United States Freight Transport Report Q2 2010

In early January 2010, the US’s largest trucking group, YRC Worldwide (YRC) was thought to have narrowly avoided bankruptcy after reaching an agreement with its creditors over a debt-for equity exchange which relieved the company on its upcoming debt repayments. The company’s travails during the global economic downturn have epitomised those of the US trucking industry as a whole, but there are signs of slow improvement. According to Bloomberg, holders owning 70% of the company’s 8.5% bonds, which were due to mature in April 2010, agreed to participate in the exchange by the agreed December 31 deadline. YRC had been forced to extend the deadline four times after failing to reach the threshold for the number of bondholders required to sign up to the exchange. There had been concerns that some investors, holding credit-default swaps (CDS), were holding out for a payout in the event of the company filing for bankruptcy. The agreement will reportedly remove some US$470mn of debt from the trucker’s balance sheet, allowing the company, according to CEO Bill Zollars, ‘to move forward from a more solid financial foundation’. The debt-for-equity proposal was the culmination of several months of tense negotiations between YRC and its lenders as the trucking company struggled to meet its debt commitments after accumulating losses of more than US$2bn over the past two years. The company entered the recession with heavy debt, and a severe downturn in US freight demand in 2009, has seen the company’s financial position rapidly deteriorate further over recent months. The company’s revenues fell by almost 50% year-on-year (y-o-y) between September 2008 and September 2009 as a slump in consumer spending, coupled with weak manufacturing and industrial output, curbed demand for shipments of goods.

Since our last report we have become marginally more positive about the short-term outlook for the US. We now estimate that GDP fell by 2.5% in 2009 (from -2.7% previously) and we have lifted the forecast for 2010 to 2.4% growth (up from 1.9% previously). Somewhat offsetting that, however, we have cut our projection for 2011 to 1.8% growth (down from 2.3% previously). As a result for the five-year forecast period of 2010-2014 we now forecast annual GDP growth marginally up to an average of 2.2% (was 2.1% previously). While on the low side, this will still be above the 1.1% average achieved in 2005-2009 (which of course reflected the impact of the 2009 fall). While better, the operating environment for the freight transport industry will remain tough. Traditionally, in developed countries like the US, freight traffic, measured in tonnes-km, tends to grow a little slower than GDP. Overall, we see this pattern continuing during the forecast period and are predicting that total freight traffic growth will average 1.8% per annum, around 0.4pp slower than the expansion of the economy as a whole. According to our latest estimates, transport and communications GDP fell by 1.8% in 2009, 0.7pps less sharply than overall GDP, which we estimate to have slumped by 2.5%. For the 2010-2014 forecast period we expect the transport and communications sector to outpace the economy as a whole in value terms, although by a narrow margin (note that this measure includes communications, as well as freight businesses). It will achieve average annual growth of 2.4%, versus 2.2% for overall GDP. The total value of transport and communications GDP will rise to US$1.174trn in nominal terms by 2013, representing 6.6% of US GDP.

Road haulage freight traffic grew quite strongly in 2002, and maintained a slightly slower but steady expansion thereafter until 2008. Prior to the economic slowdown, the constraints have been to do with road congestion and a lack of haulage capacity, but although environmental standards will become more demanding, we do not envisage federal action to impose major new road taxes. We expect truck cargo traffic to grow at a 1.6% annual average to 2014. In some ways, the most dramatic performance story concerns airfreight. Air travel in general was hit very hard by the 9/11 terrorist attacks and many of the big airliners have not fully shaken off major financial difficulties. In 2001, airfreight traffic fell by a dramatic 16.0%. Domestic airfreight recovered in 2002 and subsequent years but contracted in 2005. Although the financial health of the main companies was fragile, profitability improved up until 2007: in 2008 a new round of losses materialised and intensified in 2009. Across the forecast period, airfreight should grow at an annual average of 2.3%, broadly on a par with GDP expansion. We forecast average growth in rail freight traffic of 2.4%, ahead of truck freight, reflecting a small modal shift away from excessive reliance on the roads. Maritime freight will expand by 1.3% a year. Finally, pipeline throughput will grow at an annual average of 1.1%. These numbers show a relatively gradual emergence from the impact of the current global recession.