Post by upsd70m on Jan 19, 2009 12:00:39 GMT -5
Traffic World: Recession rides the rails
(The following story by John D. Boyd appeared on the Traffic Word website on January 19, 2009.)
WASHINGTON, D.C. — Across the rail freight industry, the only business piling up is debris from a worsening economic crunch.
Shippers, watching demand evaporate from their own industrial and retail customers alike, are booking far fewer trains as they close plants and lay off workers, and the impact is reverberating across rail networks that had been carefully constructed over years.
Railcar suppliers that hobbled through a tough 2008 are bracing for a much worse 2009, with forecasters warning of the worst demand levels since the 1980s. Equipment leasing giants and shippers are idling hundreds of thousands of railcars, pushing back on new car prices and wondering if they still need cars they ordered earlier.
Even the largest railroads are starting to feel the pain, as the collapsing freight sector curbs profits even as carriers lay up locomotives to shrink capacity and furlough workers to cut operating costs.
December was the worst month yet in this downturn for rail traffic, with volume tumbling even faster at a time many analysts had hoped the slide would ease. So far, January has signaled more wreckage to come.
Tom White, a spokesman for the Association of American Railroads, quipped before issuing last month's numbers that he was "digging through the thesaurus to try to find new words to describe how bad December was."
Railcar loadings of bulk materials and large products plunged 14.2 percent from December 2007, while train hauls of intermodal containers and trailers fell 13.7 percent. That followed a November that saw carloads drop 10.1 percent and intermodal fall 7.9 percent, up to then the worst declines of the year.
The outlook got worse as retailers reported poor Christmas sales, which in turn will probably undercut orders for new stock from U.S. and foreign suppliers. That could weigh on domestic and international intermodal shipments for months to come.
December probably won't be the low point for bulk railcar loadings either, since both giant aluminum maker Alcoa and major coal producer Peabody recently announced sharp cutbacks.
Anthony Hatch, rail analyst at ABH Consulting who says carriers are in a long-term "rail renaissance" of solid profits and growth in market share versus other transport modes, says the economic climate has him worried. "This is really troubling," he said, "but as a citizen, not as a rail analyst."
Hatch said freight specialists in and out of the rail industry were caught off guard by "the violence of this drop" in volumes. "December was terrible, and January is starting off badly," Hatch said.
He thinks the "renaissance" concept still holds for railroads, which through this downturn can keep posting profits and building market share against trucking. "They are going to shine on a relative basis," he said. "None of this is shaking my faith in them at all" to continue to outperform other transport modes.
But the news has been almost relentlessly bad for the traffic outlook. Coal is the single-biggest rail cargo and had long been a source of strength for railroads even as every other shipment category weakened. In December, even coal loadings fell.
"If even coal is reduced, what does that say about the strength of this country?" Hatch asked.
Some big shippers are asking similar questions. From the retail stores that stock high-end electronics to the manufacturers that handle the basic commodities of industrial production, businesses are taking actions that can dry up shipping pipelines for the foreseeable future.
Alcoa said Jan. 6 it will cut global aluminum smelting output 18 percent, including some U.S. operations, shed more than 14 percent of employed and contract workers and cut capital spending in half.
"The aluminum industry is caught up in a perfect storm of historic proportions," Alcoa's President and CEO Klaus Kleinfeld said as the company reported losing $1.2 billion in the fourth quarter on a nearly 20 percent decline in revenue.
A lot of Alcoa's demand for metal fabrication is from key sectors that are flattened: housing, appliances and automobile manufacturing.
Dow Chemical had already announced output and job cuts in December, grim news from a major rail shipper whose products are linked to nearly every aspect of manufacturing, from metal coatings to paints to shrink wrap.
But it's only the beginning, according to Dow Chairman and CEO Andrew Liveris. "We will accelerate these actions even faster and more aggressively in 2009," he said this month.
But beyond aluminum and chemicals, coal is king for the rail industry, by far its biggest cargo category, comprising nearly 40 percent of all carload shipments for major U.S. railroads in 2008.
That made Peabody Energy's Jan. 7 cutback announcements all the more troubling. The company said it will sharply reduce production of electrical coal in Wyoming's Powder River Basin and metallurgical coal in Australia - sapping one of the main areas of traffic strength at big U.S. railroads.
With BNSF Railway and Union Pacific Railroad sourcing their coal traffic heavily out of the PRB, and CSX Transportation and Norfolk Southern hauling metallurgical coal exports to fabricators, Peabody signaled declines coming for many U.S. railroads in a major cargo category, warned William J. Greene of Morgan Stanley Research.
