Weak ’08 demand pressuring freight transportation: Agency

NEW YORK — The past year has proved challenging for the freight transportation industry in the U.S., and things don’t look to get any easier in 2008 — at least through the first half — according to Fitch Ratings, a global rating agency providing credit markets with independent credit opinions.

The hoped-for up tick in demand that many expected in the second half of this year never materialized, says the agency, and demand in the peak season south of the border has been about as weak as the lackluster period last year.

Looking toward 2008, continued weakness in housing, potential tightness in the credit markets and high energy prices are expected to restrain economic growth in the United States.

This slow growth rate will continue to weigh on the financial performance of both trucking and rail, although the latter sector is expected to perform better overall as relatively tighter rail capacity and less exposure to cyclical shipments will continue to support pricing.

The unfavorable combination of extra capacity and
cooling demand has put immense pressure on trucking rates.

Recently, the weakening of the U.S. dollar has also spurred an increase in exported commodities, which also has helped to support rail volumes. On the other hand, the trucking industry, which is more closely tied to retail and manufacturing demand, has experienced a more significant decline in volume as the economy has cooled.

The trucking industry’s problems have not only been the result of waning demand, however. It also suffered in 2007 from a rapid increase in capacity that was partly the result of the U.S. EPA’s change in emission regulations for heavy-duty truck engines that took effect in January.

This growth in tractors led to an increase in trucking capacity just as demand was cooling. This unfavorable combination has had the predictable result on industry pricing, forcing truckers to reduce unit rates or see volumes decline materially.

Going forward, the challenges remain, says Fitch. Pricing in the truck sector will remain competitive, although the steep decline in truck deliveries in 2007 combined with normal equipment retirements should help to improve the capacity situation somewhat.

Fitch also expects capital spending in the trucking industry to decline in 2008, perhaps significantly, from 2007 levels, which should further help to alleviate some of the industry’s overcapacity.

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