Railroad auto business is not the only traffic segment facing serious cutbacks in coming months

Implications: The recent announcements of major cutbacks in US light vehicle production will definitely have a negative impact on both railroad traffic volumes and railroad profits. While this traffic only accounts for only 5% of all US carload shipments, its hefty margins contribute much more to the bottom line than other traffic segments. However, more serious problems relate to the potential decrease in grain traffic during the current grain year due to the weather and flooding problems in the Midwest. After the 1993 floods, grain traffic fell 30%, and this traffic segment accounts for 8% of US railcar loads.

Analysis:

So far this year, railcar loads of autos and autoparts were down 14% before the cutbacks in production were announced. Part of the problem was identified by the author of the “Sector Snap” article as being related to the change in the mix of automobiles and light trucks and SUVs. Multilevel autorack flatcars can handle more automobiles (15-18) than trucks and SUVs (12-15), so when more automobiles than SUVs are sold, fewer railroad carloads are needed to handle the traffic. This trend is expected to continue in the future, exacerbating the problems related to the announced production cutbacks.

 

A more serious problem for the railroads however, involves the potential for serious losses in the grain traffic during the second half of 2008 and most of 2009. If grain production suffers only half as much as it did in 1993, the railroads would still lose over 15% of their traffic since more of the crop would be used for domestic needs than exported, and the railroads transportation share of the domestic market is lower than the export market. Grain has been the one of the few traffic segments that have not shown decreases since the housing bust and financial crisis began, and the loss of this traffic will strain railroad profits since it is unlikely that they will be able to raise rates enough to cover this magnitude of a loss.