FINANCIAL EDGE, RAILWAY AGE, JULY 2020 ISSUE: On the June 17 Railway Age Rail Insights webcast (held in lieu of the usual conference in Chicago), the path forward for rail and the post-pandemic future of rail loadings was on the mind of presenters and the audience. The rail industry is searching for the bottom and looking for “green shoots” that suggest the market has “bottomed,” and that loadings might start to return to normal levels.
Reading around the industry analysis, there is significant hope for a quick return. Prevalent questions remain: When will the industry recover, what are growth prospects for the future and what will car supply look like post-pandemic.
Discussions on the current state of affairs and the future of rail freight are what made Rail Insights so important right now.
The CEO of Genesee & Wyoming, Jack Hellmann, provided a “boots on the ground” approach discussing the near term. It is an important perspective for the industry. On loadings, Hellmann noted the following: “Some railroads are up and some railroads are down … If you’re moving a lot of frac sand, you’re probably moving a lot less of it today. If you’re moving pulp (G&W moves pulp, which is up 8%, on the Chattahoochee Industrial Railroad for use in paper towels, facial tissues and toilet paper) and paper linerboard (up 5%) for e-commerce, in general you’re probably moving a lot more.”
Weekly Class I loadings dipped as low as 30% less from the previous year (around week 20) while they are now hovering around 13%-14% total decrease YOY through week 25 of the year.
Hellmann noted that G&W is working to manage what it can while trying to be prepared for anything. However, he feels a gradual “U”-shaped recovery is more likely than a “V”-shaped recovery. The ever-present wildcard: the potential impact of a second COVID-19 wave.
Pat Ottensmeyer, President and CEO of Kansas City Southern, closed out Rail Insights with a continental perspective. Ottensmeyer discussed USMCA (U.S.-Mexico-Canada Agreement, in which he has played a key advisory role) and the potential for rail loadings growth that can be generated as a result of finalizing the terms of the new trade agreement.
On KCS, Ottensmeyer is seeing “sequential carload growth for the past several weeks [that] has been much more rapid and [includes] our train start and crew start growth.” He noted that KCS has maintained efficiency gains and cost savings obtained through this larger downturn. Leading into Rail Insights, KCS was seeing positive trends in automotive loadings.
When asked about post-pandemic loadings growth, Ottensmeyer noted that PSR and the pandemic allowed the rails to create capacity that he feels will allow for them (post-COVID-19) “to be more competitive, allow us to gain market share from other modes of transportation … this should be good for shippers as well as longer term.” This excess capacity (effectively the result of decreases in loadings) should benefit the shipper community as the fixed capacity can be allocated to existing shippers and to additional growth opportunities.
Car supply was not a direct topic at Rail Insights, but it is determined by the heavily discussed Recovery and Growth. Where is car supply headed? Like with railcar loadings, a long-term “U”-shaped recovery continues to suggest downward pressure and stress on the market, lease rates, new car deliveries, car pricing and total demand. One industry associate suggested that the rail industry at large would be better off not building a single additional new car in 2020 and 2021 (and maybe 2022) to account for the existent overhang in railcars in the market today. The logic? With roughly one-third of the national fleet in storage, railcar supply is unlikely to increase demand anytime in the
The industry has gone through cycles of large storage numbers before. The difference here is that the storage numbers in 2020 are across all market segments, including large percentages of autoracks and intermodal well cars. This is on top of sand/cement covered hoppers, coal cars and energy-related tank railcars. With velocity up, there are large storage numbers for grain and plastics skewing toward the older aged assets in those services.
Ottensmeyer noted that the rails expect, even as loadings growth increases, to handle the same or increasing numbers of loads with fewer railcars. The wildcard is what percentage of loadings coming back to rail will require increases in equipment supply. So far, this is a COVID-19 mystery.
Listen to a recording of the Rail Insights webcast. It is worthwhile to hear from those executives on the front lines of the pandemic to understand our future.
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