Posts Tagged ‘Class 1 railroad freight traffic’

Panelists Upbeat About Class 1 Rail Traffic

September 12, 2020

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.

Class 1 RRs Love Their Longer, Less Frequent Trains

July 28, 2020

If you’ve spent any time watching trains either trackside or via online railfan cameras you already know that since the COVID-19 pandemic and its accompanying economic recession hit last spring that Class 1 railroads have been operating fewer trains.

The weekly and monthly freight traffic reports of the Association of American Railroads have told the story of declining traffic volumes pretty much across the board.

Not surprisingly, Class 1 railroads have reported sharp drops in their revenue for the second quarter of this year.

But amid the quarterly earnings reports that Class 1 executives have discussed with investors has been a bit of bad news for railfans.

Fewer trains will continue to be the norm even as traffic begins to rebound from the depths of the pandemic when many businesses in America were shutdown amid stay-at-home orders.

The idling of the North American auto industry plants particularly hit railroads hard.

The plants have since reopened and new vehicles are rolling off the assembly lines. Parts for those vehicles are again moving in boxcars.

But during the time when those plants were shuttered, railroads ceased operating auto rack trains and consolidated the movement of other traffic in an effort to reduce their costs.

The auto traffic is coming back but continuing to move in general merchandise trains as a reflection of a new philosophy that a train is a train and can carry anything.

It wasn’t always that way. It used to be that you could sit trackside and see numerous types of dedicated single commodity movements, including intermodal, automotive, aggregates and agricultural commodities.

The consolidation of freight into longer and fewer trains is not strictly a byproduct of the pandemic.

Long before most people had heard the term “coronavirus,” Class 1 railroads had begun consolidating freight into fewer and longer trains as part of the move to the precision scheduled railroading model.

This included auto traffic that once ran in dedicated trains. But even under PSR dedicated auto rack trains didn’t completely vanish.

Then the pandemic struck. In an analysis published on the Trains magazine website, the magazine’s business of railroading correspondent Bill Stephens noted that although freight traffic has begin ticking upward since bottoming out in May the number or road trains operated by CSX continued to fall even as freight traffic began rising.

He argued that what happened at CSX is not an anomaly but representative of Class 1 railroads generally.

Rather than resume operating dedicated auto rack trains CSX has tacked auto rack cars onto merchandise and intermodal trains.

“This is one of the biggest reasons why the number of road train starts is nowhere near the railroad’s overall volume recovery,” Stephens wrote.

If you’re a laid off engineer or conductor it has meant spending more time on furlough rather than getting called back to work.

Traffic at CSX may have risen by 25 percent since May but the company is only using 13 percent more locomotives and has seen only 14 percent more road train starts.

Stephens said the comments made by Class 1 managers during the recent earnings calls indicate they plan to continue the operational changes they made during the early weeks of the pandemic.

It is too early to say how long this will last and when railroads will return to pre-pandemic levels of train operations.

But Stephens had earlier predicted in another analysis that if the lessons of the Great Recession of 2008 hold true for the current one railroads will not gain back all of the traffic they lost during the pandemic.

In the current recession, truck volume has recovered more quickly than rail traffic which is tied more closely to the industrial economy.

The industrial economy continues to lag behind the consumer economy.

Still Stephens wrote, “I would not necessarily link the longer train phenomenon with lower volumes from here on out. The volume recovery will depend in part on service levels, pricing, demand, and what’s going on in trucking.”

But in the meantime long trains will continue to get longer as executives enjoy seeing their costs fall. It is one way they can continue to try to please Wall Street.

It may be that at some point another E. Hunter Harrison will come along with a different service philosophy.

That outlook might emphasize more frequent and faster trains in a bid to better compete with trucks for certain types of traffic.

In the meantime, though, the industry seems enthralled with the idea of doing more with less. That means fewer trains and fewer employees.

Loss of Coal Traffic Drove Class 1 Freight Volumes Downward During 2nd Quarter of 2020

July 3, 2020

Loss of coal traffic was a major driver in sharp volume declines for North America’s Class 1 railroads in the second quarter of 2020.

The carriers posted an aggregate 19 percent decline during the period with Norfolk Southern taking a 56 percent hit.

From a historical perspective, coal traffic was down 34 percent when compared to the volumes posted in the second quarter of 2019.

NS also suffered a steep 26 percent drop in overall traffic during the second quarter of 2020 due to shut downs of automotive plants amid the COVID-19 pandemic.

