Q4 earnings season — Part 1: Broad-based strength evident

The tone was set by Union Pacific’s (UNP) positive preannouncement. The backdrop for transportation is strong as bridge cable.

Rates are soaring across all modes. Revenue and profits are rising. So is the cost of purchased transportation, though, for freight brokers and IMCs. 

Tight capacity and congestion represent both problems and opportunities, driving rates higher but limiting volume potential.

Rail volumes have turned positive for the first time in two years in Q4, with the strength from double-digit intermodal volumes for the past several months now broadening out to second derivative improvements in industrial carloads. Top-line growth for the rails is revealing tremendous operating leverage and incremental margins from years of precision scheduled railroading.

Tight capacity in trucking since the April bottom, along with booming activity at ports on both coasts, has spilled over into a robust backdrop in intermodal. As trucking contract rates converge with spot and are renegotiated higher for the 2021 bid season, this in turn improves pricing power for intermodal and rail.

Parcels are still benefiting from record e-commerce demand and newfound pricing power. And as contract rates are renegotiated higher and spot rates peak, freight brokers are beginning to enter the sweet spot of the cycle.

All this is evident in the first round of transport earnings. We will have much more to come in next week’s follow-on report in Part 2 of this week's special topic.