Posts Tagged ‘Moody’s Investor’s Service’

North America Intermodal Service Demand Falling

March 18, 2020

Demand for intermodal transportation is falling amid lower container volumes in North American.

Moody’s Investors Service said the transportation sector faces increasing pressure due to the coronavirus outbreak.

In a report issued last week Moody’s said all transportation companies will face lower demand because of disrupted supply chains and slower economic activity.

“As the coronavirus spreads to more countries, the likelihood of longer lasting economic and financial effects has increased, the impact of which may weigh on the North American transportation sector’s financial and credit profile,” said Rene Lipsch, a Moody’s vice president and senior credit officer, in a news release release.

Container traffic at the Port of Los Angeles is down about 25 percent compared with at this time in 2019.

Moody’s noted that freight railroads already were contending with strong competition from trucking companies for container traffic.

But it said that historically railroads have been able to adapt their cost base fairly quickly in the face of weakening demand for transportation services.

The Moody’s analysis, though, said that longer term trucking companies are at risk from lower demand due to more prevalent supply chain disruptions, a broader slowdown in economic activity and potential restrictions on freight routes.

The Association of American Railroads in a report for traffic volumes in the week ending March 7 said the falloff in intermodal loadings was more noticeable than the norm over the past year.

Railroads handled 232,561 intermodal containers and trailers during the first week of the month, a 14.1 percent decrease compared with the same week a year ago.

With the number of ships arriving at West Coast ports from Asia down sharply due to the coronavirus, it stands to reason that railroads are beginning to feel an impact too, at least in terms of intermodal. It’s impossible to quantify that impact with precision,” said AAR Senior VP John Gray.

Moody’s Downgrades Outlook for Railroads to Negative

November 7, 2019

The railroad industry has taken another blow, this time from Moody’s Investors Service which has changed its outlook for North American railroads as “negative.”

Moody’s had last April described the industry as “stable” but even that had been a downgrade from an outlook of “positive” rendered earlier.

In its latest report on railroads, Moody’s said the industry is being hindered by lower freight volume, weaker pricing gains causing revenue drops, and declining coal traffic.

Moody’s expects intermodal traffic to drop along with overall rail freight volume declining by 1.75 percent to 3 percent over the next year to 18 months. Overall railroad revenue is expected to remain flat.

The decline in railroad coal traffic is projected to accelerate unless there are changes in federal policy, technological innovations, or increased natural gas prices.

The demand for coal is seen as falling by 7 percent per year over the next decade.

But there is more than declining coal traffic that is hurting railroads.

The trucking industry has expanded capacity and that is putting pressure on the ability of railroads to price their product to lure or keep freight, particularly intermodal shipments, on the rails.

“Heightened competition from truck carriers for intermodal and certain other freight continues to weigh on the North American railroad sector,“ said Moody’s Rene Lipsch, a vice president and senior credit officer. “The excess of trucking capacity has been a primary driver of softening pricing gains in the industry.”

Moody’s Examines Pros, Cons of PSR

October 22, 2018

The decision of CSX in 2017 and Union Pacific this year to embrace the precision scheduled railroading model means that most of North America’s Class 1 railroads are practicing it.

Only Norfolk Southern, BNSF and Kansas City Southern have eschewed it – at least for the time being.

The concept of precision scheduled railroading is widely believed to have been pioneered by the late E. Hunter Harrison at the Illinois Central Railroad.

Harrison later implemented the concept at Canadian National and Canadian Pacific. He was well on his way to putting it in place on CSX before his death in December 2017.

Wall Street has fallen in love with PSR because a centerpiece of it is reducing costs to drive up profitability and stock prices.

At CSX, management has touted how it is moving the same volume of traffic with fewer employees and fewer locomotives and freight cars.

Railroad executives who favor PSR love to talk up the efficiencies that it brings.

But shippers, those folks who make railroads possible by paying them to haul freight, might be less enamored of PSR.

Moody’s Investors Service is one of North America’s leading debt rating agencies.

The analysts at Moody’s are not opponents of PSR. In fact a recent report by Moody’s about the operating model concluded that service levels have improved at railroads using precision scheduled railroading.

But the report issued a key caveat that Wall Street seems to overlook or downplay.

Shippers may not like how they are being forced to conform to the railroad’s interests rather than the railroad seeking to serve the interests of shippers.

“The model’s train schedule is established with the primary objective to enhance the efficiency of railroad operations,” Moody’s said in a report about PSR. “This narrows the scope to accommodate customer needs and may cause customers having to adapt to the railroad’s train schedule.”

The report quoted an unnamed railroad executive as saying that Harrison’s PSR approach is to set up schedules and tell the customers that they need to work around the trains that are scheduled, not the other way around.

As CSX encountered severe service issues when it implemented PSR too quickly in 2017, Harrison repeatedly relied on the mantra that service would improve and shippers would have better service than they had before.

That may seem true when viewing the service metrics that railroads like to measure themselves against.

One of those is operating ratio, which shows what percentage of operating revenue is used to pay operating expenses.

Lowering operating expenses has become the rage in the railroad industry in recent years, even among carriers that do not practice PSR.

CSX has bragged about how its operating ratio in recent quarterly financial reports has dipped below 60 percent. There was a time when an operating ratio in the 70s was considered in the industry to be a good performance.

Overall, Moody’s spoke favorably about PSR, but acknowledged it “is not a panacea for service problems.”

The report noted that BNSF does not practice PSR but “has maintained good service levels that to date exceed its average 2013 levels.”

Yet, BNSF is a privately-owned company and, Moody’s noted, some metrics that mean a lot to its owner, Warren Buffet, mean far less to Wall Street investors looking for short-term gains.

Buffet is known for his belief in long-term growth, which is often seen as lacking among practitioners of PSR.

“A material reduction in capital expenditures concurrent with the implementation of precision scheduled railroading may affect the railroad’s ability to maintain good service levels over time if sustained too long.” The Moody’s report said.

Moody’s Downgrades Railroad Outlook

May 19, 2016

Falling freight traffic has prompted Moody’s Investor’s Service to downgrade its outlook for North American railroads from “stable” to “negative.

train image2Moody’s said in a news release that railroads are facing deep and long-lasting declines in freight volume that will likely continue at least through the third quarter.

“Volumes of coal, the second-largest freight group in the North American railroad industry, plunged by an unprecedented 37 percent in April amid persistently low natural gas prices and high stockpiles at utilities after a warm winter,” said Vice President and Senior Analyst Rene Lipsch.

Moody’s expects revenue growth to fall below zero, the firm’s minimum for a stable outlook, Lipsch said.

Total freight volume is projected to decline 3.5 percent to 4.5 percent this year, driven in particular by an expected 20 percent to 25 percent decline in coal shipments.