Rail Theory Forecasts™ LLC

Annual Publication

North American Rail Car Market

Norfolk Southern: NSC

CSX:CSX


BNSF: BNI


Union Pacific: UNP


Canadian National: CNR


Canadian Pacific: CPR


Kansas City Southern: KSU


GWI




PWX

What’s New on the Railroads

August 1 , 2008

Railroad Pricing Power continues to trump falling volumes

CSX and NS have both announced significant increases in quarterly profits while at the same time reporting declining traffic levels, a feat they have performed more than once in recent months. Overall railroad traffic was down about 2% for both carriers compared to last year, although up around 3.5% compared to the first quarter.  Both carries continued to raise their freight rates, with average revenue per car figures increasing from both the first quarter’s rates and from the rates in effect last year.  The commodity boom and the increasing cost of fuel oil have allowed the railroads to prosper in these worrisome economic times and an end to the combination of these forces does not appear to be in sight.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

July 14 , 2008

What is happening to railroad train speeds? With traffic very soft, especially in the intermodal segment which is more demanding of railroad locomotives and track space than other types of freight, one would expect train speeds to keep rising. CSX and NS have been on a down slide for several weeks, and BNSF recently joined them in posting slower train speeds.

July 14 , 2008

Railroad Pricing Power successfully challenged again, but not enough to end rate increases

On June 30, 2008, the STB ruled that CSX was charging excessively high rates to Dupont for several movements of chemical products and ordered the railroad to reduce them and pay reparations to Dupont . Several weeks ago, the STB ruled that UP had overcharged a Kansas Utility and ordered them to reduce their tariffs and to pay reparations. While it is possible that these cases might be the firsts of many shipper challenges to recent railroad freight rate increases,  neither case set effective limits for the railroad companies and it is doubtful that they will mean an end to the pricing power of the railroads.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

July 14 , 2008

Prince Rupert Traffic contributes to Intermodal Gains at CN

A second container vessel will make weekly stops at CN’s container terminal in Prince Rupert BC potentially bringing 1000 more containers per week to CN for movement to the Midwest and possibly raising the terminal’s inbound volume to over 2,000 containers per week.  At that volume, more than one train per day will be needed to handle the traffic and the train movements will be more evenly distributed throughout the week, decreasing the equipment and crew costs per load. Thanks to the rising price of bunker fuel that is increasing the shipping costs for ocean carriers, CN’s investment in this line may break even faster than even they might have anticipated.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

July 2 , 2008

More than floods in the Midwest are to blame for railroad traffic losses

The Association of American Railroads (AAR) reported that the Midwest Floods “continued to negatively impact rail freight traffic” during last week, a statement easily verified by a quick check of the weekly carloads of the UP RR which showed at 10% drop in carload for the week ending June 21. However, the Eastern railroads which have very few if any lines in the area suffering from swollen rivers, namely CSX and NS, reported carload losses of 8% and 5% respectively. More importantly, a continuing trend in decreasing carloads began in early May and has brought the year over year traffic gains of 1.1% posted on May 3rd down to only 0.3% on June 21st.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 22 , 2008

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

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.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 11 , 2008

Railroad Intermodal traffic will probably not rebound for quite a while

IANA (Intermodal Association of North America) reported that the first quarter intermodal volume was down 2.4%, almost identical to the decline reported by the AAR several weeks ago. Not surprisingly, the decline in imports was cited as the main reason for the decline, although the losses were partially offset by tenth consecutive increase in domestic shipments. Although it was forecasted that imports should improve at a healthy pace once the current bout of economic weakness passes, no guess was made as to when that might occur.  Our guess is that railroads may be in for a long wait for that to happen.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

May 21 , 2008

UP freight rates for Powder River coal are found to be excessive by STB

The Surface Transportation Board ruled that the freight rates that the Union Pacific Railroad unilaterally imposed upon Kansas City Power and Light in 2006 for the transportation of their Powder River Coal were in excess of the board’s guidelines for a carrier that had market dominance. Since the STB used an easily understood methodology in reaching this decision, this may be the first of many challenges to the railroad freight rate increases since 2006, often characterized as their newly discovered “pricing power”.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

May 14 , 2008

Trade Mag. finally gets it right; CSX is on the road to recovery after years of poor management

Trade magazines are usually constrained to write only positive comments about the companies in the industries they cover, since subscriptions and ad revenues are more dependent on goodwill rather than good investigative reporting. In the article reviewed below however, the writer/editor finally fesses up, CSX was poorly managed in the past, and much of the blame belongs to the ex-Chairman/CEO, John Snow. The article goes on to heap the usual praise on the new management team assembled a few years ago by Michael Ward, probably trying to aide in their defense against the corporate raid being staged by the TCI fund.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 14 , 2008

Tight capacity is one of the preconditions for railroad pricing power, so why worry about it?

