Transportation Industry Wraps Up Solid Year, Despite Tariffs

by Zach Thompson

With tariffs, a U.S.-China trade dispute and technology developments, the U.S. transportation industry was anything but lackluster in 2018. Although the industry in general fared well despite major disruptors, uncertainty surrounding tariffs raise concerns for the future.

Year in Review

On-the-road trucking and air transportation has been trending upward in the last few years and the demand for transportation has been steadily increasing. This is primarily due to President Trump’s Federal Tax Cuts and Jobs Act, which cut corporate taxes from 35 percent to 21 percent, the lowest that we have seen in a while.

For the U.S., those tax breaks have brought additional cash flow to the transportation industry, giving domestic firms the ability to build revenue and profits. The U.S. gross domestic product, which was only expected to reach 3 percent in 2018, grew 4 percent in the second quarter, the highest gain since 2014. A higher GDP meant more shipments, more purchasing and more trade, especially in the petroleum, motor vehicle, motor vehicle parts, and food and grain sectors.

From a business-to-business perspective, we saw an interesting collaborative development in the area of technology. IBM and A.P Moller-Maersk, the world’s largest container shipping company, launched a joint venture to digitalize supply chains and improve global trade. The two created TradeLens, a digital supply chain solution that helps reduce the cost of global shipping and eliminates the inefficiencies of paper. This kind of collaborative partnership demonstrates the demand from the transportation sector to create new platforms that enable speed and accuracy.

In Retrospect

After Hurricane Harvey took a toll on Houston’s oil and gas industry in 2017, we expected oil prices to jump in 2018, and they did. Despite this, the airline industry as a whole did quite well and felt minimal impact from the rising cost of jet fuel. The International Air Transport Association which represents 280 carriers, said industry is still expected to post a $33.8 billion profit this year, below a forecasted $38 billion, based on rising fuel costs. Passenger yields are expected to rise 3.2% and with oil and fuel costs falling again, profits will rise. Again, high demands for transportation have offset some of the major and minor setbacks we saw in 2018.

What we didn’t expect was the framework of how the U.S. tariffs would be applied. The layering of product tariffs - starting at 19 percent and increasing to 25 percent on Jan. 1, 2019 – are producing waves of orders immediately before each implementation, and then slowdowns right after. This was especially true for U.S. motor vehicles, where imports of Chinese steel and aluminum dropped 53 percent after the first layer of tariffs were enacted. With a rush to push through orders to the U.S. from overseas, the California ports surged and rates to purchase spots on cargo ships reached a five-year high.

Emerging Markets and Risks in 2019

As part of Tesla’s master plan to enter the long-haul trucking sector, electric semi-trucks are expected to hit the market in 2019, shaking up traditional freight transport. Also, e-commerce giants Amazon and Alibaba are expanding their already large footprint through more business-to-consumer efforts. Businesses that were relatively safe, like Office Depot and Staples, are now getting eaten up by the market share as the two companies are selling straight to businesses through their own fulfillment services.

It is still too early to tell what the future holds in reference to the latest round of tariffs ($200 billion was approved in September) but we do know, according to analysts, $34 billion of Chinese goods were tariffed in 2018.

While we have yet to see high profile bankruptcies as a result of the 2018 tariffs, it certainly makes it harder for some companies to pay the increased price for goods, which can result in cash flow problems. Large companies can weather the storm, but small companies that don’t have the large capital base may get pushed out of the market. While tariffs can cause a slow drain on profit, trade credit insurance can provide cover from complete loss.

Another area of increasing concern for the transportation industry is the threat of cyberattacks. Earlier this year, A.P. Moller-Maersk was the victim of a malware attack that resulted in a $300 million loss for the company. Business volumes were negatively affected for several weeks and this severely impacted Q3 results, according to the company’s leadership.

Anyone working in transportation needs to make sure they are shoring up their back-end data procedures to avoid, or at the very least minimize, the risk of cyberattacks. As we watch the transportation industry inching toward more digitalized logistics, we need to take note that this move comes with increased risks of breaches. Safeguarding data is critical. Seeking the proper channels of protection can avoid or minimize catastrophic losses.

Zach Thompson is a senior credit analyst at Atradius Trade Credit Insurance. He works with clients in the transportation, logistics, engineering and machinery, and focuses on financial analysis and underwriting as well as improving business practices. Prior to his role with Atradius, Zach worked for a Fortune 500 company in the credit card processing industry and held positions in banking.