Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is Riding the US and Global Economic Rebound – Opportunities and Challenges. Please be advised that today's seminar is being recorded.
Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.
Today we'll have three presenters – Steve Owens of IHS Global Insight, Randy Mullett of Con-Way, and Ken Braunbach of Walmart.
Steven Owens has nearly a decade of experience developing, collecting and analyzing transportation data. Mr. Owens joined Reebie Associates in 2002 as a software analyst, and is now a Consultant with IHS Global Insight's Commodity Flow Analysis and Forecasting group. He has done extensive work for the Information Technology and Global Trade and Transportation groups using his expertise in managing and analyzing large amounts of data. He was also responsible for the development of the Transearch Rail database for several of the past years. His consulting work has included freight flow and infrastructure analysis for regions as small as a city to as large as all of North America.
Randy Mullett is vice president government relations and public affairs for Con-way Inc. He is based in Washington DC and is well known in the transportation, sustainability, and homeland security policy arenas. Randy is vice chair of the NCFRP oversight committee and vice chair of TRB's trucking industry research committee. He also Chairs ATA's environment and energy policy committee and is a frequent conference speaker on these topics.
Ken Braunbach is Senior Director, Carrier Relations for Walmart Transportation. He has 20 plus years of transportation experience in the truckload industry. He currently leads a team that procures all modes of inbound domestic transportation for Walmart Stores, Inc., with an annual revenue spend of $3.5 billion dollars. Prior Walmart experience included managing transportation terminals and dedicated operations for both JB Hunt and US Xpress in different locations across the United States.
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The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next week. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.
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We're now going to go ahead and get started. Today's topic, for those of you who just joined us is Riding the US and Global Economic Rebound – Opportunities and Challenges. Our first presenter is Steve Owens of IHS Global Insight.
As a reminder, if you have questions during the presentation please type them into the chat box and they will be answered in the last 30 minutes of the seminar.
Thank you Jennifer and thank you to FHWA for inviting me to give this presentation today. Again my name is Steve Owens and I am a consultant with IHS. Who is IHS and why should you listen to us? IHS is a billion dollar player in the information industry. We focus on these six areas of insight. You may recognize some of our IHS brands in energy, in defense and security, in the environmental, support solutions, and sustainability, and IHS Global Insights which produced a lot of economic forecasting data that I'm going to be talking about today in forecasting pricing. IHS Global Insight is the most consistently accurate forecasting firm in the world. Our chief economist was ranked in the top 10 by Bloomberg for the past two years running. We are very proud of that, and I'm very proud to work with such a great group of people. Personally I am with IHS Consulting. We take the models and data produced by those economists and analysts and use it to craft a story on behalf of a client. That is what I hope to do in the next few minutes.
The story for 2011 is that the economic recovery is slowly gaining some momentum. We expect to pick up as the year progresses. We are expecting about a 4 percent growth this quarter, and by the end of the year about 3.2 percent for 2011. This growth might be a little slow because of the snow. Some of you may have noticed that in the past month or so the snow might have put a little bit of break on that, but we expect to finish the year at 3.2 percent GDP growth for 2011 and 2.9 percent for 2012. This lags the world a little bit as we expect world GDP to grow 3.7 percent in 2011. I will talk more about that in the next line as well is more about employment.
In terms of consumer confidence, Gallup has an economic confidence index that was measured at a three-year high in January. That measures the percentage of people who said the economy is getting better. The University of Michigan has a consumer sentiment index that is up slightly. The small business confidence in addition is improving according to some of those surveys. Unfortunately that is not driving hiring just yet. But apart from the surveys, we are seeing in the world that real consumer spending growth in the fourth-quarter of last year was fueled by holiday retail sales that were 6 percent year on year in nominal dollars growth. That has been the best result we have seen since 2005. Again, growth in 2009 is faint praise because 2009 was a pretty bad year as we all know. But we will still take that as a sign of life in the economy.
By 2012 we hope the housing correction will be far enough along to this sector will not be a drag on GDP. And we start to see a lot of residential and non-residential construction. In terms of inflation, we don't see that being a problem in the short or medium term, but we expect interest rates to stay low.
Here are the quarterly GDP growth rates for the last decade plus the short term forecast with the unemployment rate, that's the blue line overlaid. You can see the recession pretty clearly; four consecutive quarters of contracting economy, contracting pretty seriously especially compared to the beginning of the decade when we had the recession.
We think growth should be stronger and better balanced in 2011 than in 2010. You can see the first two quarters of growth of 2010 show up much higher than the last two quarters. That is mostly due to restocking. Companies have bought very little in 2009 needed to replenish their inventory. Actually growth and final sales, which doesn't account for inventory, was about half of the GDP in 2010 growth. In 2011 we are expecting final sales growth to be much closer to the growth rate of GDP, so there will be less restocking and inventory cycle will be coming to a close.
With faster consumer spending growth, we should see a strong year in addition to business equipment spending. In terms of foreign trade, that should be less of a drag on GDP growth. We are expecting a competitive dollar and the maturing of the inventory cycle means slower growth in imports.
At the end of the year we are expecting job creation on average of about 230,000 jobs per month. The unemployment rate we expect to be about 8.8 percent by the end of the year. That is better than this time last year, but if you compare that to the recession in 2002 and 2003, we are still above those levels.
In this slide it shows the forecast of manufacturing and production which is very similar to the last slides. It is worth pointing out just how much ground US manufacturing lost it during the recession. At the end of inventory cycle, the domestic manufacturing growth is starting to ease. You can see the bump and inventory there. We are predicting about a five or sub five percent annual growth rate going forward in 2011 and 2012.
This slide breaks the information down into different sectors. In 2010 we saw a growth in motor vehicles, electronics and we see that outpacing the rest of manufacturing going forward. Other big growers that are not on the chart are things like industry machinery which grew 42 percent in 2009 to 2010. We are not expecting it will grow that much going forward, but still is outpacing the rest of manufacturing.
I also want to point out textiles and apparel lines. We are not seeing that manufacturing comeback in the short term. Whatever production has not already been replaced by imports before the recession, we are predicting to the move in that direction now. At least in the short term, we are not seeing that production come back at least in the US.
