • Volume up 22 percent
  • Revenues from coal shipments increased 36 percent; General merchandise volumes up 31 percent; intermodal shipments up 23 percent

RailAmerica, Inc.

  • Q2 total revenue up 18 percent (year-over-year)
  • Operating income essentially the same as year ago
  • Carloads up 11 percent in the quarter coupled with 8.7 percent increase in Q1
  • First half carload shipments  trending higher for agricultural products, chemicals, metallic ores, food and forest products

Union Pacific Corporation

  • Q2 total revenues up 27 percent (year-over-year), coupled with 16 increase noted in Q1
  • Operating income up 71 percent, coupled with  47 percent increase noted in Q1
  • Business volumes up 18% compared to a year ago
  • Double-digit increased shipping activity; Automobiles up 105 percent; Intermodal up 35 percent; Industrial products up 30 percent; Chemicals up 19 percent; Energy up 17 percent; Agricultural up 13 percent

Ocean Shipping

The ocean shipping business continued in crisis in Q2 as shipping rates remained under intense erosion and lots of ships either remained idle in ports or decreased overall transit times to lower operating and breakeven costs.

The Baltic Dry Index, the well recognized measure of cost to transport bulk material by sea, demonstrated a steady growth increase in the first two months of Q2, peaking around the end of May.  The index then plunged dramatically during June, from a high of 4000 to 2400 by the end of June. That decline continued into July, closing the month at a reading of 1942.  A posting on CommodityOnline noted that the combination of lower iron ore imports into China, slower coal activity, easing port congestion and heavy fleet delivery schedule pushed dry freight rates lower, according to an analysis by Bank of America-Merrill Lynch. This decline was described as the longest consecutive decline since 1995. “While short-term fundamentals are poor, ships can barely break even at the current rates and we expect a high slippage rate for 2011.” The commentary further notes that the remainder of 2010 will be highly dependent on the growth in emerging markets or whether a “double-dip” slowdown occurs.

Traffic at China’s top ten container ports fell 1.9 percent in June to 9.92 million TEU’s from 10.11 million TEU’s reported in May, according to consultancy Alphaliner. Although June volume was the second highest on record, signs of weakness occurred as Guangzhou and Shanghai reported sharp declines.  This may also be a reflection of a shifting of shipping volume to China’s internal ports.

According to the Pacific Maritime Association, container volumes at U.S. West Coast ports increased 15 percent in the first six months of 2010.  Containerized imports increased 17 percent while exports were up 11 percent.  Warehouses located near California ports were jammed with inventories by the end of June awaiting transit to retailers for back-to-school and pre-holiday buying seasons.

The world’s largest freight and ocean container line, A.P. Moller Maersk AS reported its first ever financial loss in the company’s history, a somber testimony to the collapse of global trade in 2009, and carrier attempts to foster higher shipping rates in the wake of large excess capacity. The company has since announced that it expects to be profitable in 2010 based on improvements in the container business and that that the profit for 2010 will exceed the profit for 2008.

This concludes our Q2 snapshot series.  Overall, cautious optimism prevails across major levels of global supply chains as definite signs of first-half momentum slowdowns come to the surface. Continued growth in emerging regions and export markets remain the key to increased momentum for the second-half.  The American consumer remains cautious, allocating spending to basic or personal reward needs.

Momentum could change even more if any further economic setback occurs, and supply chain strategists would be wise to pay close attention to sudden demand or inventory changes occurring over the coming months.

Bob Ferrari