Automotive plants were closed during April and much of May but have since reopened.

Intermodal traffic was down a collective 11 percent for the Class 1 railroads during the quarter.

It also presented a sharp contrast. On one hand parcel shipments increased as consumers relied more heavily on e-commerce during stay home order periods.

But that was more than offset by the closure of numerous retail stores and falling international intermodal shipments because retailers maintained high levels of inventory during their shutdowns.

Carload traffic for the Class 1 railroads was down 22 percent collectively with NS suffering the greatest loss at 30 percent. This category excludes coal and intermodal shipments.

Second quarter financial results for publicly traded Class I railroads will be released later this month.

Class 1 Executives Sees Signs of Rising Traffic

June 10, 2020

Class 1 railroad executives speaking this week at an investor conference said there are signs of recovery of freight volume from the economic recession triggered in paret by the COVID-19 pandemic.

CSX CEO Jim Foote credited some of the recovery to the reopening of auto assembly plants. There have been related increases in traffic involving chemicals, plastics, and steel.

“As we have moved over the last four weeks or so we have clearly seen what I think at this point in time is the bottom of the volume decline,” Foote said.

“And we have been inching up week after week after week as we have moved through May and now into June. Clearly the increases are slight but the trend line is promising.”

Foote sought to frame the recession as a time to gain market share by getting more merchandise business from existing customers who also ship by truck from their rail-served facilities.

He said that was because CSX has lower rates than truckers who could offer shippers the opportunity to save money.

Canadian National Chief Financial Officer Ghislain Houle cautioned that the recovery will be slow and choppy with uneven improvement from week to week.

He also credited the revival of auto production with helping provide a boost to traffic.

Houle said CN traffic hit bottom in May when revenue ton-miles were down 20 percent compared to 2019. Thus far CN’s June revenue ton-miles are down 17% to date.

Union Pacific expects traffic in the second quarter to be down 20 percent compared with the same period in 2019.

Chief Financial Officer Jennifer Hamann said that through June 2, volume is off by 22 percent but has been improving to around 135,000 carloads and intermodal units per week off a low of around 124,000 carloads.

“We’ve come off the volume lows we experienced back in April and are starting to see a more positive trend,” Hamann said.

She said it is too soon to say that UP has bit bottom but business is starting to look better with gains in merchandise business in several areas, including shipments of tomato paste, sweeteners, steel pipe and recycled glass.

Kansas City Southern’s May volume was lower than expected due to a delay in reopening Mexican auto assembly plants.

But week-over-week volumes rose 13 percent as of June 6 as all but two of the assembly plants KCS serves in Mexico resumed production. Two other plants will reopen next week.

Analysis Suggests Rail Traffic Won’t Rebound Much

May 20, 2020

A westbound freight rolls through Berea on CSX tracks in June 2000. If history is an indication, railroad freight traffic will not snap back after the COVID-19 pandemic to where it was before the economic downturn began.

There has been much speculation about what railroad traffic and the economy in general will look like once the COVID-19 pandemic eases.

One line of thinking is the economy will grow sharply on the strength of pent-up demand fueled by people chaffing at social distancing restrictions imposed to contain the spread of the novel coronavirus.

Some railroad executives have predicted their companies will emerge from the pandemic and economic downturn stronger and more efficient due to unrelenting cost cutting that predates the pandemic by more than a year.

They say their railroads will be in a position to grow traffic, which has been declining over the past year long before social distancing entered the public lexicon.

But an analysis published at the website of Trains magazine suggests otherwise.

Written by Bill Stephens, who covers the business side of railroading for the magazine, the analysis concludes that the lessons of the Great Recession of 2008 are that traffic lost is traffic that is not coming back.

Stephens used historic freight traffic data to show that railroad coal volume peaked in 2008 and has been plunging ever since.

Intermodal traffic did grow for a few years following the Great Recession before it began falling in 2015. Railroads have been bleeding domestic container volume to truckers for 18 consecutive months.

Carload traffic, which is two-thirds of the railroad industry’s revenue, peaked in 2006, fell 30 percent during the Great Recession, then rebounded to a level 20 percent below it 2006 apex.

Stephens acknowledges railroads are stronger financially today than they were during the depths of the Great Recession because they have been able to increase rates they charge shippers and cut their operating costs.

But if railroads are to increase their traffic volumes they will need to go after business they have turned aside because they didn’t find it to be profitable enough and truckers were only too happy to haul it.

