Oil drop to help U.S. transport only in short-term

By Nick Carey - Analysis

CHICAGO (Reuters) - A recent dip in oil prices should boost U.S. transport companies' earnings for the current quarter, but oil is still too pricey to offer the sector any long-term relief from the many economic headaches it faces.

Transport firms will get a short-term lift as the fuel surcharges they implemented to cope with higher oil prices finally begin to bite, while at the same time actual fuel prices fall.

But a wobbly U.S. economy and the pounding U.S. consumers have taken from tighter credit and rising inflation mean transport companies -- trucking companies above all -- are likely to see little more than a short-term earnings bounce.

"Yes, oil has come down a fair way from its recent highs," said Jason Seidl, an analyst at investment bank Dahlman Rose. "But it's going to have to come down a lot more -- and I mean a lot -- to have a significant impact."

Longbow Research analyst Lee Klaskow said, "Looking at the big picture, oil is still up significantly from where it was a year ago or two years ago. The longer-term view is that this is a zero-sum game."

Oil is down by about 20 percent since its July 11 high of $147.27. That gives a short-term bonus to transport companies levying fuel surcharges, as there is a lag between a change in the oil price and the point when a new surcharge takes effect.

It can take two weeks for surcharges to change at a trucking company and up to two months at a railroad.

When fuel prices spike, companies ranging from package delivery monoliths such as United Parcel Service Inc (UPS.N) and FedEx Corp (FDX.N) to railroads such as Union Pacific Corp (UNP.N) or big trucking outfits such as YRC Worldwide Inc (YRCW.O) feel the pinch because they have to shoulder the higher cost until they can pass along new fuel surcharges to customers.

But as oil drops, they get a lift while the higher surcharges remain. So a major railroad with a surcharge in place to reflect the late June oil price above $135 will get a boost to earnings now that a barrel of crude goes for $116.

"Lower fuel prices are going to help a bit in the third quarter," said Morgan Keegan analyst Art Hatfield. "The question is what happens to the American consumer and what that means for peak (holiday) shipping season."

TRUCKERS BEAR THE BRUNT

Oil prices are still up more than 60 percent on the year.

According to the U.S. Energy Information Administration, the average weekly retail diesel price slid 13 percent to $4.14 a gallon on Aug 25 from a July 14 peak of $4.76 a gallon.

But it's still up 45 percent on the year.

The recent drop eases the pressure on the transportation sector, but it does not alter otherwise gloomy fundamentals.