Class 1 Railroads Set to Weather Pandemic, Economic Downturn Yet Face Challenges

Although light loads such as this eastbound CSX train in Berea in April 2019 are unusual, falling traffic is among the many challenges railroads are facing during the COVID-19 pandemic and its resulting economic downturn.

Railroads appear well positioned to weather the economic downturn that has accompanied the COVID-19 pandemic but there will be challenges an analysis published by Railway Age concluded.

The magazine’s Washington correspondent, Frank Wilner, observed that the nation’s Class 1 railroads appear to be sufficiently solvent, focused and managerially prepared.

However, some small railroads may require financial assistance to get through the economic downturn.

Some shippers may be wondering if during the recession that railroad managers will give higher priority to protecting stock prices rather than providing quality service.

A future cash flow stream might make railroads attractive to a private-equity infrastructure investment fund such as Brookfield Infrastructure Partners, which bought short line holding company Genesee & Wyoming for $6.5 billion.

Some railroads might seek to prop up their stock price as a defense mechanism against being taken over by an investment fund.

This is a particular issue with Class 1 carriers practicing the precision scheduled railroading operating model.

Those carriers have aggressively reduced costs in order to drive down their operating ratio, which is the percentage of revenue that is devoted to expenses.

Only BNSF among Class 1 carriers does not practice PSR.

A related challenge could be how railroads will respond to surges in traffic once the pandemic and economic woes are over.

Although the PSR carriers have surplus locomotives and rail cars in storage and are thus well situated to handle increased traffic, the longer those assets sit in storage the more costly they will be to return to service

Wilner said publicly traded railroads may be holding the wolf of lower operating ratio by the ear and will be neither able to safely hold on or to let go.

Railroads are also facing challenges prompted by falling volume of some traffic that has long been lucrative for railroads.

Chief among them is coal, which is down 23 percent since the 1980s as natural gas has displaced coal as the fuel of choice for many power plants.

In 2019, 45 percent of electricity in America was generated by coal-fired plants but that has fallen to 24 percent.

Other lucrative traffic, such as chemicals and automotive, have fallen during the global economic slowdown and trade wars.

Wilner said carloadings of these commodities could stagnate at low levels.

Intermodal traffic offers hope for traffic growth but only if railroads can compete with truckers who are benefiting from lower fuel prices.

Railroads could be further hamstrung in seeking to divert trailers and containers from highways if Congress increases the allowable sizes and weights of trucks.

Wilner argued that railroads need to be able to negotiate one-person crew agreements with their unions in order to be competitive for some traffic.

Other challenges looming that could have negative consequences for railroads include the use of battery-operated heavy-duty trucks that could reduce the operating costs of truckers.

The continued rise of e-commerce is expected to refine retail supply chains and lead to more closings of brick-and-mortar stores.

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