In the energy sector, we are not seeing any future price spikes like we did in 2008. We expect crude oil to continue that same trajectory that they have been on since 2000 or so, if you take out the spike and the dip in the recession. That red line is a crude oil.
So, $100 barrel for oil is on its way in the near to medium term. Natural gas, on the other hand, we don't expect to have the same rise as we are expecting with oil. We are seeing the oil and natural gas prices decoupled from each other. This may drive some investment were searching for alternative fuels.
I want to talk a little bit about exports especially since the administration has been trying to push them as a way to grow out of the economic slump. This slide shows the annual growth of exports by sector. We are expecting solid growth in the computer equipment and other capital equipment as well as transportation equipment like aircraft, autos and trucks. These are generally high dollar value items and so you would expect to see them at the top of the list. If you look at high tonnage exports like chemicals, oil, feeds, scrap, having high growth rates. Other high tonnage products like grain, coal, petroleum, those are not expected to grow quite as fast as these high dollar exports.
Where are those exports going? This graph shows the shifting destinations of the US exports. We are expecting long-term growth of exports to Asia, the blue band at the bottom, outpacing the growth of European exports which is the orange just above it. By 2020, we expect the value of Asian exports will be greater than the value of all non-Asian exports in 2005. You can see the graph reflect that. After a slow growth in 2005 to 2010, the real value of total exports is expected to double from 2005 to 2020.
On the import side, it is not quite a mirror image, but we'll see the growth rates from Asia dominating and being about twice the growth rate as all other regions. So that 6.3 percent growth in imports from Asia as compared to 3 to 3.5 percent from the rest of the world. By 2020, we expect that just over half of all imports by dollar value will be coming from Asia. That includes not just China, but Japan, Korea, and India and the India subcontinent. So it is not just China, but China is a big part of the growth.
Here we have the US containerized trade forecast in twenty foot equivalent units broken apart by coast. The imports are the solid line; the exports are the dashed lines. The growth of Pacific imports, top blue line, we see as continuing to outpace the Atlantic and Gulf Coast. On the other hand we are expecting exports to be roughly symmetrical between these East and West Coast. You can see the graphic reflecting that faster growth from the Pacific, particularly the imports, but the Atlantic is keeping pace. I just told you how the Asian trade is going to grow faster than European trade, so how could it be that we expect Atlantic trade to grow like that? One of the reasons is the Panama Canal expansion and this is a question we get a lot, especially from planning agencies along the Gulf and Atlantic coasts. We expect all water moves from Asia to the Atlantic and Gulf Coast to be facilitated by the expansion of the Panama Canal. Last I heard it is on schedule for 2014 and opening in 2015. You can see the number of TEUs on a ship will increase from about 4,800 to 12,500, so it is a pretty big increase of containers that go through a single ship.
Many US ports on the Atlantic and Gulf Coasts are making investments to prepare for those larger and deeper draft ships. The Port of New York-New Jersey has a plan to raise a bridge and dredge their channel. The Port of Houston is investing about $1 billion in a container terminal, and they built warehouses along Highway 146 to get ready for the container traffic. Savanna, Boston, Miami, are all too shallow and they have plans to dredge to get ready. In fact right now, on the Atlantic seaboard I think the only ports that are deep enough currently are Norfolk, Charlton, South Carolina, and Halifax, Nova Scotia.
Here are some headlines from the trade press which I have recently come across. What we are seeing is some good or at least better than before news across all transportation modes. So the ATA American Trucking Association measure of truck tonnage is up. That is just one of the measures that I could've picked to highlight. The Cass Freight Index measure that measures shipments of about 400 or so companies and their subsidiaries that use Cass to process the payments, that is up year-over-year. The Bureau of Transportation Services Index is up year-over-year and month over month. A little bit less any other measures, but it is still up. Heavy truck orders are up from January 2010. Intermodal shipments are up. Railcar loads are up year-over-year. North American air cargo is up year-over-year. Again, being up year-over-year from 2009 is kind of faint praise because 2009 was so bad. But overall 2010 was better and we are expecting 2011 to continue.
And here's what we are expecting in terms of freight tonnage on US domestic freight by mode. This is a percentage of 2006 tons so on this graph 2006 is one for all modes. Intermodal rail is where we are seeing is the highest growth rate. Keep in mind it is also the lowest tonnage, about 8 percent of all rail tonnage, but 28 percent of units in 2009. We expect that percentage to increase in favor of intermodal rail going forward. Is that going to take trucks off the road? Does that mean a container that is on rail will not be on the road? Well, truck tonnage growth is slowed; you can see on the graph it is curving in the out years, but it is still positive. Carload rail is still positive, but expected to grow much slower than truck. Most of that is due to the commodity mix that is typical of carload rail.
I wanted to point out the total freight line. That includes inland water, domestic air. Air by tons is really a drop in the bucket of total tonnage, so I did not include that. Water, we expect to see slow growth similar to carload rail just because of the commodity mix that we see by that mode.
So this slide compares the growth of freight bearing truck miles traveled with state and local highway investments. Now the stimulus allowed that growth to keep pace in the short term, but going forward we are seeing that the number of highway males by freight being trucks is growing faster than the investment at least by state and municipalities. Of course, freight bearing trucks are not the only vehicles on the road so to fairness in the trucking industry I have plotted freight miles and passenger miles on the same scale. You will see the number of vehicle miles traveled, the purple line at the top, is hovering around three trillion miles, give or take a hundred billion. VMT did have a small dip during the recession, but recent estimates showed it increasing during the recovery. So don't think I'm picking on trucks, I am freight guy I love trucks, but the growth in miles of all kind is going to outpace investment, that is the main story here.
In terms of rates, we saw rate recovery in 2010 and that for most modes we are going to see that the growth rate of rates will go down a bit in the short term. As far as rail goes, they had a rate increase of about 5 percent last year. We expect the railroads to be on their best behavior, as I just read today that the STB is thinking about making it easier for rail shippers to make complaints to the Surface Transportation Board and words like reregulation are getting used out in Washington. So we expect we'll rail rates to not increase quite as much as last year.
