Talk to us about what you see that's particularly interesting when it comes to this deal.

Yeah.

So what you're doing is the number one freight broker, CH Robinson, is buying the number three freight broker here in the United States, which is RXO.

Uh, the combined two companies will have around twenty percent market share of the US market.

Uh, you know, what's really interesting to us, and it kind of, uh, dovetails from the conversation we were having earlier with AI, CH Robinson's really been a leader, uh, within the freight transportation market in terms of investing and creating AI to be a more profitable freight broker.

And they also have implemented over the last couple of years lean management, uh, systems, which have made their average freight broker, uh, much more, uh, productive than, uh, your average RXO freight broker.

So you bring in those RXO freight brokers into the CH, uh, uh, Robinson's model, and you should have significant, um, uh, productivity gains, not only from the top line, but also from a, a productivity standpoint.

A- and tell me, why exactly does this deal make sense right now in particular? Is this about gaining mar-- uh, you know, scale in what's a particularly, uh, difficult freight market right now?

What's going on?

So there's two things.

The space is obviously early cycle and people are a little excited about what's going on with the industrial sector.

economy, given the data center build-out that's really been helping with freight.

That, coupled with ag, has been pretty good as well.

That's one thing.

But really, what's probably primarily driving it is a tighter trucking market.

At the end of the day, they

Do you agree or disagree with that statement?

I mean, I think it's here to stay.

I really do think that the benefits that the current administration is getting are not going to be reversed, because I think that a lot of folks, when looking back in the rearview mirror, think that the lax rules that they had before just didn't work.

And I think a lot of folks in and out of the industry didn't realize how corrupt some of the bad players were, whether it's when ELDs came, most people thought, oh, this is great.

Everyone's going to be on a level playing field.

People won't have five sets of books anymore.

But so much is calling an Eastern European hacker and getting into your ELD and kind of rolling back your hours.

Lee, do you think there's additional operating improvements and operating leverage available for the LTL carriers?

What, what are your thoughts on sort of the current state of, of the market?

Yeah.

So, uh, at Bloomberg Intelligence, uh, you know, we cover all modes of transportation.

So whether it's on the road, the rail, the air, or the ocean.

Uh, to your point, it's been, uh, a pretty exciting time to be in this space, especially since, uh, the pandemic.

Um, it's nice to, uh, you know, have people interested in your markets.

Um, and, and the, the interest right now is obviously being driven, you know, you mentioned it a couple times, on the truckload market.

If this cycle does go on for a couple of years, I mean, wh- where, which companies are the best position to take advantage of a elongated cycle?

What did we learn from their earnings?

Yeah, hey, Paul.

I thought they did a pretty good print for their fiscal fourth quarter.

You know, what they've been able to show is that their cost controls, they've had a number of different programs in place that are really starting to pay off.

And that kind of helped them with their beat.

They also painted a relatively okay demand picture for us.

They noted that they didn't see much demand destruction from higher fuel costs, which is a very good thing to hear.

How well positioned or perhaps not so well positioned is FedEx and along with its peers for that?

How long do we think that'll take?

Yeah, so they're already offering these services.

And what they tend to do is they go into a market because they want to reduce their costs to serve, their costs to do their core competency, their main businesses, which obviously is the Amazon.com business.

So what they're trying to do is really take the excess capacity, the expertise that they have, that they built doing things in-house, and kind of be able to lower the, like I said, lower the average cost.

How long will it take? I mean, it really depends on what they're going after.

We don't think they're like a huge threat to the less than truckload market.

We think that, you know, for commoditized freight, yes, they can make inroads into the brokers and freight forwarding businesses.

So how has this changed?

The railroad business would create the first truly coast-to-coast, east-west rail system in the U.S. Lee, but of course, the big, big, big issue is will the regulators allow it? What's the feeling here?

You know, the feeling is really mixed amongst participants.

Obviously, if you're Union Pacific or Northern and Southern, you really think the deal is going to get done.