For almost 100 years, or since 1921 to be precise, the railroad industry has been shedding excess capacity and abandoning lines and terminals. For most of that time, unfortunately, it was also losing traffic to other modes of transportation, primarily to the trucking industry. It was only recently that the railroads finally realized that they had abandoned too many lines and that excess capacity was no longer an issue. BNSF had to buy back a line they had sold that went from Seattle across the Cascade Range, and UP has been busy relaying some of the double track the SP had removed from the Sunset Route in the early 1990s. (The SP president was named the Railroad Man of the Year for that and similar feats.) With capacity tight, the railroads learned that they could charge more for their services and be somewhat indifferent to traffic losses as long as they were operating at or near capacity. Why would a company in such a situation be in any hurry to build more capacity?

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 27 , 2008

CSX Exec boasts confidence in continued turnaround

Mike Ward said that CSX would continue to enjoy double digit earnings growth for another few years, and he put an exclamation point to his forecast by boosting the share buyback program and increasing the dividend on these shares outstanding. His inspiring words however, might just have been an opening salvo against the investment funds who want to scale back CSX’s capital investment programs in order to reward their short term investments. It’s a shame that such bravado is necessary, but it would also be a pity if The Children's Investment Fund and 3G Capital Partners were allowed to loot the CSX treasury for their short term gain at the expense of other investors and perhaps the US taxpayers if they set up another Conrail type bailout in the future. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 29 , 2008

Railroad freight rate increases are only reason for increased profits and share buybacks

It’s hard to argue with success, and success is what the railroads are currently achieving after a decades -long battle for survival with their highway and barge competition. While all modes of transportation saw freight traffic soften in recent quarters, only the railroad companies have been able to maintain their profit growth. Praise is coming from all quarters and investors are being encouraged to join the likes of Warren Buffet in buying into the rail industry. The high P/E ratios are said to be justified by the prospects of double digit profit growth for several more years. Notwithstanding all the hype about productivity, the problem is, all of the recent growth in profits has been due to freight rate increases, and it must be questioned how many more years these annual increases can be maintained.  http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 29 , 2008

Ag and Coal are lifting railroads above economic potholes

The two largest railroad carload traffic segments, Agricultural products and Coal, are once again flowing in record quantities after a disappointing performance in 2007. Grain traffic is up 17% for the first 8 weeks of the year and coal shipments are up 3.4% for the year following increases last week of 18.3% for grain and 4.8% for coal compared to the same week last year. Traffic segments related to construction and the domestic economy in general were all down, except for Chemicals which include ethanol (up 3.7% YTD). The largest segment by revenue, Intermodal, was also down for the year, -3%. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 20 , 2008

Railroad Pricing power being fueled by boom in commodity prices

Railroads, both large and small, have managed to keep raising freight rates each year, even as some of their traffic segments have suffered declines in loadings and ton miles. Although the data is still incomplete, it does not look as if the rate increases are to blame for these traffic losses. Moreover, opposition to the freight rate increases has not grown significantly and regulatory laws that have been promoted by groups such as CURE are not likely to be passed  in the near future. If there is one factor that has been responsible for this situation it is the steady increase in commodity prices during the past few years, and rail freight rates should be able to keep rising as long as commodities keep getting more expensive. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

January 24 , 2008

Railroads pricing power continues to offset traffic loses

Both Norfolk Southern(NYS:NSC) (NSC) and CSX Transportation(NYS:CSX) (CSX) posted strong earnings for the fourth quarter and the year in spite of traffic losses. Costs were tightly controlled on both systems and were reduced in proportion to the contractions in traffic, allowing all of the freight rate increases to be reflected in the bottom lines. CSX had the most aggressive rate increases and indicated that they would take similar pricing actions in 2008, preferring margin gains over traffic increases. Both companies have promised and delivered rate increases for three straight years. Although those who have doubted that rates could go much higher have been proven wrong in each of the two previous years, once again it must be asked if these increases be sustained indefinitely. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 20 , 2007

Railroads will fare better than most companies, and very much better than trucks in 2008.

A Fitch Ratings report has predicted that railroads, although likely to face weak traffic demand in 2008, will fare better than trucks because grain and coal volumes should increase over the rails and the vaunted “pricing power” of the railroad companies will remain in force.  So what else is new, and why go to the trouble of stating the obvious? Railroad earnings next year are almost sure to increase over 2007 levels since volumes will climb and rates will increase. Most other industries should be so lucky in what appears to be setting up as a “down” year.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 7 , 2007

Railroad tonnage and carload gains should put railroads on the road to recovery in 2008

The American Association of Railroads (AAR) reported that US carload traffic during the week of Nov. 15 was 5.1% higher than the similar week in 2006 and that intermodal traffic was only down 0.8% .  Carload traffic began to improve at the start of the fourth quarter, but this was the first time since midsummer that intermodal traffic looked anything like last year. However, not all of the railroads are enjoying the traffic gains; most carriers are still handling less traffic than last year. The Union Pacific seems to be the only railroad reporting significant traffic gains over 2006. (Both Canadian railroads are reporting more traffic this year than last during the fourth quarter.)http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 7 , 2007

CP is improving its operating ratio the old fashioned way; increasing business and lowering costs

CP Rail recently announced that their third quarter operating income had increased over 7% compared to the same period in 2006 and that its operating ration had improved from 74% to 73%. Although most of the other major, Class I railroads in North America had reported similar results for the 3rd quarter, CPR stands out for the way they achieved the same result. Unlike the other railroads, including the Canadian National Railroad (CN), CPR had strong traffic gains in all sectors. Moreover, while all of the other carriers reported significant freight rate increases, CPR’s revenue per carload in the third quarter of 2007 were very similar to the numbers reported during 2006. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 7 , 2007

Another wave of railroad mergers is not going happen, anytime!

