Transportation

U.S. Transportation and Logistics: Future remains uncertain

The ripple effect of the financial crisis and economic downturn was felt in almost every business around the globe, and the transportation and logistics (T&L) industry has been no exception. Although the crisis has started abating and signs of recovery are visible in better-than-expected economic data, the T&L industry continues to suffer from lower demand, falling rates, and increasing uncertainty.

The global T&L sector includes aviation, shipping, rail, passenger services, mailing services, and warehousing businesses. According to the Association of American Railroads (AAR), carloads have increased while intermodal traffic was down 12.6% compared to the same week in 2008. Loadings of coal hopper cars are also increasing. The container shipping sector is still recovering from the steep fall in freight rates for dry-bulk shipping by as much as 90% in the early part of this year. Even the trucking sector did not escape unharmed. Recently, the U.S. airline industry has shown signs of recovery with revenue passenger miles increasing.

The lackluster mood was captured in a recent survey by PricewaterhouseCoopers. The report says that CEOs are not expecting immediate revival, and as such, are not optimistic about the performance in the near term. However, they are more hopeful about the medium-term outlook. In fact, 75% of respondents stated they were “very confident” about the growth prospects over the next three years, because the industry as a whole should pick up.

Medium-term growth for the sector, however, would depend greatly on how well companies tackle the current crisis. The economic downturn could pose some additional risks such as delayed payments (as a sizeable number of customers continue to experience financial difficulties). This may hamper high-quality customer service, which is a key value proposition for most T&L companies. Also, the global T&L sector has become increasingly complex and multijurisdictional as current market conditions lead to greater concentration among fewer global players. The sector as a whole is affected by the pressures from fuel price volatility and the emphasis on reducing CO² emissions. In the U.S., the transportation sector alone releases 32% of all carbon dioxide emissions.

On the whole, the T&L companies are facing a tough time. They must also decide whether to focus on short-term objectives to survive in difficult economic circumstances, or concentrate on long-term objectives, such as dealing with global risks due to climate change or the impact of demographic shifts on the talent pool. Additionally, the deal activity in the sector has slowed dramatically, with both the number and value of deals worth $50 million or more announced during the first half of 2009 lagging behind the prior two years due to lack of credit and liquidity. Whatever the situation may be, companies will need to find balance to prosper, going forward.