The truck rates hardly increased at all in 2010, and we are starting to see them recover. We expect them to recover this year. Deep-sea shipping rates due to the fact that they still have excess capacity of shipping lines means the rate increases we saw last year are mostly because they were giving away containers space in 2009. But the rate of increase will not be sustainable. That said, the Mediterranean shipping company, which is the second-largest container line just announced a few days ago a rate increase to US exports to Asia of $100 per container. So there still may be surprised increases in 2011, but not at the same rate as 2010.
Just to wrap up, the bottom line is that the economy is now headed in the right direction, albeit slowly. It job growth will continue to be a challenge. At this time last year, we were talking about the risk of a double dip recession, and those risks have largely subsided. Excess capacity in the job market will likely keep wage inflation down. The dollar is expected to slide against most currencies, especially those in emerging markets, and maybe not so much against the euro, and that should help push up exports. We are not seeing a lot of federal transportation investment in the near future. The stimulus is over, we have divided government in Washington, but we hear a lot of talk about infrastructure investment. Before it was shovel ready projects, but now we are hearing things like doing more with less. In addition we are seeing some pushback on deficit spending both from the leaders in Washington and in the financial market. So again we are not anticipating a lot of investment from the federal government. That is about all I have and all the time I have.
Again I want to thank everybody for listening and there will be opportunities for questions later and I will turn it back over to Jen.
I will now turn it over to Randy Mullett of Con-way. If you give me a minute I will bring up your presentation and you can go ahead and get started.
Thanks to everyone for listening. Here are a couple of caveats. You know that I work for a trucking company and I'm from Washington, so please excuse my biases as we move forward.
The first thing I wanted to talk about so you know who we are. Con-way is a $5 billion company, we own a LTL company called Con-way Freight, a truckload carrier called Conway Truckload and we own a logistics company called Menlo Worldwide Logistics. We have about 30,000 employees worldwide in 500 locations. We run a lot of trucks and trailers and manage a lot of warehouse space. We run about a billion miles annually on the US highways and we burn about 150 million gallons of diesel fuel every year. Menlo controls international supply chains for a lot of household name type companies like Nike, International, and Hewlett-Packard for example. In addition to what we handle ourselves, we control many other billions of dollars of transportation.
So I wanted to set the stage a little bit and talk about some trucking and intermodal statistics. Most of these you may be well aware of. There are over 500,000 trucking companies in the US and most of them are small business. These trucking companies pay about 40 percent of the total into the Highway Trust Fund and we run about 13 percent of the miles. About 70 percent of all goods by weight in the US moved by truck, but more by value and way more as a percent of consumer goods, the things we actually eat, wear, and consume. Future modal shares are expected to stay fairly constant. The vast majority of US communities are served only by truck. There's an awful lot of the vast majority of shipments that move by truck that travel less than 500 miles which makes the shipments not available by rail. One thing I think that is interesting is that if rail intermodal capacity doubles by 2020, market share moves from 1.8 percent versus today's 1.5 percent. So to make significant changes in truck movements, rail capacity has to go up even more. I think it is also interesting to note that the largest single customer of rail is United Parcel putting their trailers onto intermodal.
As they go through, I want everyone to remember that there is absolutely no way we can separate economic growth from the growth of transport resources and infrastructure needed to support that. We seem to have gotten ourselves into a situation through underinvestment and financial constraints and our quest for sustainability that somehow we can separate the two and that we can enjoy good GDP growth and good growth in manufacturing and somehow not have good growth in transport. I just don't think that's possible, so I want us to keep that in mind.
A lot of these things I got from ATA and their Economic Research Department and I think I have them all cited. These follow the economic situation in the United States. If you look back from 1999 to 2010, this is ATA is For Hire tonnage index and it is very sympathetic to the economy. You can't separate the transport growth from economic growth and you also can't separate some transport decline from economic decline.
The LTL Loads Index is a 'more true' indicator of the actual amount of loads that are being tendered to carriers. You can see there was a very significant dip after the recession. But before that, you can see a big spike. I want us all to think back to 2008 we have capacity constraints in almost all modes of transportation, and other than the economy slowing down, nothing has happened from a policy or infrastructure point of view to alleviate any of those concerns as the economy starts to come back.
This is a very important slide that is indicative of what happens when the economy slows down. We can see that from the early 90s until we have this problem in 2008 and 2009, the cost of inventory-to-sales in the United States came down. This is across all modes. This is a big reflection of a couple of different things. One is the ability through IT systems to better manage inventory levels and do point-of-sale ordering. Along with that, the advent of just-in-time inventory techniques. This decrease in the inventory level freed up capital which was used for other investment and business expansions because the money was not tied up in excessive inventory. As those things drove down, shipment sizes got that traditionally smaller.
This just-in-time inventory and the way we currently run our businesses has a big bearing, and not just in the United States but internationally, has a lot to do with reluctance to do mode shifts to larger sized shipments on rail or on barge for instance and secondly the thought processes of we are going to drive more freight business to those modes and this helps illustrate why this is difficult to do.
I also thought that this might be interesting to see exactly what kind of freight has really gone up over this period of time. The truckload segment has seen a nice resurgence. It is interesting to me to see that the specialty items like tank trucks, which include fuels, chemicals, foods and then flatbed which include iron, steel, machinery, as one might expect those precursors to economic recovery have actually grown faster than the traditional van freight.
Now let's talk about the supply-side. There is a lot of ease of entry and exit in the truckload sector. Bob goes by is truck and can be in a trucking company in a very few days with very little money. Bob can also exit the market very quickly if things go south. I think it is interesting to look at when trucking values have occurred, and the fact that there were way more trucking failures during the tech bubble and right after 9/11 than there were in 2008 and 2009. But, that movement in and out of the business means that trucking actually can recover faster when the demand comes back then people that have substantial capital expenses. It is a lot more difficult to buy an airplane or railroad than it is to buy a truck.