With so much traffic sliding across many categories, carriers are taking defensive measures to cut capacity.
BNSF Chairman, President and CEO Matthew K. Rose said his railroad is laying up line-haul locomotives "in good order," meaning they undergo regular maintenance so they can be quickly pulled back into service if demand suddenly returns.
A spokesman said those power units are also distributed at various facilities across the carrier's network, so that when they are needed in a region they can be close by.
Meanwhile, Norfolk Southern is putting 100 of its older road locomotives into storage. "These models are among our oldest road units and generally are less fuel efficient than newer units, which will remain in service," said spokesman Rudy Husband.
Railroads have also been trimming their labor force for several months and putting more train crews on furlough in recent weeks.
Most will update those layoffs in their quarterly earnings reports and conference calls with analysts later this month.
The pain is also spreading to industries that rely on close ties to railroads and shippers.
Leading railcar maker Trinity Industries reportedly laid off about 300 workers this month at a Longview, Texas, tank car plant. Amsted Rail, which makes railcar parts in Granite City, Ill., is idling about half its 750 employees in February. Caterpillar's Progress Rail is trimming at its Raceland, Ky., railcar shops.
Greenbrier, the second-largest railcar builder, reported a big loss for the quarter that ended Nov. 30 and vowed more belt-tightening.
Like other heavy industries, those car makers have been caught with materials they purchased when input prices were higher, and now must try to cover their costs in a market where customers are pressing for price cuts.
Greenbrier is asking its own suppliers for concessions as well.
It's not as bad for railroads. One analyst who declined to be named told Traffic World "a lot of rail pricing for 2009 is already baked in the cake" under long-term contracts, so it is not subject to price cuts when the market weakens.
In addition, he said, railroads are still updating some older legacy contracts in which shippers enjoyed lower-than-market rates for many years, and those will come with hefty rate hikes regardless of the downturn.
He said many shippers understand and accept that, and customers are also reporting the large decline in rail fuel surcharges in recent months is giving them a big break in total freight bills despite rate increases.
What has some investors more edgy, he said, is that a new Congress might try to help ailing shippers by pushing through tougher laws on railroads - such as ending their limited antitrust immunity and ordering regulators into a more pro-customer stance - that would undercut future rail earnings.
Some shipper groups are hoping for just that type of action to correct what they say have been many years of government policies that favored railroads at customer expense.
Still, the drag from plunging traffic levels alone will hit railroads, warned Morgan Stanley's Greene and Adam Lonston, who said railroads may face a tough year. "We have been bullish on rails since 2007 and have long argued that railroads' pricing power can support earnings growth even in a downturn," they said. "In 2009, we believe the decline in rail volumes will finally overwhelm the benefit of core price increases. As a result, we are substantially cutting our rail estimates for 2009."
They projected only UP increasing its earnings this year, partly because it has more legacy contracts to update than other major carriers.
Despite the severity of recent declines, AAR's White said the rail industry is still not facing a situation as bad as in 1982, when revenue ton-miles plunged 12.3 percent. Last year rail ton-miles fell just 1.2 percent, although they worsened dramatically into double-digit declines in the final weeks.
CSX gave an early glimpse of its financial situation in a Jan. 12 pre-announcement of what it expects to report officially when it leads off the industry earnings round.
But it also said it will stop giving any long-term earnings guidance "given the current economic challenges, particularly the uncertainty facing U.S. manufacturing."
The company has been grappling with a $35 million loss at a major non-rail unit, a resort hotel in West Virginia called The Greenbrier, which is laying off about half its normal 1,350 staff.
CSX said writing down that investment took about a third off its net income. From its other business, overwhelmingly rail service, CSX said revenue rose 4 percent to about $2.7 billion and operating income jumped 16 percent to $692 million.
Lee Klaskow of Longbow Research said the CSX earnings-per-share number was below expectations, but "we view the revenue growth as evidence that the railroad pricing story is still mostly intact."
John Larkin of Stifel Nicolaus says railroads still have solid pricing power but says they also are enjoying a short-term boost from fuel surcharges that are coming down more slowly than diesel prices. Last year it was the other way around, of course, as those fuel fees ratcheted upward only well after prices surged. But right now the surcharge benefits on paper can obscure what is happening in the underlying rail freight market.
Looking at the CSX example, "we believe the company would have reported negative year-over-year (earnings per share) comparisons without the fuel benefit in the quarter," Larkin said.
