The period when the Class I railroads and rail equipment manufacturers unveil their fourth-quarter financial results is upon us. Rail volumes are still down from a year ago, but recent actions regarding U.S. trade relations with China and, separately, with Canada and Mexico could start to provide clarity to industry stakeholders. Here are some themes that might arise during earnings calls and throughout 2020:
Efforts To Regain Volumes
U.S. rail traffic in 2019 fell from 2018 levels in part because of the systemic decline in coal volumes. Coal carloads represented about 31% of U.S. carloads in 2019, according to the Association of American Railroads (AAR), and could shrink even further as prices for natural gas, a competing generating fuel for electricity, remain low.
The railroads have been looking to other segments, such as intermodal, to boost rail volumes. Although U.S. intermodal volumes were down 5.1% in 2019, they were still at their highest level ever, according to Luisa Fernandez-Willey, senior economist at AAR. Progress in reaching a free trade agreement in North America, as well as improving trade relations between the U.S. and China, could help intermodal volumes this year.
"The rise of intermodal in particular — as well as growing political support for trade agreements like the [U.S.-Mexico-Canada free trade agreement] — are cause for optimism leading railroads to adapt and modernize to meet customers' needs," Fernandez-Willey said in a report on Monday. "With greater certainty on trade policy and as railroads effectively implement operational changes aimed at increasing efficiency, the industry is poised to meet renewed customer demand this year and in years to come."
Service And Pricing
Despite lower rail volumes in 2019, service metrics largely improved, in part because of the railroads' implementation of precision scheduled railroading (PSR), an operating model that seeks to streamline operations. But some rail observers wonder if the railroads will be able to maintain those improved service metrics should volumes rise in 2020.
"2019 was a year of strong service levels and operating metrics, but that is easy with volumes down sharply across the board. Will service still be effective if volumes improve, or could there be a situation similar to what Canadian National (NYSE: CNI) ran into in early 2018 when it couldn't get grain to market?" said FreightWaves market expert Mike Baudendistel.
Railroad executives at investor conferences last fall reiterated the need to improve customer service as a way to gain additional volumes and compete with the trucking market. Meanwhile, the railroads were aggressive with pricing in 2019 so that prices were ahead of rail inflation, but whether the railroads will ease up in 2020 remains to be seen.
An Active Surface Transportation Board
With the addition of two board members last year, the Surface Transportation Board (STB) became more active and started to address some shippers' long-standing concerns as well as some recent ones, such as the application of demurrage and accessorial fees. But the timeline for when the STB might issue decisions remains uncertain; what's also unclear is whether the Class I railroads will act differently under the possibility of additional regulatory oversight.
"Will the rails take a step back on assessing accessorial/demurrage charges given the attention that issue has drawn from the STB?" Baudendistel asked.
Guidance On Capital Budgets And What's Next After Positive Train Control
The U.S. operations of the Class I railroads must meet a December 2020 deadline to have positive train control (PTC) installed and operating in such a way that one railroad company can read the signals coming from another company's train.
With PTC installation largely complete, one question will be how that will affect capital investment levels in 2020 since the railroads won't be spending as much money on installing the technology. Another question: How do the railroads plan to use PTC in the longer term once the system has been up and running. Some industry observers have said PTC could improve productivity because railroads will have opportunities to space out trains with more precision.
Meanwhile, short line railroads are applauding government efforts to help them finance their capital projects, such as the 45G tax credit and grant programs through the U.S. Department of Transportation. The 45G tax credit — named for where it is discussed in the U.S. tax code — offers a credit of 50 cents for each private dollar spent on freight rail upgrades and maintenance, up to a cap of $3,500 per track mile annually.
"They're all competitive and none are reserved solely for short lines, but nevertheless short line projects tend to compete well in these discretionary programs," said Chuck Baker, president of the American Short Line and Regional Railroad Association (ASLRRA). "ASLRRA has been working hard on ensuring that these programs are viable and obtainable for small business railroads."
Baker also said his group is watching any developments toward a surface transportation reauthorization bill, and it is keeping an eye out for potential regulations from the STB or the Federal Railroad Administration.
"We hope that any legislation takes into account who uses and pays for the transportation, does not cause a diversion from rail to truck by increasing truck size and weights, and stays away from counterproductive rules such as mandated crew size," Baker said of the surface transportation bill.
Will Headcount Keep Trending Downward?
Labor headcount among the Class I railroads fell to its lowest levels in 2019, and that could continue into 2020 with the continued implementation of PSR.
Image by Peter H from Pixabay
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