Transportation Outlook 2009

By Julia Chen, Kansas City SmartPort

The transportation industry experienced a slowdown in 2008. The nation’s economy is struggling to overcome multiple shocks, including a downturn in housing markets and turmoil in financial markets. Meanwhile, transportation companies are dealing with higher costs related to the record high fuel prices, capacity constraints and increasing labor costs.

The weak domestic economy and sharply rising fuel prices are having a dramatic effect on the logistics and distribution industries, and it could signal a shift in the way shippers move cargo. Diesel prices in the U.S. rose to $4.72 as of 7/21/2008, according to Energy Information Administration. That marks a rise of $1.83 per gallon compared to a year ago. There’s no question the trucking industry is feeling the crunch.  In the first quarter of 2008, 935 trucking companies went out of business in the U.S., the most in any single quarter since the third quarter of 2001 – the last national recession – according to the American Trucking Association. Some of the largest carriers introduced competitive strategies to keep current market share. For instance, Yellow Freight Corporation has significantly broadened its expedited service offerings, including next-day and two-day delivery, through a wider region.  As fuel prices have significantly increased shipping costs, trucking companies respond to the situation by adopting fuel-saving operations and eliminating less profitable freight lanes.

Railroads also have experienced declining freight volumes, despite high fuel prices that have prompted freight to shift from trucks to rail due to its relative cost effectiveness over long-haul lanes. Still, the major railroads have achieved favorable pricing gains. For the first quarter ending March 31, 2008, railroads reported an average 9% gain in revenue, while volumes were down 0.6%. As rail mode can move one ton of freight on one gallon of fuel and reduce highway congestion, it has been positioned as more fuel efficient and environmentally friendly. Intermodal traffic, which relies heavily on the more fuel efficient rail to deliver commodities, is expected to be more popular, responding to the soaring fuel price and high transportation cost.  Intermodal is an increasing trend that will continue to grow in the upcoming years.

In the air cargo industry, volume slightly increased 0.17% for the first quarter of 2008. With domestic freight accounting for 37% of total air cargo revenue, the international segment of the air cargo industry strengthened in 2007: ton-miles rose 3.6% to 24.7 billion. Traffic between the US and Europe comprised 25% of the total international business, 2% higher than the same period in 2006. Air cargo freight business will benefit from growing international business, but will also be faced with challenges caused by imbalanced traffic grow in different regions and the rising cost of jet fuel.

Ocean freight volume was largely propelled by the fast growth of international trade between the US and Asia.  The Asian market has been an increasingly popular source for manufactured goods as companies seek cost effective strategies. Shipping costs were also increased as oil prices spiked. Shippers’ ocean rates have been steady for the last three years; but in 2008 U.S. importers started to accept a floating fuel surcharge, with a base rate increase between $200-400 a container.  Rising shipping cost puts pressure on different parties on supply chain and will finally be passed down to consumers.

The weak dollar will keep propelling export business. The significant decline in the value of the dollar allows U.S. manufacturers to tap into the economic strength of the rest of the world to cushion our downturn. Although U.S. exports are doing well, increasing quantities of goods being manufactured in Asia are shipped to North America. The U.S. Census Bureau released that in May 2008 exports were $157.5 billion, and imports were $217.3 billion. Both imports and exports have increase about 12% from the same period last year.  The growth in U.S. exports helps the balance of trade.

Integrating the global supply chain with a common portal for visibility will continue to be important both for increasing efficiency and strengthening security as international trade increases. Transportation companies/organizations are developing technology offering real time visibility and efficiency to the supply chain. One instance is the Trade Data Exchange (TDE), an Intelligent Transportation System Integration Project led by Kansas City SmartPort that builds technology enabled platforms for logistics companies to share data, thus providing consistency, efficiency and value for its users.

In conclusion, 2009 will likely be a challenging year for both the national economy and the transportation industry, but it will be a booming year of international business in 2009. All segments of the transportation industry will be affected by fuel prices and as a result there will be a continued shift in transportation mode from truck to rail. The transportation industry will see the international intermodal container shipments among the fastest-growing freight categories, boosting both railroad and trucking volumes. The air cargo industry will face challenges of traffic-flow imbalance and a customer shift due to the weakness of the US dollar and high cost of jet fuel. Ocean freight transportation will have a prosperous year with the increase of volume which will most likely increase the cost of shipping goods. The development of an integrated technology system will fundamentally change the logistics industry, not only to offer real time visibility and efficiency to the supply chain, but also to propel a standardized process within industry. Despite the slow down of the economy and rising fuel prices, the growth in international business will help propel the transportation and logistics industry in 2009.