(The following story by John D. Boyd appeared on the Traffic Word website on January 19, 2009.)
WASHINGTON, D.C. — Across the rail freight industry, the only business piling up is debris from a worsening economic crunch.
Shippers, watching demand evaporate from their own industrial and retail customers alike, are booking far fewer trains as they close plants and lay off workers, and the impact is reverberating across rail networks that had been carefully constructed over years.
Railcar suppliers that hobbled through a tough 2008 are bracing for a much worse 2009, with forecasters warning of the worst demand levels since the 1980s. Equipment leasing giants and shippers are idling hundreds of thousands of railcars, pushing back on new car prices and wondering if they still need cars they ordered earlier.
Even the largest railroads are starting to feel the pain, as the collapsing freight sector curbs profits even as carriers lay up locomotives to shrink capacity and furlough workers to cut operating costs.
December was the worst month yet in this downturn for rail traffic, with volume tumbling even faster at a time many analysts had hoped the slide would ease. So far, January has signaled more wreckage to come.
Tom White, a spokesman for the Association of American Railroads, quipped before issuing last month's numbers that he was "digging through the thesaurus to try to find new words to describe how bad December was."
Railcar loadings of bulk materials and large products plunged 14.2 percent from December 2007, while train hauls of intermodal containers and trailers fell 13.7 percent. That followed a November that saw carloads drop 10.1 percent and intermodal fall 7.9 percent, up to then the worst declines of the year.
The outlook got worse as retailers reported poor Christmas sales, which in turn will probably undercut orders for new stock from U.S. and foreign suppliers. That could weigh on domestic and international intermodal shipments for months to come.
December probably won't be the low point for bulk railcar loadings either, since both giant aluminum maker Alcoa and major coal producer Peabody recently announced sharp cutbacks.
Anthony Hatch, rail analyst at ABH Consulting who says carriers are in a long-term "rail renaissance" of solid profits and growth in market share versus other transport modes, says the economic climate has him worried. "This is really troubling," he said, "but as a citizen, not as a rail analyst."
Hatch said freight specialists in and out of the rail industry were caught off guard by "the violence of this drop" in volumes. "December was terrible, and January is starting off badly," Hatch said.
He thinks the "renaissance" concept still holds for railroads, which through this downturn can keep posting profits and building market share against trucking. "They are going to shine on a relative basis," he said. "None of this is shaking my faith in them at all" to continue to outperform other transport modes.
But the news has been almost relentlessly bad for the traffic outlook. Coal is the single-biggest rail cargo and had long been a source of strength for railroads even as every other shipment category weakened. In December, even coal loadings fell.
"If even coal is reduced, what does that say about the strength of this country?" Hatch asked.
Some big shippers are asking similar questions. From the retail stores that stock high-end electronics to the manufacturers that handle the basic commodities of industrial production, businesses are taking actions that can dry up shipping pipelines for the foreseeable future.
Alcoa said Jan. 6 it will cut global aluminum smelting output 18 percent, including some U.S. operations, shed more than 14 percent of employed and contract workers and cut capital spending in half.
"The aluminum industry is caught up in a perfect storm of historic proportions," Alcoa's President and CEO Klaus Kleinfeld said as the company reported losing $1.2 billion in the fourth quarter on a nearly 20 percent decline in revenue.
A lot of Alcoa's demand for metal fabrication is from key sectors that are flattened: housing, appliances and automobile manufacturing.
Dow Chemical had already announced output and job cuts in December, grim news from a major rail shipper whose products are linked to nearly every aspect of manufacturing, from metal coatings to paints to shrink wrap.
But it's only the beginning, according to Dow Chairman and CEO Andrew Liveris. "We will accelerate these actions even faster and more aggressively in 2009," he said this month.
But beyond aluminum and chemicals, coal is king for the rail industry, by far its biggest cargo category, comprising nearly 40 percent of all carload shipments for major U.S. railroads in 2008.
That made Peabody Energy's Jan. 7 cutback announcements all the more troubling. The company said it will sharply reduce production of electrical coal in Wyoming's Powder River Basin and metallurgical coal in Australia - sapping one of the main areas of traffic strength at big U.S. railroads.
With BNSF Railway and Union Pacific Railroad sourcing their coal traffic heavily out of the PRB, and CSX Transportation and Norfolk Southern hauling metallurgical coal exports to fabricators, Peabody signaled declines coming for many U.S. railroads in a major cargo category, warned William J. Greene of Morgan Stanley Research.
