3 Reasons Safety Problems Could Stall FDX, UPS Stock

Advertisement

As investigators seek answers for why a double-trailer FedEx (FDX) Freight truck jumped a median and collided with a charter bus killing 10 people last week, expect closer scrutiny from federal regulators on whether existing transportation safety rules are tough enough to protect the public.

fdx-stock-ups-stockAnd if regulators decide that new rules are needed, investors in FDX and United Parcel Service (UPS) need to factor in the impact of those regulatory headwinds.

The National Transportation Safety Board (NTSB) and the Federal Motor Carrier Safety Administration (FMCSA) are investigating the April 10 crash in which a FDX Freight tractor hauling double trailers jumped a median on Interstate 5 in California, colliding with a Silverado Stages coach shuttling more than 40 students and chaperones on a visit to Humboldt State University. Five students, three chaperones and the drivers of both vehicles perished in the crash; 34 others were injured, many with severe burns.

Of course it’s beyond crass to reduce the tragic death of 10 people — five of them high school students on their way to visit a college — to a calculation of higher costs and lower stock prices. But the balance between cost and safety has always been a tenuous one for the transportation industry: Err too much on the side of safety, and transportation companies can’t stay in business; err too much on costs and people die.

As premier cargo companies, FDX and UPS stock are potentially vulnerable to public opinion – and regulatory action. Here are three reasons safety concerns could potentially stall FDX and UPS stock:

#1 — Hours of Service Rules Could Be Extended to FDX, UPS

The FMCSA last July instituted new “Hours of Service” rules that cut the maximum hours a driver can work per week.

Specifically, drivers may drive a maximum of 11 hours after being off duty for 10 consecutive hours; they are subject to a 60/70 hour limit. There’s also a “restart” provision, which requires a driver to have a 34-hour break for each seven-day work period.

The biggest deal for the industry is the requirement that truckers take a 30-minute break every eight hours — a controversial provision a federal court exempted short-haul FedEx and UPS drivers from last year. Since investigators will be looking at the potential role of fatigue as a factor in last week’s crash, regulators are likely to redouble efforts to apply the rule to FDX and UPS.

#2 — Efforts to Repeal HOS Rules More Likely to Stall

Trucking industry lobbyists were already mounting a challenge to the HOS rules in Congress. Last month, House Infrastructure and Transportation Committee Chair Bill Shuster (R-PA) and Rep. Tom Petri (R-WI) asked the GAO to look into whether the FMCSA overstated the safety benefits to be gained from the rules.

The trucking industry often cites a Wells Fargo Securities report forecasting that the HOS rules would decrease truck productivity 1.4% to 4% and result in a trucking industry loss of $500 million to $1.4 billion. The high-profile federal investigation into last week’s tragic crash — particularly in an election year — is likely to stall any movement to ease safety regulations. That also could weigh on FDX and UPS stock.

#3 — Cargo, Double-Trailer Rules Could Get Tougher

Although investigators are nowhere close to determining a cause of the California crash, count on them taking a closer look at the relative safety of double-trailer trucks, which have often been a target of safety advocates.

Also, given unconfirmed reports that the trailer might have been on fire before the crash, investigators will carefully examine freight manifests to determine if there was any volatile cargo on board. If mishandled or mislabeled cargo is proved to have been a factor in the fire, count on federal regulators to tighten safety and documentation requirements — something investors in FDX and UPS stock should keep an eye on.

So, what’s the bottom line for FDX and UPS? Well…

Bottom Line

Federal regulators must respond aggressively to reduce the chances of such a tragic crash ever happening again.

Regulators and lawmakers eventually crafted tough pilot fatigue rules in the wake of the 2009 crash of Colgan Air 3407 near Buffalo, NY caused when sleep-deprived pilots failed to recognize a stall. That crash killed all 49 people on board and one on the ground; now the airline industry is struggling to hire enough qualified pilots to comply with the law.

The trucking industry has faced a similar challenge: an acute shortage of drivers, demanding timetables from shippers and HOS rules that require drivers to spend more time resting and less time on the road.

FDX and UPS stock caught a break when the appeals court exempted their short-haul operations from the 30-minute break long-haul truckers like J.B. Hunt (JBHT), Landstar (LSTR), Heartland Express (HTLD) and others had to adopt. But after last week’s crash, double-layer safety regulation seems like a much harder sell.

While FDX and UPS stock have performed decently this year, I’d expect higher labor costs, mechanical upgrades and new regulatory headwinds to weigh on earnings in the second half of this year.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/fdx-ups-stock/.

©2024 InvestorPlace Media, LLC