The bill includes $4B in grants for cargo airlines to cover their payroll and another $4B in loans. We believe the loans and grants have some restrictions on buybacks and dividends, so we expect FDX and UPS would be reluctant to utilize this aid. AAWW doesn’t pay a dividend and is more focused on debt paydown than buybacks, so perhaps it could benefit from the $4B in grants to cover its payroll if the restrictions aren’t too severe. We estimate around $200M of potential grants to AAWW relative to its $600M market cap.
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Our WR Transport index fell another 10% last week, outperforming the 15% fall in the S&P 500. AAWW popped 28% and the Integrators increased 2% on average, while the LTLs (-5%) and TLs (-7%) relatively outperformed. However, the Rails fell another 15%, and they’re now the worst performing transport sub-sector this year. The Rails are now down 31% YTD, and they’re now the only transport sub-sector that’s underperforming the S&P 500 (-29% YTD). In contrast, the LTLs (-17%) and TLs (-23%) are now the biggest outperformers.
We spoke with a large international freight forwarder about international freight trends and the impact of coronavirus. Business levels in China have rebounded in March, with production now running at around 60%-80% of normal capacity right now, depending on the region. With reduced passenger belly capacity and following the production delays, this forwarder is seeing a significant amount of charter activity out of China and very elevated airfreight rates in the $5-10 per kilo range vs. typical rates in 1Q around $1-2. Overall volumes remain down y/y in March, but rates are up a lot and so net revenue is tracking down less y/y than volumes. Looking ahead, this forwarder expects to see a similar dynamic in transatlantic market where belly space is even more important. This forwarder isn’t sure how long airfreight rates will stay this high as passenger capacity will eventually return to the market.
Even with Friday’s record bounce (3/13/20), our WR Transport index fell 10% last week, underperforming the 9% fall in the S&P 500. SNDR (+1%), PCAR (+1%) and UPS (up slightly) were notable outperformers last week, but everyone else was down including double-digit declines for most of our coverage. The Forwarders (-6%) and TLs (-7%) held up relatively best, while the Rails (-12%) performed worst. After the last 3 weeks, our Transport index is now down 20% YTD, underperforming the 16% drop in the S&P 500 (slide 3).
We spoke with a contact at one of the West Coast ports about volume expectations. Our contact highlighted that February volumes were very soft as expected due to a combination of Chinese New Year and extended production cuts related to coronavirus. Our contact expects a similar, if not bigger, decline in import volumes in March. That said, he’s encouraged that factories in China are starting to ramp up production and that ocean carriers are starting to reduce their number of blank sailings. As a result, he expects West Coast port imports to stabilize in April and then strengthen above normal in May with a number of production orders already placed in China. Looking past May, our contact believes June port activity is more up in the air depending on the level of demand destruction in the U.S.
Today’s (03/12/20) series of charts highlight exposure to Europe across our transport coverage. To be clear, Trump’s EU travel ban does not apply to cargo/freight, but there are clearly broader demand/macro implications of what’s happening right now. As shown below, XPO, PCAR, EXPD, UPS, CMI and FDX each have double-digit exposure to Europe.
WAB hosted an Analyst Day (virtual) yesterday (03/10/20), and reiterated C20 guidance (pending any coronavirus impact) and provided 5-year guidance of mid-single digit annual revenue growth and 10%+ annual EPS growth. WAB expects 300bp+ of consolidated margin improvement over the next 5 years and sees upside to its EPS guidance from buybacks and/or acquisitions. In a strong tape, WAB’s stock bounced back 10%.
Our WR Transport index fell another 3% last week, underperforming the 0.6% rise in the S&P 500. But relative to the prior week’s sea of red, last week felt like progress with a few stocks finishing up on the week, led by UPS (+4%), KNX (+3%) and ODFL (+2%). Overall, the TLs (+0.5%) performed best last week, while the Integrators (-4%), Forwarders (-2%) and Rails (-2%) performed worst. After the last 2 weeks, our Transport index is now down 11% YTD, underperforming the 8% drop in the S&P 500 (slide 4).
We spoke with two freight forwarders and a 3PL regarding coronavirus and evolving supply chain issues. One forwarder we spoke with is seeing considerable improvements in manufacturing and trucking logistics within China over the past week. As a result, outbound freight out of China is finally starting to rebound and the number of blank sailings are set to decline in the coming weeks compared with the past month. Once these volumes hit the U.S. in a few weeks, it should help to ease pressure on empty containers and exports out of the U.S. moving forward. The other forwarder echoed these comments and noted that the pick-up in outbound volumes out of China has resulted in a 25%-30% spike in air freight rates out of Shanghai this week. However, airfreight rate increases out of Hong Kong so far have been much more modest. Meanwhile, the 3PL we spoke with is also starting to see activity recovery in China but he believes it will take some time to return to 100%.
Following last week’s 12% pullback, our WR Transport index fell 8.2% for the full month of Feb., basically in line with the S&P 500. This marks the worst month for our Transport index since last May. With the exception of AAWW (+20%) and SAIA (flat), all our other stocks were down for the month with the TLs (-11.5% on average) and Rails (-10%) performing relatively worst and the LTLs (down just 2%) holding up relatively best.
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