If rail volumes are up by 8%, why are earnings forecasts up 20%?

Freight transportation volumes and freight company earnings have always been a good indicator of how the overall economy is doing, and the current transport trends appear to be support the conclusion that the economy has stopped contracting and is now expanding. However, with rail traffic up only between 4% and 8% on the four largest US carriers over the totals posted for the second quarter, why are earnings forecasted to grow by 18% to 25% from the same period?

Since 2004, it has not been uncommon to see average rail rates (dollars per carload) rise by over 12% from one quarter to the next, but increases in the 4% to 6% range were more common. Such increases, coupled with rising traffic volumes led to significant increases in quarterly earnings. In recent months however, the average revenue per carload has fallen as fuel surcharges have decreased more than the base freight rates have been raised. For the current quarter, average rates may rise due to rate increases in old contracts and rising fuel prices, but it would be a stretch to expect the average rates to increase by more than a few percent from last quarter. With such low expectation for freight rate increases and such low increased in actual traffic volumes, how can the railroads expect to increase their earnings so fast?

 

Railroad managers have done a fantastic job of reducing costs during the past several months, almost keeping pace with the falling traffic levels. That is not an insignificant achievement. It is questioned however, if they can keep the lid on costs as tightly when traffic increases, especially when the traffic increases are in the merchandise are where per shipment costs are high. Traffic associated with the low and more easily controlled cost of unit train operations, i.e. coal and grain shipments, has not increased that much. On the other hand, shipments moved in single car lots that need lots of handling and intermediate switching have grown disproportionately to overall traffic volumes and may drive average costs higher.