If you're the other railroads or maybe some trucking companies, you might be hoping that it doesn't.

It is a high regulatory hurdle that it has to meet.

It has to meet that it enhances competition and it's in the public interest.

A long time ago, I think it was 2001, they changed the rules for mergers at the STB.

If I'm CSX, do I feel the need to maybe reach out to Union Pacific or maybe the other Western Railroad there and figure out that we need to do a deal as well?

And Lee, a good report here from FedEx, whose shares are right now up about 2%, a forecast that came in better than most people expected, including the range that it offered.

Yeah, it definitely was a nice print for their third quarter, which includes their peak season in December.

It shows us that they're really executing on their plan.

The beat was really driven by their express business or their parcel business.

Their freight business, which is their less than truckload business, continues to struggle.

That's really not a company-specific thing.

That's an industry thing, the LTL market itself.

What are you looking for there? What's the what's what's the story there, do you think?

How much of the results reflect that effort versus what's happening globally?

Yeah, I mean, we all have our own issues, but FedEx certainly does have a number of them.

And, you know, they've been busy trying to restructure their European business.

And, you know, they're kind of combining their ground and express networks.

And they're kind of going through a transformation right now.

And they're really hoping.

that they'll come out of this transformation a more nimble parcel provider that can really take advantage of some of the strong B2B markets that they're going after and higher margin B2C business also as well.

What are they saying just about core fundamental business trends?

Lee, what do you make here of what we're seeing in the Middle East and how it may impact global trade? How are you thinking about it?

Yeah.

So, I mean, at the end of the day, it's going to put upward pressure on rates because there's now a premium on capacity, especially as it relates to the tanker industry.

We've seen tanker rates get close to almost $500,000 a day.

That is speed driven by the fact that people want oil.

They're The ripple effect really for my world, because I cover marine shipping, air freight guys, and also the folks here in the U.S., the railroads and trucking companies, the biggest impact is going to be the inflationary aspect and the higher diesel prices.

When diesel prices rise significantly, it tends to weigh on margins because there is a lag effect on the fuel surcharges that they charge their customers.

Isn't that going to raise costs for everybody?

So what is the story with J.B. Hunt and how it's positioned for the current market environment?

Yeah, if you take a look at the stock, it's been up a lot over the last couple of months.

And some of that has been in anticipation of the trucking spot market to kind of turn more positively.

And that would be through more supply coming out of the market.

So the stock is off a little bit off today.

It was off a lot in the after markets last night, but it's come back a little bit.

And that's really being driven, I think, because of that kind of high expectations.

Is that the catalyst to get people excited again about J.B. Hunt? You know, what kind of cost savings it can realize this year? Maybe it can go further than what it had projected when it comes to reducing expenses?

For more, guest hosts Kristine Aquino and I are joined by Lee Klaskow, Bloomberg Intelligence Senior Transport, Logistics and Chipping Analyst.

We're thinking that next year is going to be a better year, but it's not going to be a great year.

So earnings for the rails, broadly speaking, increased by mid single digits.

We expect that to accelerate to high single digits.

I think investors would really like to see it get into the double digits and even mid teens.

But I think we might be a ways out for that for a while, and that's really being driven on the demand side.

We're really expecting tepid demand across the board at low single-digit growth.

Yeah, well, if that does not clear the regulators, Lee, what do you think that will say about the future of potential consolidation or strategic partnerships across the rail industry? Do you think people are going to see it as a one-off sort of situation, or is it kind of a harbinger of challenges to come when it comes to M&A in this space?

What did you learn?

Well, I mean, their second quarter, they performed pretty well.

And, you know, they gave us some color about the peak season, peak season from an average daily volume growth.

They're looking at mid-single digits.

That could increase to high single digits because there's one extra operating day in the quarter or during peak season, I should say.

So, you know, they seem to be executing on their restructuring plan.

The problem is, is that in their second half, they're going to be having a lot of headwinds that they're going to have to deal with.

Can you compare and contrast their approach to some of the macro challenges that faces the industry?