Hunter Harrison predicted that there will be investor pressure on the major railroads in the US to merger and that a large transaction will occur within the next five to six years. Hedging his bets just a little, he further said that these developments would not involve the CN, at least not until 2009 when he will retire. Big news! It will take at least until 2009 to get the CN/EJE merger approved by the Surface Transportation Board. The STB signaled that it disapproved of large mergers such as the CN and BNSF proposed a few years ago, and there has been not sign that they have changed their mind. There would be great opposition from many parties to any further consolidation in the railroad industry.http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

November 25 , 2007

Trends give a brighter picture then the current railroad traffic numbers

For 41 weeks, the AAR has reported that the weekly railroad carload totals were less than they were in the same week one year ago, and for most of that time, that railroad ton miles were less than the same week in 2006. The story actually began on January 12th of this year when the weekly totals turned south after heading higher for almost every week in 2006. It didn’t make sense in view of the growth being reported for the GDP, especially for the 3.8% jump recorded for the second quarter. Numerous studies, over many different time periods, for many different modes of transportation, and in many different countries have shown an almost identical relationship between GDP and ton mile growth (or contraction). So why are truck companies, railroads, and barge lines all reporting less ton miles in 2007? http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

October 20 , 2007

Railroad Pricing Power is starting to be tested in Congres

A Senate bill involving railroad regulatory matters,  S.772 introduced on March 6, 2007, was recently approved by the Judiciary Committee and sent to the full Senate for consideration. Ostensibly, the bill would give other government agencies some regulatory control over railroad mergers, which would short circuit the lasses faire approach of the Surface Transportation Board (STB) since it evolved from the former Interstate Commerce Commission (ICC). If this is all the bill contained, it would probably benefit railroad stock holders by handcuffing management on future mergers; but there are other provisions regarding freight rates which are really the reason d’etre  for the legislation. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

September 15 , 2007

CN’s new Prince Rupert business will be too small to measure for a long while.

The new intermodal terminal on Canada’s West Coast will begin operation this fall, and CN hopes that traffic will be diverted from other West Coast ports to its less congested facility and rail lines. It sounds good in theory, but there are several other West Coast ports with good highway and rail connections that are trying to break the lock that the Los Angeles/Long Beach terminals seem to have on West Coast imports. Unlike the other ports, Prince Rupert has little to offer but another way to get to the US Midwest..http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

September 15 , 2007

DM&E was a good buy for CP Rail, although a bit pricy.

CP Rail announced that they will purchase the DM&E railroad for $1.5 billion, plus an additional $1.0 billion in the future if an extension is completed into the Powder River Basin coal area by 2025. The DM&E is a conglomerate of a number of bankrupt and abandoned rail lines that was assembled during the past 20 years into the largest regional railroad in the US. Although it has gained fame for its attempts to extend its lines into the western coal fields of the PRB, it owes it current prosperity to the ethanol industry. This traffic, plus a connection to a former rail partner may be the reason for CPR’s purchase, more than the possible coal traffic that the PRB might offer. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

JuLY 18, 2007

Pricing is propelling CSX profit gains

Notwithstanding the misleading headlines of a 17% plunge in profits, CSX reported exceptionally strong earnings for the second quarter compared to both the second quarter of 2006 and the first quarter of this year. Both carload and intermodal traffic volumes were less than reported for the same quarter in 2006, but they did not decline as much as they did in the first quarter comparisons. Once again, the increase in revenue due to freight rate increases exceeded the decrease in revenue resulting from lower traffic volumes. Once again it can be asked how long the increases in freight rates can continue. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 7, 2007

Railroad Traffic

Carload and intermodal traffic levels continue to trail 2006 volumes through week 21 in the year.

June 4 , 2007

Early estimate of Second Quarter ’07 Railroad carloads

Enough weeks have passed in the second quarter to make a guess of how the second quarter’s carload statistics of each of the US railroads might look. Although car loadings for the year are down 4.5%, not all railroads did this badly. Some have done better than their reported performance during the first quarter, but some have done worse; and it can’t be as easily explained from geography as it was back in April. The continued growth in the market share of Western coal has helped carriers in that region, but not enough to overcome some of the other traffic losses out West. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

May 31 , 2007

Rail operating managers will do better, provided….