The dilemma for railroad managers is that the business they need to grow traffic volume is not profitable enough to enable Class 1 railroads to continue to fulfill their obsession with lowering their operating ratio, which is a measurement of the percentage of revenue devoted to paying operating expenses.

There is traffic to be had but it might not be profitable enough to satisfy railroad CEOs who need to satisfy Wall Street analysts.

Railroad executives say their lower cost structures will enable them to lure this business back from the highways and, presumably, make more money from it.

We’re about to find out over the next year or two if that is true or if it is executives saying the right thing at a given moment that is more mirage than reality.

The Trains analysis can be found at http://cs.trains.com/trn/b/observation-tower/archive/2020/05/19/history-suggests-rail-traffic-won-t-fully-rebound-after-recession.aspx

 

Some Traffic Decline is Due to Focus on Profits

May 12, 2020

The economic downturn triggered by the COVID-19 pandemic sent rail traffic spiraling downward in April but a closer look at what led to those numbers shows that it wasn’t all about the effects of a sour economy.

Norfolk Southern, for example, led Class 1 railroads with a 30 percent decline in freight traffic last month.

The carrier saw coal traffic drop by a whopping 52 percent while its merchandise traffic fels by 33 percent, and intermodal dropped 23 percent.

But not all of those declines were pandemic induced.

An analysis published on the website of Trains magazine quoted industry analysts as attributing NS declines in merchandise and intermodal traffic in part to an attempt to boost profit margins.

The strategy appears to be working.

NS revenue per unit was up 4 percent in the first quarter of 2020, the 13th consecutive quarter that that figure has risen.

Of course the price to be paid for higher profits could be loss of traffic. But railroad executives don’t mind because the traffic they do have has higher profit margins.

One analyst described the NS approach as seeking short-term yield over volume.

Of course the trucking industry was willing to take traffic NS let slip away because that industry has plenty of capacity and diesel fuel prices have fallen.

Analysts say it is too soon to tell if the NS approach will lead to slower traffic growth or a loss of traffic to trucks.

They also say the economic downturn will complicate efforts to reach conclusions about the potential impact of pricing on volume trends.

In the face of sharply falling traffic, NS has slashed its capital spending budget for this year by 25 percent to $1.5 billion, which is less than what its peer Class 1s plan to spend this year on capital.

It is not just track expenses that NS is reducing. It also is cutting the amount of money it will spend on information technology.

One analyst quoted by Trains said reducing IT spending is a concern because companies working to develop electric and autonomous trucks are not doing the same.

The Trains analysis concluded that although all Class 1 railroads posted traffic declines in the first quarter, not all carriers experienced the same level of loss.

Canadian National and Canadian Pacific suffered less of a decline in part because each moved record volumes of grain.

CSX saw its traffic volume fall in April by 20 percent, which was less of a drop than that posted by NS, BNSF and Union Pacific.

Not all traffic declines were the result of decision making made by railroad management.

NS executives say coal traffic plunged due to high utility generating plant stockpiles and a mild winter.

They also said record-low natural gas prices made coal uncompetitive as a fuel for generating electricity.

Railroad Freight Volume, Revenue Expected to Fall

March 26, 2020

Railroads are facing deep declines in freight traffic and revenue due to a recession induced by the COVID-19 pandemic.

Some analysts are expecting economic output in the United States to fall between 3 percent to 30 percent in the second quarter.

Todd Tranausky, a rail and intermodal analyst at FTR Transportation Intelligence, told Trains magazine that carload volumes are likely to be weaker in the coming months than expected due to the faltering economy.

Rail traffic had already been lagging and before the pandemic took hold analysts had projected flat to slightly weaker volumes in 2020.

But Tranausky now expects those to fall 8 to 10 percent below 2019’s low levels.

FTR is predicting that intermodal volume will decline between 6 to 8 percent.

Speaking to an investor’s conference this week, Canadian Pacific CEO Keith Creel said it unclear how long the economic downturn will last.

It could be as few as two months but it could more than six months.

One wild card is that most economic pain, including job losses, is expected to be in the service sector, which includes such things as restaurants, retail, and tourism-related industries.

Although those are not served directly by railroads a decline in consumer spending, which makes up 70 percent of the U.S. economy, would have a ripple effect in slowing industrial production.

Railroads could seek to mitigate a loss in intermodal traffic by cutting prices in order to gain volume from truckers.

Intermodal analysts Larry Gross told Trains that during a recession shippers are more willing to compromise in order to save money.