This is an indicator of Class 8 truck sales. Class 8 trucks are tractors for tractor-trailers. You can see there were an increase prior to 2007 and then a drop in 2007. That was in result of the EPA mandated engines that came in place in 2007, and they were adding about $10,000 to the price of a truck so a lot of fleets were trying to make a buying decision before that time. We would've normally expected to see that drop in 2007. What has happened is we've had this drop, we went into the economic downturn, and put a lot of used equipment on the market, people did not grow. Those that may have increased their fleet, especially smaller people, had a lot of used equipment available for them so you can see that is sort of bumping along at a new level. We are starting to see some increases lately as the economy recovers.
I think this is an interesting slide that talks about the For Hire truckload supply versus demand. You can see in 2008, we had a big spike where there was an over demand situation. In other words, we saw rates go the way up and a lot of capacity restraints for shippers. In the last couple years we've had just the opposite. As fleets downsize, you can see this is more in harmony and the supply and demand graphs are much closer in alignment. This means that as the economy grows, I would imagine that fleets will grow their capacity only as much as they can recover the capital.
So this will be a little bit on the transportation outlook. I think Steve had a similar graph to this, and it is just amazing the percent increase we are expecting in the rail intermodal, and as a large customer we are hoping that continues. It is interesting to see that air is so high. I think that is an indicator of numbers of small shipments as Steve said the increases that we expect to see are more in higher value products that warrant these smaller shipments and that money can't be tied up in long periods of time. It also reflects the international aspect of this. Trucking as you see is expected to grow about as the pace as the economy. And then the other modes you can see there. That will give you a little bit of an idea of what we expect.
This is a transportation forecast that shows the distribution of tonnage by mode. Even though we talk about value and consumer product, the tonnage is actually what divides up how many pieces of equipment do you really need to haul at most instances. So you can see that from 2009 to 2021, intermodal is going to increase, but it is a small piece of the pie. Air is going to increase greatly and is almost insignificant change to the whole 9 yards. What is true is surprising to me is that truck is anticipated to grow slightly while the other modes shrink slightly. This outlook and forecast has been very stable for several years. So I don't believe there is any reason to dispute this.
Steve talked about crude oil prices. I didn't want to talk about just the prices; you can see how they continue to go up. What I wanted to show was the relationship to highway diesel prices. So I'm going to flip back and forth for a second. You will see that diesel prices through the 90s stayed very stable, even into the early part of 2001 to 2003. In 2004 we saw a little bit of a jump. In 2004, you can see that is where crude starting increasing. Then there's a big spike in 2008 and then it settles back down to more normal situations.
The one thing I want everybody to pay attention to on this is not only the similarity between fuel and oil prices, but the fact that that trajectory is fairly steep. In an industry where the average truck gets six 6 or so miles to the gallon, very quickly you can have a 20 or 30 percent increase in the total cost of movement of truck goods. It is really a significant change in the cost and the pricing model for truck moved goods.
So why does all this matter? Freight in all modes is going to increase and there will be capacity constraints. None of the underlying things that were going on and we had huge capacity constraints prior to the economic downturn have changed. Energy and sustainability concerns will increase. We have to figure out a way to be more efficient and cleaner with what we do. For those of you who don't know, a 2010 tractor with the EPA compliant 2010 engine burning the EPA mandated ultra low sulfur fuel has exhaust coming out of this stack is often cleaner than some of our major cities that are in nonattainment areas. So that's how good this industry has done and how many changes have taken place in this industry. We know rates are going to increase, and delays will occur. If we keep transportation in general constrained, the economy is going to be affected and this does impact our ability to compete internationally.
We are going to see supply chain disruptions, and these will result in near sourcing. That doesn't mean jobs and come back to the United States. In our logistics business, we see a lot of companies talking about reengineering their networks and supply chains to take advantages of near sourcing. The higher the cost of transportation, the closer you can bring things and pay higher labor, etc. Jobs may not come back to this country, but they will probably come back to this hemisphere and that will dramatically change road networks. We have an awful lot of East-West roads, but not a lot of North-South. So I think that all levels of government are going to continue to discover that freight and freight infrastructure are really the underpinnings of economic development. It changes the whole thought process from that of my job is to protect the pavement to my job is to increase the throughput and the economic vitality of my area of responsibility.
So there are a lot of challenges for the trucking industry recently. We have CSA coming out which is changing carrier ratings in a way which we do not quite understand all of the nuances yet. But it is going to potentially take bad actors out of our business, which should happen. And it should take unsafe drivers out of the business and raise the barriers of entry into our business. With that comes some reduced supply. Will that will ultimately be I don't know, but it will create some capacity constraints in our business.
The hours of service rules have a new rule being proposed that would remove about five percent of the productivity in our industry through reducing the hours that are available for people to work and drive. In the trucking sector, driver equals truck as there is one driver per one truck, in most instances. We are talking about much less utilization of our rolling stock assets. So for us, this means a big capital investment both in equipment and drivers to haul the same amount of freight. I think there are, again, capacity concerns about the hours of service change.
We talked about fuel, energy and sustainability. These are not going to go away, and they shouldn't go away but we have to continue to deal with them in ways that we really have not done. EPA and NHTSA have put out some heavy duty fuel economy standards which are great first step, but the NAS study that was commissioned to be the underpinnings of that in terms of research, had several recommendations that were major lever pullers that we cannot pull because the agencies in charge do not have the authority. Those are things like slow down the speed limit, increase truck productivity through reasonable size of weight increases, etc.
From an international competitiveness point of view, as we try to ramp up exports, moving cargo from Middle America where it is manufactured to our ports often costs more than the cost of moving it the rest of the trip. A lot of that is constraints which are here in our backyard that we need to learn how to address. I hate to sound like a broken record, but in terms of truck size and weight, we are outliers on the low end compared to the rest of the developed world. What that means is, if in Europe you could move something that weighed 100,000 pounds and in the United States you could move when it was 80,000 pounds, all of a sudden our folks can't get the full amount of commodity per move in each container. It also puts a lot more of them on the road as we need to split them.
I know that all of you that are in government are up to your eyeballs in livability. We are concerned about what that means for us as an industry. It seems like livability in many instances transfers into a fascination with active transportation which is walking and bicycling or public transportation or rail. They don't take into account the fact that only trucks go into an awful lot of these neighborhoods to deliver, so they put the policy things that are at odds with each other.
