Below is from an upcoming Q&A for “Logistics Management” magazine article - and thanks as always to the AAR’s Rail Time Indicators monthly report – on the topic of traffic year-to-date, and whether one can truly extrapolate anything from the results so far….
Define the current state of the rail carload market – Helped by a tiny, tiny gain in April, YTD (through 4 months) US & Canadian carload traffic was only down 1.3%. Given the 0.7% decline in intermodal, always somewhat worrisome, total US & Canadian traffic was down 1%. Only eight of twenty traffic categories showed increases, and most of those were modest. However, it is very hard to extrapolate trends from these results given perhaps the widest variety of unusual variables I have seen in years. The trade wars and tariffs have caused “pre-buying in January” and a reduction (in some cases a complete cessation) of volumes thereafter – in intermodal, autos, grain (soybeans!), etc. Tariffs extended to erstwhile ally Canada impacted steel, lumber, and auto-shipments (Mexico too, of course). The overall economy appeared to slow down globally, but not as much, mysteriously, in the US. Market intervention by the government of Alberta, of all people, sharply reduced CBR opportunities, even as frac sand growth continues to dramatically reverse due to local brown sand (“AKA “dirt”) competition. And then there’s the weather…. Yes, winter comes every year but the extreme cold in Canada massively disrupted their operations, an effect actually topped by the flooding in the US Midwest that hammered UP & BNSF….OH – I almost forgot the Precision Scheduled Railroading operational changes going on at….CSX (almost complete), NS, UP, KCS….
Pricing is always controversial – the fly in the rail-customer ointment. That is as it should be. But there is nothing to suggest that rail pricing will fall below their “Rail Inflation Plus” targets – far from it. But there is unwritten reciprocity here when it works; there is what I have been calling the “Grand Bargain” – whereby rails get price – in return for improved service and capacity, and to allow for their (much) heavier than business average Capex needs. Of late rails haven’t been holding up their end of the bargain – but I believe that is changing. In any event, rails have been spending some 17-18% of revenues on their network – the current range (and debate, but that’s a separate topic) is somewhere between 14-14% and 25%! They need a healthy ROI to justify that….
How do things look for rail carload volumes for the rest of 2019? Better….the trade/political disruptions haven’t gone away, but the weather has, and the improved operations at the major carriers have allowed for a rather quick recovery. In fact, the “average” Class One was behind plan for the first quarter, but reiterated solid guidance for the full year, indicating an improved outlook for the last eight months.
Intermodal is showing declines, etc….Yes, and as stated that is always worrisome, but likely not a trend; the continent-severing flooding, 7 weeks of extreme cold and overall related poor service (and the trade distortions impacting international) make the results so far hard to parse. PSR changes have led to some de-marketing (particularly notable at CSXI). This will be one of the big things to watch this year. Will NS, with their heavy Corridor investment, enhance or reduce their domestic footprint? Will BNSF, alone in not undertaking a PSR transformation, gain even more share and brand in the west? Will the recovered Canadian ops restore those two carriers to IM growth leaders?
How do you compare current rail service levels to a year ago? Despite the weather, they are mostly better as seen in the metrics. And as PSR is adopted and adapted, they will get better still….So shippers will see improvements as the rails recover quicker than usual from the unusual winter disruptions and as PSR changes are normalized within ops. It won't be without some pain, as so-called “boutique services” (UP’s excellent phrase) are reduced and in some cases eliminated, and assessorial charges (to help with “behavioral change”, and not uncontroversially) continue, etc.
How are market changes affecting rail traffic? Well, the rail consensus is that truck capacity (and therefore the price differential) is far from as favorable as last year, but still remains a (near and long term) competitive advantage. Within the markets, we have discussed sand and CBR (aside from government intervention there appears to be a 2-4 year opportunity). Plastics will be a positive (as long expected) but key markets include China….Forest products and paper are areas of cyclical but also potential secular growth, as is refrigerated freight. Coal was up a bit - 0.6% in April - but that is a bit of a catchup from the weather that helped push YTD numbers down almost 5% The real story is weakening export opportunity (but not a collapse) and the secular weakening in domestic utility coal (but not a collapse – at least yet). Motor vehicles are still post-peak. Intermodal remains the lead dog on the sleigh….
Five years from now is always hard to predict but something the rails have to look to given the nature of their Capex requirements and the long life of their investments (30-year locos, etc). And although technology is both an opportunity and a threat (again, a subject for another day), I see healthy rail spending on IT. In addition, the PSR disruptions will be behind them (they better be!) and a newly energized short line industry will be even larger partners in adding carload business….
Anthony B. Hatch