Summary
Railroads, shippers, and legislators seem to be working on a compromise bill that would enlarge the STB and remove some exemptions the railroads currently enjoy from regulatory oversight. Railroad labor unions have join forces with the rail carriers to oppose the alternate bills that are currently in committee and are expected to advance in both the house and senate next month. The compromise bill seems to have some chance of passing then either of these pieces of legislation. It will probably be unnecessary legislation and an example of more government waste by the time the bill becomes law since the railroads are already under market pressure to rectify some excessive rates.
Analysis
Shippers are already pushing back against further rate increases and it is likely that some contracts completed last year will renegotiated in light of the economic changes during the past six months. The boom in commodity prices gave a lot of protection to the railroads rate hikes, and the fall in commodity prices will put some pressure on the railroads to lower rates in the future. Moreover, the capacity arguments that supported previous rate increases are no longer valid since railroads are moving 15% less freight than they did last year.
Most shippers will probably live with the freight rate contracts for 2009 shipments that they negotiated last year, but the ones that will push for lower rates and the change in traffic mix will probably keep the average railroad freight rate increases in the 2-3% range. For example, coal movements for export were made at spot rates that were higher than the average contract price for US steam coal shipments. The decline in exported coal in 2009 will put downward pressure on coal rates that will partially offset the projected increase in steam coal contract rates. Similarly, the relatively steeper decline in auto and other manufactured product shipments which move at higher freight rates than bulk commodities will also put downward pressure on average railroad freight rates in 2009.
Railroads will be under pressure throughout 2009 to lower freight rates in future contracts for all commodities and products and the impressive increases that have been achieved since 2004 will probably grind to a halt this year. To keep their Renaissance from turning into a Reformation, railroad management have to learn to run their properties more efficiently in the future and not rely on major labor concessions or freight rate increases to boost profits.