Everyone seems to be buying railroad stocks, from short term hedge funds looking for a turnaround in management performance and financial strategy, to long term value investors like Buffet and Icahn who see promising business prospects and well positioned companies. Both groups seem to have “found” the railroad industry after most of the railroad companies had posted impressive profit gains and stock performances for two straight years. The word “renaissance” has been used extensively during this period to suggest that a new era had begun for the railroad industry. But this phrase was actually first coined 15 years ago when the railroads were outshining most other industrial companies and their stocks were outperforming the Dow Jones Industrial Average. It was what happened then and what probably won’t happen now that makes these stocks now so attractive to savvy investors.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

Railroad traffic has not improved since 1st quarter reports

The layoffs by the Class I railroads that have recently been reported were well received by Wall Street and the prices of their stocks increased. The report of the layoffs was old news however, to most of the crewman affected, since railroad traffic has been below last year’s level since the start of the year. Through May 5, carload traffic was down 4.3% from last year and intermodal traffic, as measure by the count of the containers and trailers, was off almost 1%. Traffic for the most recently reported week showed similar comparisons to the traffic levels in 2006 for the same period. Railroads have traditionally responded quicker than most industries to declining business levels, but layoffs do cut expenses quite as fast as revenue is lost. Hopefully, traffic will build during the summer months and the millions the railroads spent in training those laid-off workers last year will not have been wasted.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

May 11 , 2007

LBO or private equity takeover of railroad has little upside

Norfolk Southern’s CEO recently stated that the private equity LBO model is not suited to railroads. The recent purchase of the Florida East Coast Railroad by the private equity group Fortress Investment Group LLC is not an exception to his comment. The FEC was owned by a holding company that also has a real estate company that contributed almost 40% of the Earnings of Florida East Coast Industries on 27% of the revenue in 2006. Moreover, the FEC was one of the best managed railroads in the country as evidenced by it earnings. The purchase price reflected the full value of both companies. Almost all of the other railroads are pure transportation companies, and although there may be more profit to be squeezed out of their traffic, it is not a quick fix situation.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 20, 2007

Union Pacific Profits fall 20% in spite of increased freight rates

The market hype is that UP profits surged 24% in the first quarter in spite of a 5% decline in traffic. Evidently, the market was looking to see if the railroad still had any pricing power and was cheered by their report which showed that increased freight rates had allowed them to raise freight rates on coal traffic by 3% over the fourth quarter rates and 1% on all other commodities. Rates on intermodal shipments decreased from the last quarter. Nevertheless, railroad officials were predicting that earnings would grow by 15% and that per share earning would be around $1.44 in the second quarter. Why are investors cheering the fact that the UP will most likely, by their own estimates, only match their 2006 earnings per share?

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 18, 2007

CSX still has Pricing Power that is keeping earnings up; but are industry trends being overlooked?

CSX announced first quarter earnings that were only 2% less than those reported for the first quarter of 2006 even though their carload traffic was down 5% and their intermodal traffic was off 1%. Increases in freight rates helped CSX to actually increase their freight revenue by 4% in spite of the traffic loses; increased cost drove their operating ratio, a broad measure of railroad efficiency, up from 79% to 80%. After the report was released, the price of CSX common stock rose 3.5%. The crowd on Wall Street be encouraged by the continued ability of the rail sector to raise their freight rates, but they should recognize that there will be a limit to these increases. Investors should not overlook the underlying trends of declining traffic and stagnant operating ratios for CSX and the other railroad companies.     http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 10, 2007

Not all railroads are like BNSF, and the railroads are still in a cyclical industry

Berkshire Hathaway’s decision that there is value in Burlington Northern Santa Fe Railroad seems to have convinced many investors that the railroad industry is not going to be subject to cyclical swings anymore, or at least of the near future. That would be good news if it were true, but notwithstanding all the reports of a railroad renaissance, the factors that drive this industry have not changed in recent years and downturns might be in store for some companies in the months ahead. We’ll know more after all the 1st quarter numbers are out, but with carload traffic down almost 5% and intermodal traffic up only an anemic 0.2% for the year, it will take a lot of rate hikes to significantly improve on last year’s revenue numbers. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 5, 2007

Carloadings are down through Feb. 22

Carload traffic for the year is down from last year’s totals by almost 5%, but intermodal traffic is still even with 2006 levels through the 8th week of the year. Carloads of almost all commodities are down from last year, notably lumber and paper products. Coal loadings in Appalachia are down 8% and the output from the interior coal mines is down 1.8%; production in the West continues to defy gravity and is up 3% over last year for the first seven weeks of the year. The financial results of the railroads for the first quarter might reflect this dichotomy.

February 25, 2007

DM&E has its first financial evaluation and it’s not good

Freightcar America (FCA) rolled our the first of 1,200 stainless steel/aluminum (hybrid) body coal cars for Norfolk Southern (NS) in Roanoke VA this week, building the car in a recently opened shop where NS used to build their own coal cars. The cars will replace aging cars in the NS fleet and will operate between the mines and the export terminals on the East Coast that are served by NS. That’s about the only good news that FCA will report for a while this year as its backlog of orders for coal cars shrinks. There is no other car type in its design portfolio that might allow if sales force to replace the missing coal car orders. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 12, 2007

Can railroad rates keep rising?

