Railroad Happy Hour a Bit Happier This Time

Written by Jason Seidl, Matt Elkott, Elliot Alper and Uday Khanapurkar, TD Cowen
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An intermodal panelist in the Northeast called out some recent strength in their business, which largely runs on Norfolk Southern’s network. NS photo

Leaders in the railroad and logistics market continue to see a challenged intermodal market and holiday peak season. Service has been materially improved on both coasts and the Class Is have plenty of capacity to handle more volume. STB Chairman Oberman announced his departure, a surprise to us and all panelists, leaving the seat open until POTUS names his successor.

Softness is still evident in the intermodal market, and the rails are adjusting rates accordingly. The retail side has been “seriously soft,” and a large retailer recently re-bid its intermodal freight lower, given how soft the market has been, according to our panelist. Expectations of margin improvement within intermodal in 2024 were questioned on our call, given the rate backdrop. A smaller intermodal panelist in the Northeast called out some recent strength in their intermodal business, which largely runs on Norfolk Southern’s network.

Participants noted that soft demand conditions are supporting robust service quality across the rail network. Drayage drivers are relatively unoccupied and eager to take loads to service high costs of operations, with a participant stating that drivers need 2-3 loads a day to stay afloat. Our short line panelist based in Pennsylvania emphasized that the NS network has seen a healthy service recovery effort following the derailment and tech outages that hit this year. Another panelist called out strong service levels from Union Pacific.

Forest products activity signals weak overall consumer demand, while natural gas activity may be an idiosyncratic bright spot. Corrugate business remains soft according to a short line panelist with forest products exposure. Weakness in 2H23 was attributed to broader consumer uncertainty as destocking trends are now in the rear-view mirror. Energy volumes in the Northeast are an unexpected bright spot, with another panelist noting that they have seen more frack sand activity in the past two months than they did in the four months prior. Refracks at their customers’ natural gas facilities were credited with the uptick.

STB Chairman Marty Oberman announced his departure Nov. 16. This came as a massive surprise to us and panelists on our call, who were under the assumption Oberman would seek renomination. The next Chairman will be chosen under Biden’s discretion, and we may not know who will take over for a while. In the past, the STB has run with fewer than five members for some time and may do so in the near future.

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