Wednesday, July 28, 2010

Healthy Logistics Carriers Can Thank Constrained Shippers

Most railroads and some truckers are doing all right.  Kansas City Southern just posted a massive jump in net income.  Norfolk Southern reported a significant percentage jump in net income that far exceeded its topline growth rate.  Even the German railroad Deutsche Bahn posted healthy income gains, indicating that whatever is driving this industry to renewed health isn't confined to the U.S.  Not to be ignored, 3PL provider C.H. Robinson benefited from healthier air forwarding revenue and trucker Old Dominion doubled its net income thanks to enormous tonnage growth

Such impressive all-around logistics success ought to herald a global economic rebound.  Results like this make sector-rotation investors submit "buy" orders like mad to get in before more bulls do.  Before we get all excited about railroads and other carriers, let's consider the effects of constrained capacity in another link in the global supply chain - shippers.  Ocean-going carriers trimmed a lot of capacity in the first leg of this Great Recession.  Container ships joined ghost fleets that sat idle near Singapore while shippers waited for rates to turn up again.  Now shippers are faced with a mad scramble to add boats, containers, and crews to meet order backlogs. 

This leaves carriers in land-based logistics modes - trucking and rail - with a temporary boost to their pricing power.  They now have a short window of opportunity to set rates and accept higher-paying customers while ocean cargo carriers add back lost capacity.  The smart carriers are raising prices now while retailers are frustrated.  There is no telling how long these new salad days will last. 

Full disclosure:  No positions in any companies mentioned in this post.