“With operating ratios in the 60’s, the rails have plenty of room to lower price if they choose to,” he said.

One factor that has held railroads back from cutting freight rates has been a fear if seeing their operating ratios rise as a result.

That would in turn might offend Wall Street analysts and lead to lower stock prices for shares of railroad company stock.

But with railroads share prices already falling the carriers may be less worried about what Wall Street thinks.

Class 1 railroads have already seen revenue declines this year ranging between 5 percent to 25 percent and their stock prices have fallen by double digits with Norfolk Southern stock losing 45 percent of its value amid a crashing stock market.

Despite the bleak outlook for traffic and revenue, analysts expect Class 1 railroads to hold up fairly well because they are more profitable than ever and able to reduce expenses as traffic volumes fall.

“Class I railroads’ ability to reduce variable costs in periods of declining volume has historically allowed them to weather downturns better than other transportation modes,” Lee Klaskow, Bloomberg Intelligence senior transportation analyst, told Trains.

However, doing so means more furloughs of railroad workers are coming.

As it is Class 1 railroads have already cut their payrolls by 10 percent in the past year with much of that having been prompted by the shift to the precision scheduled railroading operating model.

Carload, Intermodal Traffic Fell in January

February 6, 2020

Carload volume on U.S. railroads fell nearly 6 percent while intermodal traffic was down 5.4 percent in January.

The Association of American Railroads said railroads originated 1,165,733 carloads in January 2020, down 5.9 percent, or 73,110 carloads, compared with January 2019.

The carriers originated 1,245,080 containers and trailers in January 2020, down 71,081 units from January 2019.

Combined carload and intermodal originations in January 2020 were 2,410,813, down 5.6 percent or 144,191 carloads and intermodal units from January 2019.
Nine of the 20 carload commodity categories tracked by the AAR each month posted gains compared with January 2019.

These included: chemicals, up 3,276 carloads or 2.1 percent; all other carloads, up 2,558 carloads or 9.2 percent and grain mill products, up 1,583 carloads or 3.6 percent.

Commodities that declined ncluded coal, down 55,882 carloads or 13.8 percent; grain, down 12,908 carloads or 11.6 percent; and crushed stone, sand & gravel, down 4,973 carloads or 5.3 percent.

“U.S. rail volumes fell again in January, reflecting continued softness in manufacturing and global economic weakness made worse by trade uncertainties,” said AAR Senior Vice President John T. Gray.

“But there were glimmers of hope. Nine of the 20 carload categories we track had year-over-year gains in January, the most in a year, and several other commodities had carload declines in January that were less pronounced than they’ve been in recent months. It’s too early to say if the worst is behind us, but railroads are hopeful that 2020 will see an improved business climate and rising volumes across much of their traffic base.”

Excluding coal, carloads were down 17,228 carloads, or 2.1 percent, in January 2020 from January 2019. Excluding coal and grain, carloads were down 4,320 carloads, or 0.6 percent.

6 of 7 Class 1s Saw Overall Traffic Decline in 2019

January 3, 2020

Six of the seven U.S. Class 1 railroads failed to show growth in traffic during 2019.

The lone exception was Canadian Pacific, which posted a modest 0.9 percent growth in total traffic while the industry on average declined by 3 percent.

CSX posted a 4.1 percent decline in total traffic with its intermodal volume falling by 7.7 percent and its coal business declining by 6 percent.

Norfolk Southern saw its overall traffic drop by 4.7 percent. NS posted a 4 percent decline in intermodal traffic while coal volume fell by 11 percent.

Much of the decline that CSX had in intermodal traffic was due a management decision to close select low profit margin lanes.

The declines in overall volumes for all railroads should also be seen in the context of the fact that they are comparisons to 2018, which the Association of American Railroads has said was a exceptionally good year for rail freight traffic.

Thus the 2019 volumes may be more in line with a more normal traffic year. That said, 2019 was a year of continued declines in coal traffic and a reflection of a slump in manufacturing activity.

As for the performance of other Class 1 railroads, Kansas City Southern saw its overall volume fall by 0.8 percent.

Canadian National had a drop of 1.5 percent in total traffic while intermodal volume fell 0.5 percent and coal traffic was down 3.2 percent.

Union Pacific’s overall traffic was down 6 percent while its coal volume fell 16 percent and intermodal dropped by 7 percent.

BNSF posted a 4.5 percent overall traffic decline while its intermodal volume was down 4.5 percent and coal fell by 6 percent.