Freight rate increases have been only story for NS profits in 2008

Implications: In every story about railroad traffic and railroad profits in this, and indeed in all of the last few years, commentators have used revenue growth as a surrogate for traffic increases, neglecting to inform the reader that traffic levels have been uncharacteristically stagnant in the recent  economic upturn and that most revenue increases have been due to freight rate increases. In 2008, carloads and tonnage in many domestic traffic segments have actually decreased and only export traffic has kept the overall freight volume from declining.

Analysis:

Without the surge in coal exports during 2007 and 2008, Eastern coal traffic would have continued the steady decline that began 10 years ago. Both NS and CSX have benefitted from the extra 40 million tons of export coal that has moved through their coal terminals since the beginning of 2007. Not only are the  average movements longer (somewhere over 700+ miles compared to the 300+ miles for most utility coal shipments), but the traffic has moved at higher freight rates compared to the contract rates that cover most utility coal shipments. If the global slowdown affects this traffic, it will be bad news for both carriers.

 

Regarding their capex situation,  NS has begun to improve the operational efficiency and capacity of some of its core lines and these investments should bear fruit in coming years. However, both NS and CSX (which is also expanding and improving certain core lines) have explained to congress and state authorities that public money is needed to justify these projects; so don’t look for any significant impact on the bottom line at either carrier. The main effect of these upgrades may just be the public good of having fewer trucks on the highway.

 

Finally, it must be questioned whether or not the current financial meltdown and expected economic slowdown will hinder the railroads ability to continue to raise freight rates. Most carriers were projecting continued freight rate increases for the foreseeable future. The decrease in crude oil prices, as well as the decrease in many commodity prices will remove much of the support the railroads have enjoyed from economic factors in their push for higher freight rates.