The last thing we have to deal with our physical capacity. Federal Highways have done an awful lot of work on bottlenecks. You all know those things that are within your areas of responsibility as well. A lot of those issues have falsely masked by the downturn of the economy, and none of those things have changed. They will be back with a vengeance as the economy comes back.
This graph shows the difference in productivity increases from 1987 until 2008. Railroad, through double stacking, longer trains, and those sorts of things, has had a huge increase in productivity. You can see private business has been on a productivity increase as well. Airlines have seen a fairly substantial increase recently. You can see that trucking was enjoying some increases up until the early 90s. At that time, the Federal Size and Weight freeze went into place, and you can see that trucking since that time has actually had a slight decrease in productivity. It is not something that we want to we are looking at how much we expect for freight to grow over the next 20 years.
This slide shows potential opportunities and the politics that come along. We have had a lot of changes in Congress, and that is not just a change of Democrats or Republicans in the House. There has been a huge paradigm shift against taxes, earmarks, and also the large majority of the new people from the Republican side that are on the T&I party with Tea Party backed candidates who are very interested in the 10th amendment. These are things like send the power and authority back to the states, no federal mandates, etc. So by definition, I believe what is going to happen is that with a smaller federal spending in transportation relative to the growth, that states and localities and regions going to have to pick up a bigger portion of that responsibility from a spending point of view and from a project and policy point of view. So in order for that to happen, I think we have the potential of the feds to make some significant policy changes that put some of that authority back in the state and local levels.
I also think that the feds are going to look for policy changes that focus on how do you do more with less, how do you increase productivity, how do you increase throughput, how do you get regulation out of the way. We are hearing that not just from the new Republicans, but also the administration and the Senate. So I think significant changes may come that are going to produce a lot of opportunity for meaningful policy changes that are no longer focused simply on building infrastructure. Remember you cannot separate economic growth from transport growth. Thank you for listening and I look forward to your questions at the end.
Thank you Randy. Our final presentation is going to be given by Ken Braunbach of Walmart. I will be switching the slides for Ken, so you may hear him say 'Next Slide' throughout the presentation.
Thank you everybody for listening, and I do apologize because there will be some redundancy in slides that I heard Randy present, but again I am not online so I didn't see them. If I skim over something and someone has a question, feel free to include that in the question-and-answer session.
I'm going to talk specifically about Walmart's distribution network and Walmart's freight movement. There are a lot of conclusions you can draw from transportation volume. Historically, increases in truckload volume have been an indicator that we are heading out of recessions. However, even though Walmart saw an increase in freight volume throughout 2010 there is not a direct correlation between increases in volume and increase in sales dollars. Walmart is releasing earnings results next week, so I cannot discuss specific information about the Walmart sales trends. For reference, the Retail Index for January had an estimate of 2.3 and came in at 4.3 and the discount sector came in slightly higher. However that is no reference to Walmart's sales results, which again will be released next week.
The next slide is a map of the United States. My department's responsibility is to source third party transportation into these buildings. These buildings represent Sam's distributions centers, Walmart distribution centers, and our grocery network. The color shading represents the service area that they service the stores in this particular market. As a reference of where our stores are located, you can see we are dense in the East and sparse in the West. The next slide is our import network. Those are import distribution centers that we utilize to bring merchandising from overseas. You can see a number of the different ports we use around the country on this slide.
The next slide is a reference of our international footprint. We have 141 distribution centers internationally on top of the 150 domestically. So we have a sizable footprint from the distribution center network. International is extremely important to our model as it is our largest growth vehicle at Walmart currently. We currently have 3600 stores internationally and we are hoping to close on an acquisition in Africa that will net us another 500 plus stores.
Here are a few more facts about Walmart internationally. In total we serve 15 countries with 7,900 stores and clubs, and 228 to distribution centers in total. I am not going to read every point from the slide, but we are in a variety of different businesses outside of the United States. We are in food sourcing, banking, restaurants, and things of that nature that you don't see when you think of Walmart US.
Again, this slide shows a number of the different formats that we have outside of the United States. This number will change next week, but for the most part 20 percent of sales is derived from outside the United States. As we continue to expand it affects the supply chain, we have varying degrees of maturity throughout our international countries. India, where we have a joint venture, is an emerging and immature model that is not yet stable. Then you have countries like Brazil which is a leveraged for high growth country compared to the United States which is mature and asset heavy. Another example would be Japan where it is very mature and we are redefining and modifying the supply chain for that country.
Specific transportation industry trends are seen on this map. You can see the red area illustrates infrastructure that is stressed. The current demand exceeds its capacity of the roadways, bridges, tunnels, and so on in those markets. You see the yellow trending, and this is a few years old so some things may have changed, but the interesting thing is that only seven percent of all of the stimulus money that was spent went to infrastructure. Initially that was projected and forecasted to be one of the largest impacts to the recovery effort by putting people back to work and general improvement to the economy. Again, a lot of it has yet to be spent, and of the total stimulus only seven percent went to domestic infrastructure in the transportation sector.
These other trends have remained unchanged for a few years now. Climate change continues to be an issue, driver shortages are being magnified by some of the information presented early with CSA, and fuel is dramatically up, 14 percent year-over-year, highway congestion and regulatory change which I can touch on as well.
This next slide illustrates what our modal spend looks like to Walmart. When we spend money on inbound transportation about 70 percent is truckload, which includes intermodal. Embedded in the truckload sector about 40 percent of the total is intermodal. The reason we capture it like this is because it is relatively similar in nature, a 53 foot quantity shipment and primarily tendered directly and operationalized by a truckload carrier who has a direct relationship with a railroad. This information is just domestic US and does not include steamship lines. Ocean sector, a lot of people don't think about domestic with ocean, but we do service Alaska, Hawaii and Puerto Rico with ocean carriers.