For more on this, guest host Lisa Mateo and I were joined by Lee Klaskow, Bloomberg Intelligence Senior Transport, Logistics, and Shipping Analyst.

What's going on at UPS is they are making progress and they're executing on their plan and their plan plans.

really is to create a network that can not only handle but thrive in an ever-changing environment.

And that change is being driven by e-commerce.

It's being driven by the uncertainty around tariffs.

And what they've been able to do is increase productivity through technology, whether it's automation or AI.

And that also they were stepping away from business from Amazon.

Where were they seen? And what kind of, let's say, year-over-year cost savings does it expect in 2025 from all of this?

What's going on there?

Yeah, trust me, I enjoy being a flavor of the month, so I'm glad to be here and talk about transport.

You know, what's going on at UPS is they are making progress and they're executing on their plan.

And their plan really is to create a network that can not only handle but thrive in an ever-changing environment.

And that change is being driven by e-commerce.

It's being driven by the uncertainty around tariffs.

And what they've been able to do is increase productivity through technology, whether it's automation or AI.

Where were they seen and what kind of, let's say, year-over-year cost savings does it expect in 2025 from all of this?

How do you look at them and their business models as it's kind of reflective of maybe how the U.S. economy is going?

Well, you know, what I would say is, you know, their stock is on fire right now.

And that's really driven the fact that they outperformed in the third quarter.

A lot of that has to do with them doing company specific company driven cost cutting measures.

So it's not so much about the macro.

It's kind of more about, you know, what is J.B. Hunt doing? And they've increased their productivity or reduced costs for around $20 million, which added 16 cents to the bottom line and helped fuel that beat.

What I would say, though, to the macro is we are pretty interested in management's comments on the peak season.

Talk to us about the state of the of that part of the business, just, I guess, attracting and retaining drivers.

So what are you expecting to see in this week's earnings results?

Yeah, it's going to be tough.

They're facing a lot of headwinds.

A lot of those headwinds are related to the kind of more protectionist stances from the Trump administration.

One of those, which actually had bipartisan support back in the Biden days, was getting rid of de minimis exemptions, which really allows lower valued goods to be imported into the United States.

without facing any duties or tariffs.

And that floor was at $800.

But FedEx had a couple of initiatives, Drive and Network 2.0. How have the company cut costs and shed businesses? How has that impacted the business? And what is there left besides FedEx Freight to cut?

We first asked Lee to give us his outlook on how this mega deal can get done.

Yeah, I think the whole speculation before the deal was formally announced about a possible consolidation And I think people are just trying to take maybe a breather right now because there are some execution risks, right? This deal is not going to close.

If it does close until early 2027, it needs regulatory approval, which is not an easy thing to do.

There were certain rules that were created at the Surface Transportation Board to make it very difficult for large Class 1 rail mergers to happen.

That was because at one time in the 80s and 90s, Those sorts of deals resulted in terrible service.

I think that the rails today were much more cognizant of service as it relates to integration.

And I don't really think either company, once assuming a merger does happen, are going scorched earth in terms of what they're going to do to their networks.

How do they plan to make money back? What are the financial wins, so to speak, to justify that hefty price tag?

How do you view it?

Yeah, I think the whole speculation before the deal was formally announced about a possible consolidation, you know, really fueled shares of Norfolk Southern previously.

And I think people are just trying to take maybe a breather right now because there are some execution risks, right? This deal is not going to close if it does close.

until early 2027, it needs regulatory approval, which is not an easy thing to do.

There were certain rules that were created at the surface transportation board to make it very difficult for large class one rail mergers to happen.

That was because at one time in the 80s and 90s, Those sorts of deals resulted in terrible service.

I think that the rails today were much more cognizant of service as it relates to integration.

How do they plan to make money back? What are the financial wins, so to speak, to justify that hefty price tag?

Can that happen? Will the regulators allow that to happen?

I mean, it's possible, given where the surface transportation rules are now as it relates to large acquisitions.