So Bear Stearns thinks that the railroads are about “mid-cycle” (his term.) But what does this mean: halfway up or at the top and about to start on the downward side again? Edward Wolfe said that the reason for the current strength is a “more diversified freight mix and greater operating efficiency.” He is partially right but mostly wrong on his interpretation of the railroad traffic and operating statistics. A closer look at the numbers and a comparison with historical trends shows the current increase in profits is all due to increasing freight rates. Since rates have been rising for over 24 months, it might be time to pause and ask if the railroads can keep increasing their prices without giving any better service for the money. See www.GLGnews.com for the rest of the commentary

December 28, 2006

CSX: 2006 will be tough to repeat   

CSX achieved some impressive results through the third quarter that are correctly attributed to their pricing power in 2006. Overall volume grew only slightly during the year, .6% through the first 9 months, but revenue increased 12% and operating earnings were up 31%.  This is even more impressive considering that the two traffic segments that grew, coal at 4.5% and intermodal at 2.1%, are traditionally the lowest rated commodities handled by the railroads. Shipments of chemical, automotive, and forest products, historically highly rated commodities, were all down in 2006. Things will be different in 2007, and not for the better. See www.GLGnews.com for the rest of the commentary

December 12, 2006

Year over year traffic increases have been decreasing for both regular carloads and intermodal traffic since the start of the third quarter. In the last few weeks, traffic levels have been less than those recorded during the same period in 2005. This does not bode well for GDP growth in the fourth quarter or for railroad traffic in 2007. Most railroad stocks are still at or near their highs for 2006 and analysts are projecting an earnings growth of 10% or more for most carriers. With an end in sight to freight rate increases and traffic slowing, the railroads will have to drastically lower their costs to make the estimated earnings.

August 28, 2006

Railroad railcar traffic is just slightly ahead of last year. The AAR reports that YTD carload traffic is just 1.5% above 2005’s levels as of this data. For intermodal traffic however, the story is much different. YTD container and trailer loads are up 6.4% over last years totals, which is slightly above the normal growth rate of 6% for this segment of railroad traffic. Ton miles are up 2.7% for the year, although most of that gain was achieved during the first half of the year. Ton miles for the last several weeks have only be marginally above last year’s weekly tallies. With traffic growth returning to more normal levels, watch for railroad executives to start touting the improvements in their operating performance, especially train speeds as locomotive deliveries exceed traffic increases.

July 28, 2006

Profits for the main US railroads climbed again during the second quarter, and once again the rise is due almost entirely to increases in freight rates. Compared to all of 2005, cost per carload during the first half of the year were up 4.9%, mostly due to a 22% increase in fuel costs. Revenues per carload however, were up 8.3%. Freight rates increased 10.8% for general merchandise, 7.5% for coal traffic, and 4.7% for intermodal shipments. Needless to say, the continued increase in freight rates is generating political actions to re-regulate or to facilitate the processes whereby aggravated shippers can appeal to the STB. Since only one or possibly two rail carriers are deemed to be earning their costs of capital, it would be a hard sell to roll back the rates because a few shippers feel disadvantaged. Railroad rates might have a way to climb before all carriers earn adequate revenues.

July 19, 2006

Railroad train speeds have continued to improve, albeit at a slower pace than in the first quarter. For the year to date, the composite average speed for the industry is up 3.5%. Compared to the average speed in the for the second quarter of last year, the speeds in the second quarter of 3006 were still down by 1.6%. At the current rate of improvement, trains speeds might end the year where they were at the start of 2005. These modest improvements are best for the railcar leasing and building industries, since they do not introduce any negative demands for equipment (car surpluses). The fact that speeds are not decreasing however, means that the artificial demand for new freight cars is gone and that new car orders should begin to fall.

May 18, 2006

I have been advised that my arguments that a locomotive shortage is causing the current slowdown in train operations have been countered by other consultants who are proposing that railroad track capacity is the problem affecting the train speeds. They reason that the additional trains that have been added to the system have added delays due to more train meeting and passing events and that these delays have caused measured train speeds to decline.

Academically, I could easily argue that this might well be the reason the fall in train speeds. In a few years and after much more data become available, it may be proved that the railroads do indeed have line capacity problems that are slowing train speeds. For the present however, I am sticking with my intuition that the speeds have fallen because the railroads scrapped too many engines in 2003 and could not acquire replacements fast enough in 2004 and 2005 to handle their growing traffic levels. In 2004, when the train speeds began to fall, traffic levels were still less than they had been a few years earlier. Unless many miles of rail had disappeared in the past two years, track capacity was not the cause of the slowdown. In 2005, the added intermodal trains (which are given a higher priority in train movements) might have been causing some delays to other freight traffic, but even intermodal trains were running slower.

The railroads are currently trying to convince Congress of the need to appropriate money for railroad infrastructure improvements. One might question if the consultants supporting their arguments are just hired guns or independent thinkers. While I hope to collect a small pension from one of the Class I's one day, it is not enough to hire my thinking.

The improvement in train speeds recorded during the first quarter has not continued into the second quarter. Fortunately, they have not yet been reversed.

