Summary
Almost all of the well known commentators on the railroad industry wear two hats: under one they advise investors on the railroad companies they track; under the other they help the railroads promote their own agendas in order to keep close relations with them and to gain access to their properties. Consequently, one never hears from them a negative comment on either the industry or any of its major companies. It is therefore, sometimes difficult to accept their endorsements of these companies and the rosy expectations of future developments. For the sake of argument, let’s look at what might not be so good for the railroads in the future.
Analysis
The four major railroads in the U.S. share one characteristic, coal is their main carload traffic segment, ranging between 33% and 37% for NS, CSX, and UP, and averaging around 46% for BNSF. Coal is what made these railroads the survivors of the 30 to 40 Class I railroads that were in existence in the 1970’s. Coal however, is almost universally blamed, rightly or wrongly, for global warming and its fortunes are not so bright for the immediate future. It is very possible that total coal production in this country may have peaked in the last economic expansion and that output will steadily decline in future years as “greener” sources of electric power are installed around the country. Moreover, the spectacular gains in revenue per carload that have been achieved in the past few years may also be in jeopardy if natural gas prices stay low and wind energy continues to increase. Coal producers have already cut their prices to stay competitive and have very little room to maneuver. Railroads may have to do the unthinkable and cut some of their rates to keep their traffic from falling too fast.
Intermodal traffic is the next most important traffic segment for the railroad industry. Although the individual box count is about 60% higher than the number of carloads of coal, it now produces about the same amount of revenue for the railroads. For many years however, it was questioned if the railroads actually made money on these shipments, especially when most of these movements involved highway trailers and the segment was dominated by domestic shippers. When importers containerized their traffic in the 1980’s, the debate ended as intermodal shipments grew and both haulage and handling costs diminished. Now however, imports are down and questions are being asked if they will both recover soon and resume their blistering growth. Both questions are still unanswered at the present time, and neither is dependent on anything the railroads can do. For their part however, the railroads are continuing to invest most of their Cap-Ex funds in facilities related to this traffic segment, and some of the reasons do not related to import traffic. Carload traffic not related to coal or grain has been falling for many years, with losses accelerating since 1980. Some of this traffic was converted to domestic intermodal and some was lost to truck competition. Either way for the railroads, there was a loss in profits since the intermodal shipments earned less revenue and had more costs than shipments in standard railcars. These trends have continued unabated up to the present, and unless the losses are offset with increased imports or gains in some other traffic segments, railroad traffic will not grow in the future as fast as might be desired.
