FedEx's Friday reduction of its profit outlook because of high fuel costs and weak demand is a bad omen for small U.S. trucking companies that have been hammered by both.
Oliver Quillia for CNBC.com
"Trucking companies are getting squeezed at both ends -- by fuel costs and the fact that high gasoline costs are hurting consumers," said Lee Klaskow, an analyst at Longbow Research. "In recent downturns the (U.S.) consumer has shouldered the burden and eased the blow for trucking companies, but this time they may not be able to because of the price of fuel.
"Smaller trucking companies in particular face extremely stiff headwinds."
The U.S. trucking sector has been hit by weak demand since the third quarter of 2006, caused by lackluster retail and auto sales, the housing sector meltdown and faltering U.S. economic activity. Excess truck supply has pushed prices down, as competition for business is fierce.
"There's been plenty of pain from low volumes in the trucking sector and everyone's hanging on for the turnaround," said Keith Schoonmaker, an analyst at Morningstar.
But should smaller operators be forced out of the market in the meantime by high fuel costs and continued low volumes, some analysts say it might be good long-term news for larger companies, as lower supply should allow them to boost the rates they charge.
After the market closed on Friday, Memphis-based FedEx said it now expects earnings per share for the fourth quarter ending May 31 in a range from $1.45 to $1.50, down from its previous forecast of $1.60 to $1.80. When FedEx gave that that previous outlook in late March, company Chief Financial Officer Alan Graf warned that volatile fuel costs made the forecast uncertain.
The package delivery company said on Friday that spiking oil prices had raised estimated fuel costs for the quarter by 7 percent. The cost increase, plus restrained demand for the company's U.S domestic express business and its less-than-truckload services, would result in the earnings shortfall, FedEx said.
Less-than-truckload (LTL) operators consolidate smaller loads into a single truck.
Like its main rival United Parcel Service and the railroads, FedEx passes on higher fuel costs to customers, but there is a time-lag before its price increases take effect.
"When fuel prices spike, carriers are temporarily exposed," Morgan Stanley analyst William Greene wrote in a research note. "We'd also note that this new (FedEx) guidance assumes no additional increase in fuel and no further weakening in GDP, so we see potential risk even to the revised numbers."
Spiking Costs
Wachovia analyst Justin Yagerman wrote in a research note that the news from FedEx could act as a drag on some trucking stocks. In trade Monday, YRC Worldwide I stock was down more than 4 percent while Con-way was down 0.6 percent. Both companies are LTL operators. FedEx's own shares were off 16 cents or 0.2 percent at $90.21.
"Longer-term, rising fuel costs should continue to accelerate trucking failures, which we believe will eventually lead to a tighter supply/demand environment for the trucking industry," Yagerman wrote.
"However, in the short-term these higher fuel costs likely translate into a material earnings headwind."
Truck companies are paying nearly 50 percent more for diesel than at this time a year ago. Last week the U.S. Energy Information Administration said it expects retail diesel fuel prices to average $3.94 per gallon in 2008, up from $2.88 per gallon last year.
"For many carriers, diesel has now surpassed labor as the number one operating cost," said Tavio Hedley, staff economist at industry group the American Trucking Associations (ATA).
Hedley said the ATA recorded 935 trucking bankruptcies among companies with fleets of five or more trucks in the first quarter, the highest level since the third quarter of 2001.
"If fuel costs remain at this level and the economy does not improve, then there is nothing to suggest this number will go down any time soon," he added.
Longbow's Klaskow said while small companies will suffer, larger companies are better placed to withstand a downturn.
"The balance sheets of the large publicly-traded companies are largely in good shape," he said. "And even those with weaker balance sheets have more financial flexibility than small operators."
Art Hatfield, an analyst at Morgan Keegan, said he does not see FedEx's lower outlook as a sign of the trucking sector's problems, but as related to FedEx's express delivery service, which is suffering from a shift by customers to slower, cheaper services to save money in a weakening economy.
That said, Hatfield added that bankruptcies among smaller truck companies are likely to remain high short-term.
"This will improve the fundamentals for the industry as it will remove capacity and allow large companies to raise prices," he said.