May 12, 2006

The STB heard complaints from a wide variety of railroad shippers concerning the recent rate increases resulting from fuel surcharges. The complainants included regulated electric utilities that might have a just beef against their rail carriers who are no longer subject to pricing regulations. But the group of complaining shippers also included the automakers and other major railroad customers who, like the railroads, are free to adjust their prices with the prevailing market conditions. It would seem that they are starting to view the deregulation of railroad traffic in a different light than they have in the past. Since the higher rates are just starting to enable the railroad companies to achieve returns on equity above their cost of capital, it is hard to knock the railroads for trying to earn a profit. On the other hand, the natural monopoly they enjoy by virtue of their exclusive use of their own rail lines might seem a good reason to continue to monitor their freight rates. Since their deregulation in 1980, railroads have not raised rates as much and as successfully as they have in recent months. Perhaps now they will have to weigh their desires for more revenue against the possibility of renewed regulation or more open access to their rail lines. We’ll have to see if the quarter-to-quarter rate increases continue.  Anyone want to bet that they will cease?

May 10, 2006

Wall Street has not failed to notice the improvements in the profit margins being posted by most rail carriers. Stock prices are up across the board, although not as much for some companies. RTF has frequently commented in the past on the declining train speeds reported by most carriers. In addition, we have questioned whether the profit increases being posted each quarter could be sustained from just freight rate increases.  However, even if freight rates are only held constant during the next year, the year over year gains in profit margins for each of the next few quarters will justify the faith that the investing public seems to be showing in railroad stocks. In a speech in NYC last September, we questioned if the reported railroad renaissance was merely a recovery from past stumbles. While a final verdict can not yet be rendered, the data suggests the former may be a more accurate description.

April 26, 2006

The operating ratios (Costs/Rev) of the four Class I railroads continued to decline during the first quarter of 2006. As was the case in 2005, the reason for the improvement is all in the denominator; i.e. the railroads are still raising freight rates, although not as broadly as for all of 2005. On average, coal rates were up 6% during the 1st quarter, although Eastern carriers were lower and Western carriers were higher than the national average. Rates on intermodal moves were lower on all railroads, averaging -4% from the 4th quarter rates in 2005. Rates for all other traffic showed a quarterly increase of 2%.

This is a rather remarkable phenomenon. The railroads have traditionally improved their operating ration only by reducing unit costs, and have watched their unit freight rates remain constant or even decline over the years. Nor have past attempts to raise rates been that successful. Most recently, the UP raised rates in 2004 to solve a capacity problem and their operating ratio increased as more business was lost than costs were reduced. In this round of rates increases, the business is not only staying on the rails, but traffic is actually increasing.

Notwithstanding what might be said at the May 10 STB hearings regarding railroad fuel surcharges, there has been relatively little opposition to the increased freight rates. Escalating diesel fuel prices and their effects on truck rates is one possible explanation; but railroads might also finally be getting smarter in using the freedom they gained in 1980 with the Staggers Act that deregulated railroad traffic.

April 9, 2006

The AAR reports that carload traffic is up0.7% for the 1st quarter of 2006 vs. the 1st quarter to 2005. The weekly carload totals show a different picture. Carloads in March were reported to be about even to those in March, 2005, but the weekly totals reported this year look to be much lower than last year. The AAR numbers always leave room for doubt and that is why RTF uses the Public Use Waybill data for its analyses.

March 30, 2006

It is not a coincidence that train speeds are improving while the growth in ton miles is slowing. Railroads have been short of locomotive power since traffic began to climb in 2004, and new engines are finally being delivered at a faster rate than new traffic requires. During the first quarter of 2006, the increase in ton miles is half the gain recorded during the same period in 2005.

March 15, 2006

Train speeds during the 1st quarter are up slightly over the 4th quarter levels. The increase is not enough to signal that train speeds will soon climb back to 2003 levels. If the speeds just level off, the artificial demand for new railcars that has existing for the past two years will cease and new car orders will fall slightly to levels required by new traffic and retirements.

February 21, 2006

Intermodal traffic during the first few weeks of 2006 looks like it is on track to repeat the growth rate of 2006. Retail sales and imported goods are the main factors driving these loads, and both appear to be matching their performance of last year.

February 7, 2006

The weekly carload traffic reported by the AAR looks to be off to a better start in 2006 than in 2005. Last year, traffic finally reached 2001 levels for most of the year, but the weekly numbers during the fourth quarter indicated a decline in traffic might be seein in 2006.

February 7, 2006

Mostly because of increased freight rates, the profits of the four main U.S. carriers increased in 2005 substantially over what had been expected after their recovery in 2004. As was stated last August, rising fuel prices have historically given the railroads political cover to raise their freight rates, and they have usually increased rates more than their increased cost of diesel oil might have required. There is very little competition between the railroads anymore, and each railroad’s main competition now comes from trucks and barges. To introduce inter-company competition back into the railroad industry, new concepts such as competitive access would have to be tried. The railroad companies, having secured their regional monopolies through mergers, are adverse to these ideas and have fought them whenever they arose. That is why political cover is needed whenever rates are raised for whatever reason. RTF does not think that freight rates will increase at double digit rates in 2006 and that gains in profits will have to be earned through cost savings and new traffic. With traffic increases expected to be less than 5%, the estimated earnings for 2006 appear optimistic unless there are further increases in freight rates or greater cost reductions than have been achieved in the past.

