January 2009 | Commentary | Risks and Rewards

Facing the Challenges Ahead

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During the past year, global events created new concerns for logistics operators. For some, finding insurance coverage has become increasingly difficult, as insurance companies need to balance the likelihood of a significant loss against the prospect of recovering their payout—a trying task in times of financial uncertainty.

Purchasing insurance may well become costlier in the coming year as investors conserve their capital, which, in turn, diminishes the industry's capacity to write business. After several years of consistently softening rates, the insurance market showed signs of hardening this past summer, as claims began to unbalance overall underwriting results and investment income diminished. Earnings came under further pressure as portfolio values suffered significant declines.

As a result, the cost of purchasing insurance may rise in the coming year. The timing is particularly bad, as shippers will likely see their earnings drop in the face of diminished global trading volumes caused by a slumping world economy.

The tide may be shifting domestically, however, as the logistics sector begins to adjust to an apparent change in manufacturers' needs. With transportation costs reaching new highs this year, some no longer found it economical to manufacture goods abroad and ship them to the United States.

When fuel costs hit all-time highs and the dollar hit all-time lows, manufacturers began to reconsider locating assembly and distribution centers closer to U.S. consumer markets. Despite subsequent roll-backs in fuel costs, long-term forecasts call for eventual increases.

BRINGING BUSINESS BACK

Reflecting these conditions, the domestic logistics market is projected to expand six to nine percent in the coming year. Logistics operators have been partnering with manufacturers to service virtually every leg of the supply chain process. From assembly line to delivery at final destination, regional intermodal centers have geared up to provide integrated transportation and logistics services to customers.

As they look a few years into the future, ports along the Gulf Coast and at inland destinations have begun preparing for a projected increase in container volumes after the Panama Canal expansion is completed. Inland ports and distribution centers will likely play a greater role in servicing customers throughout the country.

CARGO SCREENING CONCERNS

Regulatory compliance will be an issue for air cargo carriers in the coming year, as the government continues to implement regulations aimed at enhancing the nation's security.

Approximately 12 million pounds of cargo are transported each day on passenger aircraft in the United States, according to the Transportation Security Administration, which faces the mandate of physically screening at least half of this cargo by February 2009. By August of the following year, all cargo traveling on passenger aircraft must be fully screened for security purposes. For some operators, this will present a financial challenge. For others, it may open new opportunities.

The transportation industry continues to adjust to the demands of shippers, who, in turn, must meet the changing needs of world markets.

Have a liability question or concern? I will try to help. Please send your questions to me via e-mail at dan.negron@thomasmiller.com.

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