This next slide illustrates our business unit spend comparing year over year change. So what does this mean if you look at 2010 versus 2009? You can see construction is down dramatically. The impact of reducing our capital expenditure for domestic US store is expansion. We are still opening stores, approximately 150 on any given year; however we took that money and reinvested it in the current stores so you can see that fixtures comparatively went up 100 percent. That is due to extensive remodels, rebranding, and movement of stores from one area to another. General merchandise, which is the majority of our volume, was up 26 percent. That is somewhat misleading because we took control of managing freight increasing approximately $400 million included in 2010 that was not under our control in 2009. Even stand alone general merchandise was up in the high teens. Grocery segment, we control 20 percent of the grocery market share in North America, and you can see it is very stable and not a lot of variability when it comes to that volume. Some of the others are specialty units. Sam's up 4 percent and LTL is a negative nine which is on top of another negative last year. We continue to see modal shift from small parcel to LTL and LTL to truckload. By itself LTL is still diminishing slightly. Overall net, we were up 15 percent, almost two million shipments in 2010.
Current impacts, some of these are well known and some have been covered. Beyond just the economic condition, there are impacts to the supply chain. There are also impacts to the transportation network such as government regulations like CSA; where the intent is taking unsafe drivers off the road, giving visibility to the shippers and hours of service changes. EOBR or Electronic Onboard Recorders will make it so that drivers cannot manage their own time, but it is automatically calculated and logged and transmitted to the carriers for permanent record. It will decrease the driver's ability to exceed the hours of service and ultimately make everybody more compliant which is the right thing to do. CARB is the California Air Resource Board's initiative which looks to make the air cleaner but is causing some operational issues, a little more inefficiency and cost continues to go up in that port drayage sector. On the finance side, the trucks are older and on top of high fuel costs, the carriers can't get credit for the most part to replace their equipment. Older equipment is less fuel-efficient and also the residuals on the trucks, they are worthless and they can't do anything with the power. Therefore ultimately the capacity will be decreased as we go forward.
Some other issues such as weather; snow has been a factor in February. A couple weeks ago, most of the country was covered in snow, including places not accustomed to snow. This snow came on top of being the week of the Super Bowl, and being a food retailer, it is our second largest food holiday. Due to the snow, we saw a lot of demand for milk and bread and not for the other things associated with Super Bowl celebration like electronics big-screen TVs things like that. Unfortunately there is only one Super Bowl so you can't have a backlog of that kind of demand to be bought up and sell to our customers 2 to 3 weeks from now.
Also the demand for merchandise has seen a large backlog of orders caused by weather. CSA, covered earlier in great detail, but from the shippers perspective, we feel there might be some tort reform and how does that affect someone who has negligent retention, hiring, and awarding of carriers that are unsafe. Also how are shippers going to use that information for awarding business? We have already taken a look at all of our contracted carriers, have classified them into high, medium, or low risk and are starting to use that information as we award and tender our business out. Security, there was a shift in manufacturing during the recession; it started with the cost of fuel in 2008 and grew as the recession worsened. Mexico and Central South America have seen an increase in manufacturing. So there are challenges with the increased risk of doing business in Mexico specifically and direct impact to supply chain safety and security. Not to mention the food supply chain safety, the majority of the off-season produce comes from Central and South America and Mexico.
Something completely under the radar is the steamship chassis management. There is a $3-$10 cost for each container that is imported to the United States. The steamships are divesting themselves of the responsibility for providing and managing a chassis pool and that burden is being placed on the shippers or owner record of the freight. So this is a new cost and a new problem to solve in the supply chain. Some other issues are currency stability and inflation. Being a multinational corporation, we are impacted when there are wild swings to the value of the U.S. dollar. One for example, the Canadian dollar currently on par with the US dollar caused many of their exports to the United States to diminish, but there was still large demand for goods from the United States to Canada, so it forced many carriers to operate empty out of Canada to pick up goods in the United States and return to Canada.
What are we doing in transportation for 2011? We have identified collaboration goals with many of our transportation providers. The one true cost that needs to be addressed in our network is empty miles. This is a significant cost caused by inefficiency and is currently running about 27 percent for our private fleet. We are taking a hard look at how to engineer our network and allow our carriers to have full visibility with everybody's networks and make this contract a longer than normal so the network will be stable for both parties. There needs to be a mutual financial return for both the carrier and shipper and from our perspective will lead to higher service. The other key issue is how to take some of the negotiation and risk out for both sides by putting in indices that are relative to cost and inflationary in nature. Those could be the triggers for escalators versus market issues or true negotiation. E-commerce and multichannel logistics, we continue to expand our Walmart.com and Sam's.com models with home delivery and site to store with free shipping to our stores.
Conversion and convergence, we shifted $400 million of supplier controlled freight to our control and that will continue now in our second year. Convergence is a program primarily larger vendor that operates private fleets and has extensive supply chains. We look at how we should approach the market together and procure and manage supply chains together to ultimately lower cost and improve efficiency. Environmental sustainability continues to be an initiative for us. We are at the midpoint of improving our miles per gallon, and fleet efficiency goals established in 2005 to double that efficiency and we on target to do that. Along with locally grown food initiatives, where our customers spoke that they wanted locally grown produce. We responded and hope to source a billion dollars in sales of locally grown food. The complexity and the impact of the supply chain are not small. There are issues with capacity and small markets and smaller shipping quantities.
What does the future look like? Each American consumes 40 tons of freight annually. There will be four billion more tons of freight in the next 40 years. We talked about all the challenges in the supply chain and the transportation market and coming behind it will be even more demand.
The next slide is a supply and demand index. So as a procurer of freight, we look at this index as barometer of the industry. If you look at 2010, it was discussed earlier about the risk of double digit recessions last year and you can see that trend. You can see volume really took off in the second quarter, this is the green line. It had a pretty dramatic fall that a lot of folks did not project or forecast. It dipped again and it dropped well below the five year moving average. It dipped below 2009, towards the end of the year. There are a lot of reasons which we suspect, but there was some pent up consumer demand, some inventory rebuilding, inventory then was built and the sales did not come, and then there was a slow demand. If you look at 2011, it is starting much higher than the historical moving average and February will be a little hard to decipher with the weather impact. A true gauge will be March and April to see a true supply demand freight index tell us.
