Summary
The American Association of Railroads (AAR) has warned that rail traffic is still falling and that there are still no signs of an economic recovery for the industry. Carload traffic seemed to have stabilized during the first quarter at an average weekly volume that was about 16% lower than last year. Average weekly intermodal volumes were around 15% lower than last year during the first quarter. However, during the first six weeks of the second quarter, average weekly carload volumes have been down 22% from last year, and intermodal traffic had been off 18%. The latter can be attributed to a plunge in coal shipments, but the fall in intermodal traffic levels is signaling a further contraction in the overall economy.
Analysis
With all the negative expectations for the coal and automobile industries, it is hard to imagine how rail traffic can increase during the second half of the year. Coal shipments are falling fast; during the first 13 weeks of the year, cumulative loads of coal were down 4.6%. By week 17, cumulative loads were down 6.9% and falling fast due to weekly totals reaching only 85% of 2008 levels. The coal industry has few friends in Washington these days and there is very little hope that anything will be done to reverse the slide in this commodity that is so vital to the health of the rail industry.
Shipments of motor vehicles and equipment are down 50% from last year’s levels for most of the year, and further losses are expected when all of the Chrysler and GM plants are closed temporarily this summer. Consumer spending may pick up later in the year as more stimulus money enters the economy, especially if additional incentives are given to car buyers, but that may not held the railroads that much in the fourth quarter if sales are made of inventoried production from the first half of the year.
Perhaps the AAR is singing a tale of woe to blunt some of the arguments of the “re-regulators” in Congress and the Administration who have been making converts in their legislative battles. Railroad profits this year will be lower, in contrast to last year when they bucked the national trend due to their pricing power offsetting their traffic losses. Moreover, the cost of natural gas and wind power may force the railroads to reconsider some of their freight rate increases for coal shipments without the heavy hand of government regulators. Rail freight costs account for a significant portion of the delivered cost of coal to utilities and cuts in coal prices may not be enough to keep utilities from switching to other fuels in the near future.
