And yes, railroad traffic is slipping, badly.
But Americans still have to eat, and heat and power their homes. They still need clean drinking water. The raw materials needed—coal, agricultural products, chlorine, for example—are most efficiently, cost effectively, and safely transported by rail. These are essential tasks that only railroads can perform. Railroads handle more than 40% of the nation’s freight ton-miles while using just 8% of the nation’s energy required for transportation. That’s why America’s railroads, though certainly not recession-proof, are certainly recession-resistant.
Compared to many industries in these worsening economic times, the railroads won’t fall as far, and they’ll come back sooner. Though some cuts in spending are inevitable, the railroads continue to push forward with capacity improvement projects and basic, state-of-good-repair maintenance. Even with cuts of 20%, they will still need to spend well in excess of $10 billion in 2009 on capital expenses, maintenance, and supplies. That’s still a substantial market.
These are among the reasons railroads remain fundamentally strong. General Motors or Ford could vanish overnight. Union Pacific and Norfolk Southern and CSX and BNSF won’t.
In the midst of economic turmoil, Wall Street and investors have exhibited a good degree of confidence in railroads. “Despite a much softer freight environment, shippers expect rate hikes to continue,” says Morgan Stanley transportation analyst William Greene. “Shippers expect volume to slow, but not collapse. They see more value from rail, which is supportive of long-term pricing. All railroads are showing improvement in service and value. Intermodal will continue to take market share, and this is not purely a fuel decision. A modal shift to rail from trucks appears to be an ongoing theme as shippers look to cut costs. Even in a deep recession, we see 12% to 45% upside by year-end 2009 for U.S. railroads.”
“Investors see railroads as the best investment in the transportation industry,” says Kansas City Southern chief executive Mike Haverty. “In addition, railroads have high barriers to entry, which provide a greater degree of security to the investment. Plus, during a difficult economic period, investors like to be invested in companies with hard assets, which again favors railroads. And, while re-regulation is always a threat, the fact that railroads are self-funded suggests that politicians would be reluctant to do anything to hurt the financial viability of the industry.”
How the Obama Administration will treat transportation is the industry’s biggest source of concern. Initially, the positive signs seem stronger than the negative ones, even as some disaffected shipper groups flock to Capitol Hill, waving their “railroads are thieves in cahoots with one another” banner. (One clear and present danger is a class-action lawsuit brought by a group of shippers that have accused the railroads of colluding on fuel surcharges. If they prevail in court, it could cost the railroads heavily.)
While politicians who have listened to cries for re-regulation will most certainly try to push their agendas, indications are that President-elect Obama and those he has chosen to lead the Department of Transportation will practice restraint, with a more even-handed approach. Chances are good that when funds become available, the railroads (both freight and passenger) will be getting a bigger slice of the federal pie, especially if infrastructure dollars are part of an economic stimulus package that includes large public works projects.
While this is encouraging, large sectors of the industry are beginning to feel significant pain. For example, freight car deliveries should total just under 58,000 units this year, but an economy in recession will dampen future demand for capital equipment, including freight cars. In 2009, economic conditions will not support much demand for cars other than coal, grain, DDG, and tank cars, according to Economic Planning Associates: “Based on beginning-year backlogs and moderate demand for these cars, we look for deliveries of 41,000 cars in 2009, followed by a further easing to 39,000 in 2010. We expect minimal, if any, interest in boxcars, centerbeams, bulkhead flats, autoracks, and intermodal equipment.”
After 2010, the freight car market is expected to recover. “Assuming that the measures undertaken by the Treasury Department, the Federal Reserve, and the central banks of a number of major foreign economies will eventually correct current liquidity dislocations and the high costs of capital, we expect a cyclical revival in railcar demand beginning in 2011,” EPA said. Deliveries are expected to increase to 45,000 units in 2011, followed by 52,800 in 2012 and 57,500 in 2013.
At this point, it remains to be seen exactly how the industry will ultimately be impacted by a worsening economy. These aren’t the best of times by any stretch of the imagination, but the railroads have many things in their favor. President-elect Obama wants to make what he is calling the “New Energy Economy” the centerpiece of his administration. He is referring to new or more-efficient energy sources, to wean the nation off foreign petroleum.
The railroads can and should have a large part in carrying out the new President’s vision.
For the full story, subscribe to Railway Age.