Monday, September 15, 2008

Why Lehman Brothers and Merril Lynch Matters ot the CEP Industry

The seriousness of today's financial news is broadcast across the top of all of the world's newspapers, at the top of Internet news sites and is the lead story on all broadcast newscasts. The headline in today's Wall Street Journal succinctly describes the situation, "Crisis on Wall Street as Lehman Totters, Merrill is Sold , AIG Seeks to Raise Cash" In the first paragraph, the Wall Street Journal states that "the American financial system was shaken to its core" by these events that developed yesterday.

The financial crisis may represent the greatest since 1929. More recent financial collapses of savings and loans, Mexico, Long Term Capital, and the Russian Ruble all pale in size. As this is not a financial blog, I will not comment as to what it means to your investments including your home, and savings in 401-K's, IRA's or equivalent retirement savings accounts. What is clear is that a lot of large banks, insurance companies, and other corporate and public institutions hold significant quantities of assets that have values well below what is currently on the balance sheet and will need to sell assets or seek infusions of cash to meet their obligations to their customers, policyholders and pensioners. Also, equity investors and lending institutions of all types will be more risk adverse than they were. This will will result in tighter capital markets in the near term.

So, what does this mean the courier, express and postal industry?
  • The immediate impact of crisis will be some job losses in the financial sector that will slow growth in regional economies most heavily dependent on this industry. (e.g. New York, London, etc) CEP business tied to those markets will suffer.

  • Tighter investment capital will act as a brake on the economy. It will make it more difficult for businesses and individuals to gain capital to do everything from buy a set of tires on credit to expand a factor to meet customer demand. Less credit-worthy businesses may even find their normal sources of operating credit drying up. A slower economy means less volume. FedEx's recent announcement on its current quarter's earnings highlighted the impact of a slower economy on volume. Postal operators should see a similar impact on revenue generated by their more economically sensitive products including parcels, advertising and periodicals.

  • Well capitalized and cash generating CEP competitors, may try to provide alternative financing arrangements to lock customers into a broader relationship of financial and transportation services. UPS's recent announcement that it will use it UPS Capital unit to lend to small exporters, illustrates this trend. Other CEP competitors that have home markets that can generate substantial cash, may also enter this market.

  • Certain costs of the CEP business may drop due to the slowing economy. Lower fuel prices will reduce the expense of delivering letters and parcels. Lower demand for transportation capacity in general may reduce the cost of capacity bought on the spot market. The industry should be cautious that, in the near-term, some of the lower fuel prices may reflect an oversold commodities market as financial institutions unload positions in oil and gas futures to raise cash.

  • The lower fuel costs will have a side benefit of higher margins for companies that charge fuel surcharges in that the decline if fuel prices is occurring at a faster rate than the companies are reducing the surcharges. Fedex noted that affect in announcing higher earnings than projected in its current quarter. A similar impact will be felt by UPS.

  • Capital spending among all CEP firms will slow. Every quarterly announcement from publicly traded firm will announce a delay in capital investments for the foreseeable future.

  • CEP firms, and in particular postal operations facing faltering finances due to the slow economy will find their path to improved finances more difficult. Those administrations that are planning reductions in headcounts, retail offices, or capital spending may take a second look to see if further reductions can be made. Those administrations that have not begun the process will begin the process.

  • Consolidation of letter and parcel sortation operations into fewer, more automated facilities will occur among both public sector and private sector firms. Plant consolidations at national posts, both public and private, in their home markets will likely receive significant political attention given the impact on jobs in a slow economy. Consolidations happening in the private sector and by national posts outside of their home market will receive little if any negative political attention. UPS's recent opening of a new ground terminal in Louisville, Kentucky consolidated sortation that was done elsewhere in Louisville, as well as in Lexington, Ky., Cincinnati and Sharonville, Ohio. The opening was attended by Louisville's mayor and the city named the day in commemoration of the opening.

  • To the extent that regulatory restrictions do not restrain competitive responses, incumbent operators may begin to expand and accelerate counter-moves to new entrants in upstream, downstream, and end-to end markets to use excess capacity in more efficient automated facilities to recapture market share.

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