The next slide is covering fuel and fuel costs. I am not going into it in great detail as I heard it covered earlier. In 2008, there was a dramatic cost increase to the supply chains that means hundreds of millions of dollars of unbudgeted cost directly caused by the spike in fuel surcharges. If you look at 2011 in the forecast, we are still at the inflection point that we were in 2008. That is something to be watchful of.
How do we maximize intermodal opportunities? If you look back two or three years ago we were in the 16 to 17 percent range of intermodal spend. The representation in our portfolio today is closer to 40 to 41 percent. You can see that even in 2010, there were gains throughout the supply chain modes. Domestic intermodal was up 10 percent and the truck tonnage coming in at 60 percent of that all while the highway capacity continues to decrease.
There has been a lot of capital invested in eastern railroads, and we've seen a lot of growth there. So the truck mode owns the lanes of 300 miles or less, then the intermodal providers begin to take part of that market with the exception of the Florida East Coast Railroad which runs up and down the East Coast in Florida. But with the capital expenditure increases in the East allowing 600 to 700 mile shipments, the rail providers are anticipating taking some of that market share from the trucking companies.
This is another graph to illustrate the percentage increases. Eight and nine percent in total fourth-quarter in December; these are high increases year-over-year. Also this shows the trend over the last four years. Here's another illustration, a pie chart of the Western Railroads. There are not a lot of players, only five Class I when the roads in the United States. Of those, you can see the makeup of who owns what shared by railroad. The key difference is the BNSF allows privately owned containers while the UP is a hybrid where they allow both. We continue to use the both railroads as much as possible. As long as the cost continues to be favorable, we will continue to grow this mode.
The next slide talks about environmental initiatives for 2011. We continue to test our 7200 fleet of trucks with a variety of different technologies and we will try all of them that show promise. The common denominator we found is that they all lead to improve on fuel economy. However, the operating cost is not viable long-term. The infrastructure to operate those trucks is almost nonexistent. So in California where we can go 60 to 70 miles and come back to our terminal to have liquid natural gas available, it makes a lot of sense. But some of the others where we have to go 400 to 600 miles, it is not a viable option. On top of that we need to have quick access for maintenance and parts for these vehicles and that is not available yet. The residual value for these trucks is virtually worthless for the most part even if we try and extend the useful life out to a point in the future. Until the manufacturers decide what the truck of the future is, you can continue to test, but the outcome is still uncertain.
These are a couple of highlights for 2010. We delivered 161 million more cases while reducing 97 million miles. From the percentages, year-over-year found three percent more cases and seven percent less miles. There was a 14 percent increase in trailer cube and a 5 percent reduction in empty miles. There was a 12 percent reduction in load distribution. What does that mean to our company? It is $178 million that was shaved from our operating costs. We continue to focus on packaging whether it is yogurt lids or corrugate that goes into the packaging. We have worked on several initiatives using industrial engineers to maximize cube utilization and the next slide shows the impact of that. We had 700 less shipping containers we saved 5,000 trees and we prevented 1300 barrels of oil from being used.
This is another low hanging fruit option, where we send industrial engineers out to our vendors to understand that there are inefficiencies in packaging and the loading of the trailers. This is a pillow manufacturer, who had 200 pillows per load, and we changed the packaging and number of pillows in the box and we were able to get 5,300 pillows per load. The statistics are in yellow. You can see there are 1800 less truck loads. So how do we combat the high cost of fuel with lesser amount of capacity that is available? It is through initiatives like this.
The last thing to touch on is our customer. Through the recession, every week about a hundred million customers come to Walmart or Sam's and they have changed the way they buy merchandise. They changed it based on a price point, what was cheapest, and whether they will go to multiple places to find the least cost. They also changed base on how close it is to payday, the day of or day after payday has dramatic impact to sales in our stores. What are they buying? It depends on the time of the week. There are priorities for basic items bought versus luxury items. We also saw a change in 'staycations,' in 2009 and 2010 where customers took less vacations and stayed home and the merchandise mix changed dramatically, especially in typical vacation coastal areas. Something that is not talked about is the tax return delays and that they are projected to be about 30 days late. About 30 percent of Americans pay off debt with their return and 70 percent will go buy something which is good for merchandisers like our self and that is going to be an impact in January and earlier February. And then the credit crunch is still an impact to our customers; they cannot get the credit to buy some of the higher priced items that we sell.
The last thing I included was a retail index and you can read that at your leisure. It shows the different retailers and how they performed year-over-year. You do not see Walmart represented there because we do not release our sales on a monthly basis, it is quarterly. So, Jennifer that is all I have.
Think you Ken and thank you to all of our presenters. We will now go to the question and answer session. I'm going to ask the presenter's to give the best answer they can but also be quick with your answers so we can get through as many questions as possible.
I'm going to start from the top of the list. I think the first question was for Steve, and it says now food and energy costs are again rising, what's the likelihood that rising energy and food prices will dampen GDP growth?
Thank you for the question. First of all, baked into that forecast are those rising energy costs. We have commodity costs baked into the forecast of five to ten percent higher over the course of a year. That includes oil, food, and things of that nature. Those increases are baked in. There is enough pent-up demand that we think we can withstand some increase above that. If we have another shock of fuel prices like we saw in 2008, that puts the recovery potentially in jeopardy. If it happened last year, it would've put more jeopardy than if it happens this year. I think the economy is more able to withstand that in more so in 2011 than in 2010. But, unless we see some big shock, such as an oil price increase and everybody is watching what is going on in the Middle East very carefully as of that, our projections should be reasonable.
The next question is for you as well. It is actually several questions, so I will start one by one. Where in the country are the freight corridors maintaining and growing according to the two categories of growth vehicles and computer/electronics?
I did not break things down into freight corridors, so I do not have the answer on the top of my head. I would imagine you would see the corridors growing out of California, you would see some manufacturing. In the Southeast you would see some increase in manufacturing as well. I don't think it will return so much to places like the upper Midwest, the Rust Belt. I think you will see the growth which slower in places like that. In terms of those particular sectors, I have not looked at it, so I do not have those numbers off the top of my head.
Where can money be slowed down for those sectors losing growth in textiles or clothing?
I am not sure I follow the question.
