Airfreight & Logistics (Market Underweight): We spoke with an industry contact based in Europe about ocean container rates and his outlook for global containership capacity. Global ocean container volumes declined roughly 20% y/y on average during the first half of the year, but our contact anticipates second-half 2009 volumes to average down around 5% y/y, reflecting easing comps and expectations for improved intra-Asian trade trends. While the Asia-Europe trade remains relatively weaker than the transpacific trade, rates along the Asia-Europe lane have begun to inch up over the past four or five months from unsustainably weak levels. In July, our contact expects to see average all-in Asia-Europe container rates (including bunker surcharges) reach roughly $1,200 per FEU, up from $1,040 in May and $960 in March on average. Although fuel has likely played a role in the increase since March, our contact believes that the Asia-Europe container lines have been downright desperate to raise rates from the levels observed earlier this year. In contrast, container rates along the transpac have taken a step down over this period as new contracts begin to take effect. Our contact cited that average rates including bunker surcharges from China-U.S. declined from $2,000 per FEU in March to $1,900 in May and are expected to average around $1,500 in July. Importantly, a large number of the carriers along the Asia-Europe lane renegotiate rates quarterly, while the transpacific rates are more often negotiated annually in the spring. Our contact stated that in such an environment, those forwarders with more exposure to the Asia-Europe lane may face more pressure on purchased transportation margins, likely until demand picks up. Our contact also stated that relative to past cycles, he believed shippers have reacted more quickly to changing market rates, leaving the international forwarders less time to benefit from falling capacity rates. With rates still likely only modestly above variable cost-type economics, many container shipping lines are quickly chewing through cash and have begun to recapitalize.

Trucking (Market Underweight): We spoke with a mid-sized Western manufacturer about leasing dynamics, TL rates and volume trends. This manufacturer has a private fleet of about 100 trucks which he leases through a combination of Penske and PacLease, and serves to augment his third party trucking capacity. Our contact has also negotiated with Ryder, but has not found its lease rates competitive. In the current weak economy, this shipper has extended some leases for 12 and 18 months instead of renewing for full terms, parked some leased trucks for a flat fee, and returned some to his lessors to adjust to lower volumes. On the few leases he has renewed, our contact has received moderate improvements in lease rates, though not nearly as large as in the TL market. Due to his small size in for-hire TL volumes, our contact was previously paying somewhat exorbitant rates which were negotiated in the much tighter TL market of 2005-2006, and in a bid during 2Q:09 he was able to reduce these rates by 25%-40% (net of fuel), in part by bringing in new carriers. This shipper's end markets are mainly residential and commercial buildings, where he has seen replacement demand stabilize over the past several months, with almost no new single-family homes but some multi-family construction. While our contact's volumes remain down materially y/y and have been spotty in recent weeks, his y/y declines have moderated in recent months.

Railroads (Market Weight): We spoke with a mid-sized indirect materials (inputs into manufacturing) shipper about recent demand and pricing trends with the Class I rails. Our contact's volumes are trending down 10%-13% y/y, roughly in line with declines witnessed throughout 2009. This shipper has seen a seasonal uptick in volumes in June and July thus far has been stable, but there has been no turnaround in demand levels about which to get excited. As a result, our contact expects y/y volume declines to remain in the double-digit range throughout the rest of the year, as inventory levels will likely remain very lean going forward. This shipper is currently negotiating the pricing for his contract with BNI, which is a three-year evergreen contract, meaning that either the shipper or the carrier can decide to re-price the business after a 12-month period has lapsed. In this case, the contract is two years old, and has not yet been re-priced. Over the past few years, the rails have generally initiated price renewal discussions on these evergreen contracts, with the hopes of increasing rates; however, in this case, the shipper wanted to discuss new rates, implying that rates could decline from current levels. But, our contact acknowledged that the rails are making rate reductions difficult by adding in stricter fuel surcharge recovery programs. Finally, our contact has moved roughly 5% of his freight off of the rails and on to the highway to take advantage of low truck rates and strong truck service, and he continues to look for more opportunities to convert freight from railroads to trucks.

Note: Each of the comments above represents the viewpoint of a single shipper or industry contact. They are not necessarily representative of the overall market and do not necessarily reflect the opinion of Wolfe Research unless specified.

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