Panelists Upbeat About Class 1 Rail Traffic

Participants in an investor’s conference saw sunshine this week when discussing the state of  North American Class 1 railroads.

Speaking at the Cowen and Company Global Transportation & Sustainable Mobility Conference, analyst Jason Seidl said the railroads “are focused on adding back traffic at high incremental margins, though rail network congestion persists.”

Seidl, who is managing director at Cowen, along with fellow analysts Matt Elkott and Adam Kramer wrote in Railway Age that freight fundamentals across all modes are strong, with retail and consumer packaged goods restocking of inventories a major driver of the current spike in demand for intermodal business.

“Many customers are choosing to renegotiate TL (truckload) contracts early as spot rates just eclipsed 2018 peak levels and are likely headed higher,” they said.

Executives from Canadian National said traffic is moving back toward normal levels, driven by strong growth in intermodal, grain, lumber, and frac sand volume.

“We are clearly seeing a recovery happening,” Chief Financial Officer Ghislain Houle said.

CN’s domestic intermodal volume is up 30 percent while international intermodal gained 19 percent.

“Frankly, at this point we have good demand. I would say that we’re essentially not even moving everything that we could move,” Houle said. “We are calling back people. But this is a good story. This is a good problem to have.”

The Cowen analysts said CSX has benefited from a strong intermodal recovery in domestic and international intermodal volumes alike

Domestic intermodal traffic began rising at the end of the second quarter as the economy started to recover and employees returned to work.

That led to a need by retailers to replenish their inventories.

The Cowen analysts wrote that intermodal is currently in excess of 15 percent cheaper than trucking, which gives CSX an opportunity to increase pricing when renegotiating contracts in the coming months and next year.

At Norfolk Southern, traffic volumes are are close to pre-COVID-19 levels in merchandise while iIntermodal and total volumes are now above.

However, coal traffic remains well below pre-pandemic levels.

NS officials have reported seeing a shift in intermodal traffic from the West Coast to the East Coast, but is not giving up on West Coast traffic.

Capital spending for NS next year is expected to increase only modestly as the carrier tries to minimize the magnitude of the increase.

The Cowen analysts said NS is looking at reducing its workforce in the third quarter compared with the second quarter and a year over year improvement in the third quarter operating ratio.

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