January 23, 2006

It is too early to post the results in graphical form, but the train speeds during the first two weeks of the first quarter of 2006 were up significantly over the average speeds of the fourth quarter of last year. The only big exceptions are the coal train speeds of the western railroads which are being depressed more by track conditions than by locomotive shortages, and even these stopped declining. The next few weeks should be very interesting for watchers of this leading indicator of railcar orders.

January 19, 2006

Once again the railroad presidents are touting their capital expenditure plans (cap-ex) for the next year as signs of their continued confidence in their companies and their prospects for growth. In the railroad industry however, much of what is categorized as capital spending is really just maintenance of the existing plant. Even the funds supposedly targeted for equipment acquisitions is somewhat questionable since most locomotives and railcars are secured through operating leases that are not capitalized on the balance sheet. It would be helpful to see just what amount is actually spent on new plant and equipment, such as the NS upgrade of the KCS Meridian to Shreveport corridor (the old A&V/VS&P line of the Illinois Central), and the CN expansion of their Prince Rupert corridor. A better evaluation of the ROI of these projects could be made without all the maintenance costs that are also included in the cap-ex totals.

December 30, 2005

Smith Barney recently reported that train speeds on CN have improved over last year. That may be, but why did CN stop reporting train speeds to the AAR in October, 2005? The other railroads that still report, including CPR, have not shown any improvement and the trend through the 4th quarter was still down. It the train speeds keep deteriorating, more new railcars will be needed even if traffic stops growing.

October 24, 2005

There is a simple rule followed by most railroad executives: when business is down, talk about performance, when business is good, talk about profits. This rule worked reasonably well in the past, before actual measures of performance were available for analysts and stock holders to check current claims or past promises. Since 2001 however, operating statistics for each major railroad have been published by the AAR on a weekly basis showing train speeds and terminal volume and efficiency. As profits have increased in recent years, performance has deteriorated. For management, either the rule had to be discarded, or something had to be done about those “damn numbers.” Another rule of management is never to abandon what has worked in the past, and so it was better to monkey with numbers than change how they talked to shareholders.  In February of 2005, the BNSF changed their method of computing train speeds, seemingly invalidating all the old records. In October, the AAR instituted new standardized rules for all reporting railroads, and put everyone on notice that old records may no longer be valid. In both instances, the AAR published a 53 week history of the past records so that the old and new methods could be compared. RTF has all the old weekly reports and has modified, when necessary, past records to conform to new rules.

Train speeds looked to be improving during the third quarter or at least not declining any further, with one or two systems actually showing minor improvements. During the first three weeks of the fourth quarter, the downward trend has resumed, introducing even more artificial demand for new railcars.

October 5, 2005

At the Sept. 16 New York City Rail Trends conference sponsored by Progressive Railroading, there were many comments on the capacity constraints facing the railroads and questions about the ability of the various carriers to finance the needed infrastructure additions and betterments. No one mentioned the miles of double track there were reduced to single track during the 1990s, nor the lines that were abandoned and later repurchased by the Class I carriers. The railroad public relations managers and the AAR in particular are to be commended for shifting attention to the need for public assistance and away from some of the downsizing decisions that are now coming back to haunt the industry. One need only go back to 2003 for a good example when thousands of high horsepower locomotives were scrapped or sold by the major carriers, some via Internet auctions.  This power was sorely missed in 2004 when the traffic began to grow. The slow trains in that year were blamed on crew shortages; but two years hence, the trains are still going slow and new locomotive purchases have increased over 30% during the last 20 months.

August 15, 2005

The four main US railroads posted stronger than expected second quarter earnings, continuing the pace of year over year gains that they set during the first quarter. Even the UP began to show some improvement, although their operating ratio still puts them well behind the pack. Although they are often cited by the railroads for their low profit margins, high fuel prices are generally good for the railroad industry. Some shippers divert traffic to the rails when truck rates become too onerous, but not enough to offset the higher costs. However, the high fuel costs are widely known and they give the railroads political cover to raise freight rates. Railroad revenues have grown as much from the higher rates as the increased business from the expanding economy. The stocks of the western carriers are being priced at P/E ratios of over 20, while the eastern railroads have P/E ratios around 11. Neither seem to adequately express the value of these stocks, with one group apparently over and the other under valued in today’s booming transportation market.

	Operating Ratio	2Q05 vs. 2Q04 Operating Profit
NS	73%	40%
CSX	80%	54%
BNSF	77%	40%
UP	86%	30%

July 11, 2005

On average, railroad trains speeds have continued their downward track through the second quarter of 2005, although the speeds on some systems have stabilized. Results from the early part of July indicate that they are off to a bad start in the third quarter. Slow trains mean longer car cycles (fewer trips per year) and therefore more cars are needed to handle the same volume of traffic. The current slowdown has created a demand for 100,000 more freight cars over and above the number needed to handle the recent increased in traffic. Should the train speeds ever increase, this artificial demand will decrease and car surpluses may return to plague railcar supplies.

