One of the more confusing market moves in recent weeks has been the tremendous surge in transportation, or as we call them trannies, stocks...
... even as underlying fundamentals have continued to steadily deteriorate.
On one hand, none other than Railway Age had an article titled "Down, down goes the freight traffic" in which it said that "freight traffic still shows no signs of growth in the week ending April 16, 2016, as carloads and intermodal units were both down nearly 13% and 7.5%, respectively, the Association of American Railroads (AAR) reported on April 20, 2016.... For the first 15 weeks of 2016, U.S. railroads reported cumulative volume of 3,613,417 carloads, down 14.1% from the same point last year; and 3,848,344 intermodal units, up 0.2% from last year. Total combined U.S. traffic for the first 15 weeks of 2016 was 7,461,761 carloads and intermodal units, a decrease of 7.3% compared to last year."
Words, however, hardly do justice to the unprecedented, coal-driven collapse in total rail freight carloads, shown below:
But maybe if one excludes rail, things are better?
Sadly no. In a note released on Friday by RBC looking at the broader airfreight and surface transportation sector, and subtitled "These headcount numbers aren't encouraging", the Canadian bank has a very depressing assessment: "We are a week into the 1Q/16 earnings announcements for our Airfreight & Surface Transportation coverage universe and so far, the message is pretty sobering. It’s clear that no “green shoots” developed during the quarter from a freight or pricing standpoint, and instead the companies that were successful at cutting costs and realizing productivity gains are the ones being rewarded."
Which is the good news. It is also the bad news because RBC then goes on to note that the future is anything but bright judging by the dramatic headcounts:
If a company is cutting headcount, it probably means the freight environment isn’t robust. We’ve seen three data points in the last few days that provide a clearer look into the headcount reductions being experienced across the freight transportation sector.
Here is the rest of the all too honest note:
Let’s be honest about what the cost reductions are telling us, especially the cuts to headcount and therefore, wage and benefit costs. If a company is cutting headcount, it probably means the freight environment isn’t robust. We’ve seen three data points in the last few days that provide a clearer look into the headcount reductions being experienced across the freight transportation sector.
First, according to the Department of Labor’s April 1st labor report, total employment for the Transportation and Warehousing sector declined by 2,500 positions in March 2016. The largest decline was experienced in the railroad segment, which shed 2,800 positions. The trucking segment was next with a decline of 2,400 positions. The one bright spot was the courier and express segment, which experienced an increase of 1,000 positions. In all honesty, we saw the decline in railroad employment coming given other data points but are surprised at the magnitude of job eliminations in the trucking segment and the job growth in the courier/express segment. In fact, given that we are post the peak-season, we expected that the express carriers would still be trimming some headcount from the system. However, maybe the growth of e-commerce is fueling better demand and resulting in an uptick in employment.
Second, there was another data point concerning the employment trends within the U.S. railroad sector. Based on data from the Association of American Railroads (AAR), total railroad employment dropped 11.3% y/y and 0.3% sequentially in March 2016. The y/y decline reflects the seventh consecutive month the railroad segment shed jobs, while the sequential decline in March extends the streak to eleven consecutive months. In analyzing the March data, every category of employment saw a material y/y decline, with train and engine employees declining 20.0% and other transportation employees declining 7.6% (the two largest declines). The sequential data showed a similar trend, with five categories experiencing a decline with only maintenance of way and structure employment rising (albeit a modest 0.6%). The sequential trends make sense in that this is the time of year major maintenance projects get underway, so we would expect a modest uptick. However, this headcount trend is far different versus just twelve to eighteen months ago when the railroads couldn’t hire new employees quick enough to cover the volume growth. We guess a continued downturn in coal volumes and collapse in all things oil & gas related results in fewer employees required to run the network.
Third, as with the railroad employment trends, we saw an additional data point concerning TL and LTL headcount. According to the American Trucking association’s Quarterly Employment Report, the large TL fleets (i.e. >$30 million annual revenue) experienced a 3.9% sequential and 3.8% y/y decline in headcount during 4Q/16. While the data point is dated (the report was released April 20), it does provide more detail concerning the employment categories. During the quarter, the large TL carriers saw a 5.3% y/y decline in over-the-road drivers and 5.0% y/y decline in local drivers. Sales related employment was also down 3.2% y/y. More importantly, the decline in total employment at the large TL carriers was the largest decline experienced in several years. Also, the LTL component of the trucking segment saw a 1.6% y/y decline in total headcount, fueled by declines in all categories with a 2.7% y/y decline in freight handlers the largest contributor.
Bottom line, just like Intel slashing 12,000 workers is the best "tell" about the future of the semiconductor industry (for those confused, Intel would not be firing thousands if it saw an immediate rebound), so the US transportation industry firing tens of thousands in recent months is all one needs to know about what happens next if one steps away from the chart showing the dramatic, if unsustainable, rebound in transportation stocks.
Here is RBC's summary:
The TL, LTL and especially the U.S. railroad segments are reducing headcount levels. We believe the decline in rail and LTL headcount is warranted given the current freight environment and while the TL sector is facing a challenging freight environment as well, we are surprised to see a decline in drivers. These headcount reductions are helping the companies operating in these segments to aggressively lower wage and benefit costs and better align resources with freight volumes. As we said earlier, we appreciate any company that can aggressively cut costs and shrink the expense base. However, we believe it is important to be honest about why these segments are facilitating and/or experiencing these headcount trends. We believe it continues to point to a weaker than expected freight environment and suggests that the management teams don’t see a near-term improvement.In sum, we are all for cost reduction as a means of protecting profitability. However, we believe that until these headcount trends reverse and the various freight transportation carriers start hiring (even modestly), it portends a continuation of the current sluggish freight environment.
But before getting depressed about the implications, think of the spin: another 50,000 or so waiters and bartenders are about to start making a minimum wage and boost Obama's "recovery."