Suds with Seidl: Positives From ‘Railroad Happy Hour’

Written by Jason Seidl, Wall Street Contributing Editor
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Yes there is an official “Suds With Seidl” beer glass. Just remember Rule G if you’re on duty! William C. Vantuono photo.

Rail industry leaders were bullish on the quarter-to-date at the latest “Suds with Seidl” event, with one panelist citing a spring surcharge for containers, underlying the strong rate backdrop for carriers.

At Cowen and Company, we view this as a positive for railroads and IMCs like Canadian Pacific (CP), Hub Group (HUBG), Kansas City Southern (KSU), Norfolk Southern (NSC) and Union Pacific (UNP).

Among the key takeaways from our event:

• From a customer-demand standpoint, there has been a clear demand to improve their supply chains. February was an aberration due to weather, but March so far has been a clear rebound. One panelist from a short line railroad highlighted a particularly strong surge in volume over the past ten days in March.

• The harsh weather caused one panelist to put hundreds of cars in storage when the railroads shut down. There is the potential for less flexibility for shippers in these situations when railroads use Precision Scheduled Railroading (PSR). Another panelist noted that a lot of preparations were forgotten this winter due to such easy weather conditions since 2014. It is apparent that there will be cost impacts in the first quarter for most companies in the transport space. Another intermodal panelist pointed out that containers were sitting in Chicago for ten days because of weather congestion. NS, for example, had operational issues for almost four weeks, which drove some business to CSX, according to the panelist.

—  Some railroads have implemented a spring surcharge in the $200 to $300 range in an attempt to control equipment shortages/imbalances, while simultaneously taking advantage of a strong demand environment. —

• One intermodal sector panelist said, “Demand has not ceased one bit.”  The truck market is surging, and rates from the Northeast to Chicago that used to be $1,200 are now running at $2,000. For the first time that we can remember, some railroads have implemented a spring surcharge in the $200 to $300 range in an attempt to control equipment shortages/imbalances, while simultaneously taking advantage of a strong demand environment.

• On the intermodal pricing front, one Suds with Seidl industry guest highlighted that the railroads have not seen the dramatic rate increases that the trucking sector has benefited from. The railroads, recognizing that trucking demand is surging, are trying to take full advantage of the market. This panelist noted seeing rates up 5% to 15%, and that many customers’ freight budgets have been “blown out of the water.”

• Fuel surcharge has made a real impact, with one panelist citing it being up 7% to 8% year-to-date. Another panelist stated that wholesale rack rates have increased 50 cents per gallon. This has led to some modal shift in the marketplace.

• For the broader economic outlook, one panelist noted that all customers have been extremely busy, although it has been difficult to get orders from China. The same panelist shared an anecdote that described a customer that was four weeks behind on orders, and could not obtain containers in New Jersey. Another panelist highlighted that 2021 will likely be a year of tremendous organic growth, and the pandemic has taught ten years’ worth of lessons in 12 months.

Primary Rail Investment Risks

• Risk of economic downturns and their impact on rail traffic and pricing.
• Regulatory risk posing a threat to the railroads’ ability to achieve sufficient returns on their investments.
• The possibility of high-speed passenger rail encroachment.
• Litigation risk stemming from accidents and fatalities.
• Competitive threat posed by other modes of freight transportation, such as trucking.
• High capital spending required to build and maintain railroad networks and to replace cars and locomotives.
• Risk of severe weather disrupting railroad networks.
• Rising fuel costs and the lag effect of fuel surcharge recovery.

Primary Trucking Investment Risks

• Risk of economic downturns and their impact on tonnage and pricing.
• Litigation risk stemming from accidents and fatalities.
• Competitive threat posed by other modes of freight transportation, such as the railroad sector.
• Rising fuel prices could significantly increase truckers’ operating costs.
• Environmental concerns and regulations associated with air pollution.
• Driver availability and stricter driver screening requirements.
• Risk of severe weather disrupting trucking operations.

Primary Air Freight and Logistics Industry Risks

• Risk of economic downturns and their potential impact on the integrated parcel business.
• Rising fuel prices could significantly increase operating costs.
• Competitive threat posed by other modes of freight transportation such as rail and trucking.
• Risk of doing business abroad, including currency exchange, political and legal risks.
• Risk of terrorism and the costs associated with more stringent security requirements.

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