Cuts in Government spend affect logistics and transportation providers

Uncertainty continues over what sequestration will mean to the US economy. Despite this, companies that provide services to the US government have been feeling the effects of federal budget cuts long before sequestration officially began. Much has been written about the effects on major contractors such as Lockheed Martin, Raytheon and Boeing, but how will budget cuts affect logistics and transportation providers?

Although the impact is not quite known, it is probable there will be some negative effects for logistics and transportation providers – particularly for those with a focus on the US Defense department.

The buildup of troop involvement in the Middle East proved financially beneficial for providers such as FedEx, UPS and others. In particular, Menlo Worldwide Logistics, who since 2007 has managed the US Department of Defense US Transportation Command (USTRANSCOM)’s Transportation Coordination Initiative (DTCI), benefited significantly. The initiative was designed to save the Department of Defense’s transportation expenditures through consolidating and optimizing freight movements by a single provider. Menlo is responsible for coordinating and determining the appropriate mode of transportation and arranges, controls and monitors freight shipments within the US.

The majority of FedEx and UPS’ exposure to the US Department of Defense is from the US Transportation Command (USTRANSCOM). Because of escalating troop withdrawals from the Middle East, there have been year-over-year declines in contracts under this program. According to the website, which monitors government contracts, between fiscal year 2011 and 2012 (periods ending September 30), the value of USTRANSCOM contracts declined over 50% for FedEx, while UPS’s portion declined almost 14%. However, both companies remain active in spot bidding for one-off projects which are not tracked in public databases.

Besides managing USTRANSCOM’s DTCI, Menlo also manages warehousing throughout the US on behalf of the US government, much of which is for the Department of Defense. It has also been successful in additional contract gains from the Department of Defense and noted a slight increase between 2011 and 2012. The majority of these gains were in combination with other companies such as Royal Dutch Shell and Health Net Inc.

Still, providers such as FedEx, UPS and Menlo also have contracts with other US government departments such as the Department of Justice, Treasury, Transportation and Veterans Affairs. Although FedEx has provided domestic air express for the US Postal Services’ first class mail for quite some time, this $1bn annual contract is not considered a government contract and is currently under review for renewal.

Many logistics and transportation providers offer specialized services to the US government. While government service offerings do not comprise a significant percentage of major logistics providers’ overall revenue, it does affect the smaller providers and the consequences of these budget cuts could cause some of these providers to cease operations.

As government budget cuts intensify, there will be cuts and modifications in transportation and logistics spend. Still, these services will continue to be needed, but the associated costs will be monitored closely as the fiscal belt tightens and more emphasis on a leaner supply chain is embraced throughout the entire US government.