It ain’t pretty

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So far in 2009, our markets have continued to decline. We anticipate that our markets will decline through at least the second, and possibly the third, quarter. We estimate our markets for all of 2009 will decline by between 7% and 8%. As a result, we anticipate our revenues in 2009 will likely decline by 8% compared to 2008.” –Alexander Cutler, Eaton Corp.’s chairman and CEO, form the company’s 2008 earnings statement.

I think we all know it’s far from a pretty economic picture out there. The question one asks and tries to answer, though, is how trucking is faring. Not good, of course – for either truckers themselves or the OEMs that serve this market – but folks are finding a way to survive. It’s not a pretty process for sure – in fact it’s downright ugly in many respects – but then looks don’t matter when you’re trying to survive in a severe economic recession.

“Forecasting earnings in 2009 is particularly complicated in light of the uncertain global economic environment,” noted Alexander Cutler, chairman and CEO of Eaton Corp., an OEM serving not only the trucking industry but the aerospace and hydraulic markets as well as others.

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“Looking at the first quarter of 2009, our revenues will be impacted by plant shutdowns implemented by many of our hydraulics, truck, and automotive customers late in the fourth quarter of 2008, which in many cases are extending into the middle of the first quarter of 2009,” he said in the company’s fourth quarter 2008 earnings statement. “These shutdowns will lower revenues in the first quarter of 2009 compared to the fourth quarter of 2008. As a result of these shutdowns, combined with the impact of the $110 million of severance costs associated with the employee reductions we have taken in January, we anticipate earnings in the first quarter will be the weakest quarter by far of 2009.”

Eaton’s employee reductions in 2008 and 2009 total about 10% of its full-time workforce – something one hates to see. Even despite those cuts it’s going to be hard sailing, as Cutler noted Eaton’s first quarter 2009 operating earnings per share will likely be about breakeven – a number that dips into the red when a 15 cent per share charge is added in for the cost of integrating two companies it acquired last year into its structure. Still, it’s the long view that counts, and Eaton’s full-year 2009 outlook remains positive – earning between $3.80 to $4.80 per share after all integrating and severance charges are added in.

In terms of its trucking-related business, though, things are pretty grim. Eaton’s truck markets in the fourth quarter last year declined 10%, with U.S. markets down 5% and non-U.S. markets down 16%.. Operating profits were $41 million, a decline of 49 percent compared to the fourth quarter of 2007.

“Fourth quarter [2008] production of NAFTA [North American Free Trade Agreement] heavy-duty trucks totaled 46,000, about 10% lower than in the third quarter,” said Cutler. “We expect NAFTA heavy duty truck production in 2009 to be about 155,000 units, as the economic downturn and lack of financing limit the desire of truck buyers to purchase additional trucks in advance of the emissions law change on January 1, 2010. We also expect weakness in our non-U.S. markets, with an expected decline of about 10% in 2009. “

The reason for that decline is oh-so-simple: less freight on the highway. “Many in our industry hoped for an increase in freight volumes historically experienced from fall through Christmas; however, excess capacity and the continued economic downturn presented our industry with unprecedented negative freight trends throughout the fourth quarter [of 2008],” noted Coralville, IA-based truckload carrier Heartland Express in its earnings report.

“The first quarter [of 2009] is off to a dismal start,” the carrier continued. “Freight volumes have continued to decline from those experienced in the fourth quarter [of 2008]. With the current economic environment we believe freight volumes are not likely to improve in the near term. Given the recent trends and current economic conditions, the company is prepared to downsize its fleet through attrition if the demand for freight services worsens.”

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Heartland noted this decline in freight volumes comes on the heels of high fuel prices which were unprecedented in the second quarter and early third quarter of 2008. As fuel prices increased it became clear fuel surcharges originally instituted to shelter carriers from fuel spikes were not sufficient. That deadly combination of high fuel prices, a tightening economy, and tight credit drove many in the industry to bankruptcy.

[Russ Gerdin, founder and chairman of Heartland Express.]

“The precipitous decline in fuel beginning in the third quarter provided needed cost relief to many. [But] though fuel cost has recently declined, it remains high compared to past years,” Heartland noted. “This along with the harsh realities of declining freight volumes will make it an even tougher operating environment and more difficult for the weaker carriers to survive.”

Omaha, NE-based truckload carrier Werner Enterprises pointed out in its year-end earnings report that the overall freight market became increasingly challenging as each month progressed from mid-September to December 2008.

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“A very weak retail environment combined with extremely soft housing and manufacturing markets resulted in fewer available shipments. This was especially heightened in the truckload market and caused increased price competition for freight in the spot market as carriers competed for loads to keep their trucks productive,” the carrier said. “Freight rates were also lower in the spot market due to the increased competition for freight and because the decline in fuel prices resulted in lower freight rates from third party brokerage companies.”

The severe tightening of the credit and financial markets may create significant challenges for highly leveraged carriers that have financing issues or refinancing needs, Werner added. “Unless freight and financial market conditions improve quickly, the company believes there is a higher probability of increased carrier failures in 2009,” it reported.

Like I said, it ain’t pretty out there as economic conditions create big hurdles for any trucking provider to overcome, large or small – including the OEMs that serve the trucking market. However, an old saying in the world of athletics opines that sometimes you’ve got to be able to win ugly in sports. For trucking, this is indeed one of those times.

What's Trucks at Work?

Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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