You know, we give it a relatively low probability, maybe 25, 30, 35 percent chance of happening.

The STB is actually in August reviewing some of its rules to streamline some of the processes that it deals with.

But, you know, it's not impossible.

But again, you know, we think that the probability is below 50%.

If it were to happen, it would create the first TransCon railroad.

What cost do I take out? What are the synergies, do you think? What's the reason for doing this deal?

Lee, FedEx, what did they tell on the street today?

so um their last quarter was a decent quarter but the quarter uh looking forward their first physical quarter is not going to be a great quarter and that's really just given the uncertainty that is being driven by the tariffs so you know they're seeing weakness in their b2b business they're seeing weakness in their industrial kind of end markets, and they're obviously seeing some weakness for volumes that are coming out of China into the United States.

So these are kind of the headwinds that they're facing.

FedEx is doing what it can.

It has a couple of initiatives.

where it's trying to take permanent costs out of its network.

Plus, at the end of the day, the company is transitioning from one that used to be B2B, business to business, is now is mostly, you know, the growth really is B2C, so that e-commerce business, which is more expensive to deliver.

So what's the next question?

They're going to focus on higher margin packages that could wind up being much more stable and profitable, right?

Yeah, to your point, they're really focusing on revenue quality.

They mentioned on the call that some of their business out of Amazon fulfillment centers just really wasn't profitable for them.

So it obviously doesn't make sense to take that business.

And if they're able to create capacity by getting rid of some of this business and filling it with uh what they call smb small to mid-sized businesses um you know that's going to be a good thing for its margins overall and it'll allow them to generate the kind of returns that they can reinvest in in their network because you know while they're doing a lot of investing and now in automation and they're closing some um some facilities just to be a little more nimble than they were in the past they're still going to continue to have to make those investments because technology continues to change and those benefits will need to be driven by those investments.

What are you seeing there these days? What are they telling you?

Again, you know, it's a lot of uncertainty.

They saw a kind of a surge in demand ahead of the tariffs.

What's your base case?

Well, we've been saying for a while that tariffs are not good for the freight markets.

And the reason for that is obviously they're inflationary and the consumer is a big part of the U.S. economy.

So it's going to have an impact on things that we import.

So it's going to impact companies like Maersk and HubHug Lloyd and Costco.

Those are marine shipping lines because they'll be hauling less containers from Asia to the United States.

It'll impact railroads such as hauling less freight, and it'll impact truckload carriers and LTL carriers, and also it's going to obviously impact the parcel carriers like FedEx and UPS.

Are you hearing anything now about bookings or any of that kind of stuff?

Lee, I'm going to ask kind of the same question I asked to Poonam Goyal about Nike, which is how much of the underperformance in FedEx results was due to just maybe the market being a little softer, the consumer being a little softer, or FedEx specific issues?

Hey, Paul, I think it's a lot has to do with the fact that the macros is a little weaker than they thought.

And the weakness that they were seeing is in the business to business volumes, as well as the industrial economy.

You know, they have a lot of exposure to the industrial economy in their FedEx freight business, which is their less than truckload business.

That business kind of disappointed on the earnings, while its parcel business, express business, slightly beat expectations.

The company is going through a major transformation.

It's been operated as a kind of bloated concern for a number of years.

That looks pretty attractive, but I guess you have to buy off on management's ability to execute, right?

What do the tariffs mean to the I-42 manufacturing cor- corridor in North Carolina?

Well, interesting enough, like, you know, there is a long secular trend of bringing more manufacturing back to the United States.

Um, and that's obviously a good thing, but it, it takes time.

So just because tariffs go on doesn't mean there's gonna be a light switch and manufacturing's gonna start, and that's gonna just increase the demand for trucking.

So what you're gonna have really is, is not so much the industrial sector.

The industrial sector's gonna be impacted because of lack of demand, and we're seeing that in flatbed rates.

So flatbed rates are usually tied to the industrial economy, uh, and they, and they've been, uh, pretty weak, uh, uh, recently.

Right