With so much traffic sliding across many categories, carriers are taking defensive measures to cut capacity.
BNSF Chairman, President and CEO Matthew K. Rose said his railroad is laying up line-haul locomotives "in good order," meaning they undergo regular maintenance so they can be quickly pulled back into service if demand suddenly returns.
A spokesman said those power units are also distributed at various facilities across the carrier's network, so that when they are needed in a region they can be close by.
Meanwhile, Norfolk Southern is putting 100 of its older road locomotives into storage. "These models are among our oldest road units and generally are less fuel efficient than newer units, which will remain in service," said spokesman Rudy Husband.
Railroads have also been trimming their labor force for several months and putting more train crews on furlough in recent weeks.
Most will update those layoffs in their quarterly earnings reports and conference calls with analysts later this month.
The pain is also spreading to industries that rely on close ties to railroads and shippers.
Leading railcar maker Trinity Industries reportedly laid off about 300 workers this month at a Longview, Texas, tank car plant. Amsted Rail, which makes railcar parts in Granite City, Ill., is idling about half its 750 employees in February. Caterpillar's Progress Rail is trimming at its Raceland, Ky., railcar shops.
Greenbrier, the second-largest railcar builder, reported a big loss for the quarter that ended Nov. 30 and vowed more belt-tightening.
Like other heavy industries, those car makers have been caught with materials they purchased when input prices were higher, and now must try to cover their costs in a market where customers are pressing for price cuts.
Greenbrier is asking its own suppliers for concessions as well.
It's not as bad for railroads. One analyst who declined to be named told Traffic World "a lot of rail pricing for 2009 is already baked in the cake" under long-term contracts, so it is not subject to price cuts when the market weakens.
In addition, he said, railroads are still updating some older legacy contracts in which shippers enjoyed lower-than-market rates for many years, and those will come with hefty rate hikes regardless of the downturn.
He said many shippers understand and accept that, and customers are also reporting the large decline in rail fuel surcharges in recent months is giving them a big break in total freight bills despite rate increases.
What has some investors more edgy, he said, is that a new Congress might try to help ailing shippers by pushing through tougher laws on railroads - such as ending their limited antitrust immunity and ordering regulators into a more pro-customer stance - that would undercut future rail earnings.
Some shipper groups are hoping for just that type of action to correct what they say have been many years of government policies that favored railroads at customer expense.
Still, the drag from plunging traffic levels alone will hit railroads, warned Morgan Stanley's Greene and Adam Lonston, who said railroads may face a tough year. "We have been bullish on rails since 2007 and have long argued that railroads' pricing power can support earnings growth even in a downturn," they said. "In 2009, we believe the decline in rail volumes will finally overwhelm the benefit of core price increases. As a result, we are substantially cutting our rail estimates for 2009."
They projected only UP increasing its earnings this year, partly because it has more legacy contracts to update than other major carriers.
Despite the severity of recent declines, AAR's White said the rail industry is still not facing a situation as bad as in 1982, when revenue ton-miles plunged 12.3 percent. Last year rail ton-miles fell just 1.2 percent, although they worsened dramatically into double-digit declines in the final weeks.
CSX gave an early glimpse of its financial situation in a Jan. 12 pre-announcement of what it expects to report officially when it leads off the industry earnings round.
But it also said it will stop giving any long-term earnings guidance "given the current economic challenges, particularly the uncertainty facing U.S. manufacturing."
The company has been grappling with a $35 million loss at a major non-rail unit, a resort hotel in West Virginia called The Greenbrier, which is laying off about half its normal 1,350 staff.
CSX said writing down that investment took about a third off its net income. From its other business, overwhelmingly rail service, CSX said revenue rose 4 percent to about $2.7 billion and operating income jumped 16 percent to $692 million.
Lee Klaskow of Longbow Research said the CSX earnings-per-share number was below expectations, but "we view the revenue growth as evidence that the railroad pricing story is still mostly intact."
John Larkin of Stifel Nicolaus says railroads still have solid pricing power but says they also are enjoying a short-term boost from fuel surcharges that are coming down more slowly than diesel prices. Last year it was the other way around, of course, as those fuel fees ratcheted upward only well after prices surged. But right now the surcharge benefits on paper can obscure what is happening in the underlying rail freight market.
Looking at the CSX example, "we believe the company would have reported negative year-over-year (earnings per share) comparisons without the fuel benefit in the quarter," Larkin said.