June 27, 2005

KCS, which is one of the major seven North American Railroads, with extensive operations in Mexico and the U.S., has not been profiled due to its delay in filing fist quarter results. Like the other North American railroads, KCS showed a significant improvement in its operating income compared to the first quarter of 2004, with the 2005 results showing a 143% gain. The operating ratio for this railroad is still 87%, one of the highest in the industry.

June 13, 2005

The two Canadian Class one railroads, both of which have lines in the U.S., have performed much like their state side counterparts with spectacular gains over the first quarter results of 2004. More modest improvements are expected in the remaining quarters of 2005, although both companies are projected to increase their earning per share for the year by 154% for CP and 124% for CN. The two major publicly traded shortline holding companies, Genesee & Wyoming, Inc. and RailAmerica, Inc., each had outstanding first quarters, and are expected to increase earnings per share for the year by 121% for GWI and by 174% for RRA over 2004 results. The 2005 EPS improvements seem quite optimistic to this observer for all of these companies.

May 31, 2005

The growth rates for both carload and intermodal traffic, as reported by the AAR, have slowed in recent weeks, due to: (1) some temporary operational problems reported by the western carriers; and (2) perhaps to a cooling of the national economy as indicated by recent statistics released by the Federal Reserve and the Association of Purchasing Managers. The first quarter year-over-year net profit gains by the big four might not all be duplicated in the second quarter. The average earnings estimates of analyst who track these stocks seem to be too optimistic for this observer, even without the recent downturns.

May 16, 2005

The first quarter financial results for the four main U.S. carriers have been posted and CSX shows the most improvement, joining NS and BNSF with a low operating ratio and improving its profit by 132% over the first quarter of 2004. UP is the only carrier not benefiting from the high level of freight car traffic this year, blaming its poor performance on fuel cost increases and weather problems.  All of the carriers saw major increases in fuel costs, amounting to 40% for all companies except for CSX which only reported a 16% rise is costs.

May 4, 2005

The main four US Class I carriers have barely increased their 2005 capital expenditures for Track and Structures over 2004 levels in spite of that fact that their revenue increased almost 20% and net profits rose over 40%. The big four’s Cap-Ex expenditures for Track and Structures have remained relatively constant since 2000, while ton miles have increase 10%. Some of the money has been and will be used to increase track capacity, but most Track and Structures expenditures are really capitalized maintenance projects.  (It should be noted that NS increased their T&S budget by 14% in 2005, but decreases at other companies reduced the average for the group to around 1%.)

April 18, 2005

TTX is soliciting bids for more doublestack cars just when it appears that the rate of growth for intermodal loads has dropped. Last year intermodal loading surged almost 10% after an impressive gain of over 7% in 2003. Doublestack well orders in 2004 indicated that TTX and its railroad owners anticipated continued growth at these levels. The intermodal loadings reported by the AAR during January seemed to reinforce this belief, but the loading levels since then indicate that a more modest gain of approximately 3% will be realized in 2005. If this trend continues, the recent 4,500 well order by BNSF and any size order from TTX will lead to a small surplus of cars in 2006 which, in turn, will cause a falloff in orders next year to let loadings catch up with the available fleet.

April 4, 2005

The capacity problems that are plaguing the railroads will not be solved with additional rolling stock to compensate for the car shortages that are resulting from delayed shipments.  Nor should the railroads be looking at larger 315,000# capacity cars as a possible solution with so many 286,000# cars just recently financed.  New rail lines are very expensive to build and will not work in all regions of the country. New technologies such as Positive Train Control (PTC) and Electro-Pneumatic Brakes (EP) can increase train densities on existing lines, but they are also costly to install. Moreover, the cost burden will not as easily be shifted to industry suppliers as was done with the new 286,000# capacity railcars. It is not hard to understand why the carriers have once again looked to employee productivity to generate some of the additional funds. However, one man crews may be asking for too much this time, given the issues of public safety and employee overload.  Nevertheless, some means of funding these improvements must be found since ton miles have steadily grown for the last century and are projected to double in the next twenty years.

March 21, 2005

2004 was a good year for railroads, and financial results improved greatly over 2003. This year should also be an outstanding year, but the year-over-year gains of last year will be hard to match. BNSF and UP are selling at P/E ratios reminiscent of the go-go 90s, about two times what is being reflected from NS and CSX earnings; but all four carriers will have a hard time repeating the gains made last year, regardless of what the stock analyst are saying.

March 7, 2005

Railroad ton miles have resumed their annual growth rate of the last quarter of 2004, expanding at 3.5% per annum even without an increased in tonnage from more grain moves. If this trend continues, train speeds are not expected to improve even as new locomotive and track capacity comes online. Slow cycle times for most car types will continue to add an artificial demand for railcars on top of a genuine demand from increasing business.