I am not sure if it's worded the right way. We will go onto the next question. If the author of the question wants to repost and clarify the question, they can. Will the imports cause continuing coastal congestion and when will we hit the maximum capacity for accepting those imports at the ports?
In 2005 and 2006 we saw serious congestion, particularly at LA and Long Beach. Actually, Ken might be able to use answer this as well. What a lot of shippers did was they diversify their supply-chain so they were not dependent on just that one gateway. With the opening of the canal with the other ports that have appeared on the horizon, like Prince Rupert in Canada and Lazaro in Mexico, these are port that were not really active in 2006. We are seeing a less likelihood of congestion in a single port affecting the entire system.
Scalability is still available at Prince Rupert. Lazaro is domestically used for our Mexican operations, not domestic US. As far as other ports, with the steamship contracts and the way it out from 2009 to 2010, it is sometimes cost advantageous to do a land bridge over from California to other ports. When the Panama Canal opens up in 2014, we see that trend changing.
What level of highway investment and other infrastructure investment is assumed by IHS?
Not a very high one. I put that slide up which had state and local investments. One of the issues and Randy touched on this as well; we expect state and local governments to have more responsibility, but at the same time they will have fewer funds available area. We don't see a lot of federal investment because the stimulus is over. State and local portions are important, and a lot of states don't have money to dump into highway projects. So we are seeing a relatively low level of investment compared to other years.
Randy, there are two comments in here directed toward you. Stating that trucks only contribute 13 percent of miles driven versus 40 percent of Highway Trust funding is misleading given that it is the weight and size of the vehicle that impacts the system from a maintenance and congestion standpoint.
Similarly, I have seen reports that compare the vehicle miles travel by truck equate to 2000 passenger vehicles in the amount of damage to the road. I am not sure that your slide that showed that trucks Pay 40 percent of Highway Trust Fund total and drive 13 percent of the miles takes that the road damage caused by trucks into consideration. I will give you a chance to comment on that.
I know there was a study back in the late 1990s that showed there was significant damage caused by overweight trucks. I think since there has not been any recent studies on that, it is difficult to say in actuality that trucks don't pay their fair share or that they do pay their fair share. My slide was strictly for illustration purposes so that people don't think that trucks necessarily got a free ride.
There is also a lot of research going on right now of single wide tires, different configurations, different axel spreads, different pavement mixes which indicate that the damage caused by trucks may be going down relative to the way it was by using old tires and a lot more pressure in the tires. I think it is debatable about whether or not trucks pay their fair share. The other thing I would say is that the industry is on record as saying they would be willing to pay higher fuel taxes as long as those taxes are going into highway projects.
This question is for Randy and Ken. To what extent are you using scores from the new CSA safety monitoring system to select carriers? Is it something you are already doing, or are you waiting until the information is more complete and normalized?
This is Randy. We have a very large spend through Menlo and through Con-way Freight buying truckload services. We have made use of the previous carrier rating system that FMCSA had in place and we have run every one of our current stable carriers through the CSA model to help rank them. The public data is not complete yet. There are seven basics. Two of the seven basics are not yet available to the public because FMCSA is still during work to make sure they are meaningful. As a result, we have not taken significant action until those last two basics are right and we know they are right. I think that Ken was correct in saying a lot of this is going to be based on court cases rather than what our assumptions are. That will drive what we use to rank carriers.
The day the ratings came out, and we ranked every carrier and put them in different percentiles. Now 50 percent of our carriers have two alerts or less, which is okay. So carriers with four or more, we are having conversations with. The point about not having access to all of the report, we are asking those carriers to send us the parts that are only viewable by themselves to understand the total risk and total performance of the carrier. Now with these selection criteria for selecting new carriers, we have not determined what criteria we are going to use to select or not select. To the point about FMCSA they still only have three categories to determine safety, that is still the governing body of whether a carrier does business in the United States or not. Now CSA it's great and gives a lot of references, but until the FMCSA changes something in our contracts going forward, it's still just states that you be a satisfactory carrier.
We have about three more questions. If our presenters are available to stay on for a couple more minutes, I think we will try to get through them. Do you think the just-in-time conveniences will decrease significantly as we try to fill the containers and move towards efficiency?
If the carrying cost of inventory becomes more impactful, there will be more just-in-time because we won't want to carry it in the building. So I can say that is something that could happen.
I think that is exactly right. We have not seen from our customers any inkling that they still are not demanding high levels of service and fast service. The other thing is that this gets blurred a little bit and Ken made to good point about filling up empty miles. We have as a country the allusion that every lane we move in is balanced. The only thing I can say to that is New York City consumes and awful lot. There will always be a lot of empties coming out of New York City because there is no manufacturing there. The only production is limited and the biggest export is probably trash. So the quest of getting perfectly balanced entities across all modes is almost a false trail.
Would there be any routes in the US that would be able to support land trains? Is there any advantage to the economy, livability, reduction in diesel fuel use, or any other advantage?
If they are talking about the road train that is used extensively in the rural areas of Australia, there is a lot of research going on in the United States around what is called 'platooning' and the road trains connecting vehicles together electronically so that they all move in harmony together. We probably have some areas that make sense for that, particularly in flat world rural areas. But we do not have public policy that would allow us to do that at this point.
There have been studies recently about dedicated truck lanes and things of that nature, but no public policy to support any of that.
The next question is for Ken. What kind of impacts has Walmart been facing as a result of ocean shipping lines increasing their slow-steaming operations, especially for goods with higher time sensitivity?
It is a concern with limited capacity as our imports are starting to grow again into the United States. It is causing some out of stock issues and we really haven't figured and determined what the best course of action is. We are having a lot of dialog. It is not that the ships don't exist, they just haven't put them back in service.
One final question, but I am not sure any of you could really answer this. Why do the railroads and government agencies continue to build intermodal facilities in urban areas at the same time they try to reduce urban truck congestion?
I think we need a rail representative to answer that one.
I will put that out there and if anybody wants to respond to the question in the chat box, feel free. I know we are a few minutes over, so I think we will close out for today. Thank you all for attending today's seminar. Thank you everyone for your patience with some of the issues in the beginning. The recorded version of this event will be available within the next few weeks on the Talking Freight website.
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