Shanghai Surprise Air Cargo Volumes Resume Growth in March 4

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 Shanghai Air Cargo Volumes Rebound in March – Air cargo tonnage from the Shanghai Pudong International Air Cargo Terminal grew 8% YOY in March, returning to growth following an 8% decline in February. In addition, the total tonnage of 123,886 is the third highest amount posted in the terminal's history and is only 3% off peak volumes from October 2010, which is a seasonally stronger month. For 1Q11, volumes were up 5% YOY, which is quite strong compared to the 97% YOY growth in 1Q10. Given the tight historical relationship between Shanghai's air cargo volume and those more closely followed from Hong Kong, we believe a solid number from Hong Kong in the coming days is likely and would be an incremental catalyst for the group.

Chinese New Year Timing Provided Head Fake – We believe Shanghai's volume performance is significant, as negative data points from Asia in February (and the ripple effect on U.S. volumes in March) have given some pause to the largely constructive trend of improving freight demand. We have ascribed most of the February impact to timing of the Chinese New Year holiday, which fell in early February this year compared to late February last year. While Chinese New Year occurred in February in both years, due to the earlier timing this year, this February saw none of the typical run-up in activity into the holiday, yet had all of the lagging aftermath post holiday. In 2010, with the holiday in the second half of the month, there was a solid build up recorded in the month and less of the after effects. This is important as the dip in growth, despite a February/February comparison, provided some fodder for discussion of Asia slowing, which clearly would have a negative ripple effect through the U.S. freight market.

Data Could Represent Upside for FedEx International Volumes – While confirmation of a rebound in growth is positive for all of Transportation, FedEx, in particular, remains best positioned to leverage the expansion of Asian air cargo volumes to improved profitability, with approximately one-third of its $10+ billion of International Express revenue driven by Asian outbound moves. Including inbound moves, we estimate that approximately 40% of the company's International Express revenues are driven by Asian freight. In addition, with a 0.87 positive correlation between Shanghai's volumes and FedEx's International Priority volumes, a continuation of March's growth could result in an upward revision of our volume target for F4Q11. We currently target 5.5% growth, but if the trend persists, it would imply 50-100 bps of upside, which could yield a few pennies of upside to our F4Q EPS target of $1.75.

West Coast Truck and Intermodal Softness Tied to Holiday Slowdown – Recent comments from domestic Trucking companies and rail carloading data have also highlighted the impact of Chinese New Year. The largest public truckload carrier, Swift Transportation, recently noted that while total volumes accelerated sequentially in March, activity in the West Coast was slower than the East Coast. Similarly, intermodal volume for western rail Union Pacific has also been weak. Nonetheless, we would expect both to reverse if Shanghai's data point is indicative of a trend.