TD Cowen: 2Q23 Surveys Say …

Railcar demand showed some resilience against a tough macro backdrop, although we view the results of our Second Quarter 2023 Rail Equipment Survey as a slight incremental negative, similar to our 1Q23 survey. While the order outlook remains largely unchanged on the balance, a notably higher percentage of those not planning orders cited “No Need,” compared to our 1Q23 survey. Our 2Q23 Rail Shipper Survey showed that expected rate increases were +3.5%, flat sequentially and still sitting below the survey’s long-term average. Business growth expectations remain unchanged, though economic confidence improved. We view survey results as a slight positive for the rail group and hope 1H23 pricing is the trough. Peak season expectations remain mixed, but June import data is encouraging.

2Q23 RAIL EQUIPMENT SURVEY

Shippers Expectations for Incremental Equipment Needs Decline Again: When it comes to order activity, we consider four key metrics: (1) The percentage of “all participating shippers” who will or may order railcars. (2) The conviction level about ordering (the split between “yes” and “maybe”) within this “all participating shippers” group. (3) The percentage of “same shippers” who will or may order railcars. (4) The conviction level about ordering (the split between “yes” and “maybe”) within this “same shippers” group.

In our 2Q23 survey, the first and third metrics deteriorated somewhat, while the second and fourth metrics improved. The new cautionary signal is that among the shippers who said they do not plan to order railcars in the next 12 months, the percentage who said it is because they do not have incremental equipment needs increased to 81% from 67% in 1Q23.

Increased Level of Certainty Among Shippers: Roughly 45% of all shippers surveyed said they will or may order railcars in the next 12 months, down from 46% in our 1Q23 survey. Within the 45% of total shippers who are contemplating orders in the next 12 months, 70% said “yes,” they plan to place orders versus 59% in 1Q23; and 30% said “maybe” compared with 41% in 1Q23. This could mean an increased level of certainty about ordering within the total shipper group.

On a same-shipper basis, about 40% of same respondents in 2Q23 said they will or may order railcars, compared to 49% in our 1Q23 survey. Within the 40% of same shippers who are contemplating orders in the next 12 months, 69% said “yes” they plan to place orders (62% in 1Q23), while 31% said “maybe” (38% in 1Q23). This could mean a slightly increased level of certainty about ordering within the same-shipper group.

Democratic Administration One of the Main Drivers for CARB Loco Rule to See National Adoption: The percentage of shippers who expect California’s new locomotive rule to receive EPA approval, potentially paving the way for eventual national adoption, was 13%, with another 36% believing it is possible but only under a Democratic Administration. About 19% of shippers believe it won’t happen, while 32% said “no comment.”

Larger View on Railcars: Railcar deliveries, still somewhat impeded by labor and component challenges, should be only modestly above replacement, sustaining the lease rate momentum. This could also flatten and prolong the railcar production cycle beyond 2023. Regulatory tailwinds could help (see our February 22 note Potential Opportunity From New DOT Proposal). Any hiccups in the manufacturing cycle could mean even more lease rate momentum, barring dramatic rail service improvement and/or additional weakness in rail volumes.

2Q23 RAIL SHIPPER SURVEY

Pricing Expectations Stayed Flat Sequentially: Shippers anticipate rail prices to increase by 3.5% over the next 6-12 months, flat compared to last quarter’s survey where we saw a deceleration from 2022 pricing levels. The 3.5% result slipped just below the survey’s five-year average and long-term average of 3.7%. We view the unchanged result as a slight positive given no further deceleration; OTR truck rates have pressured rail rates though may be finding a bottom. Below average pricing expectations should nonetheless put pressure on rail margins this year, most recently called out by UNP (previously guided for OR improvement in 2023).

Business Growth Outlook Remained Unchanged: Business growth expectations stayed flat sequentially at 1.7%, below the survey average of 2.5%. 60% of rail shippers expect their employee count to be unchanged over the next 12 months, up from 52% last quarter. Only 7% expect to a see a decline in employees, down from 12% last quarter. 35% of shippers answered that they are more confident in the direction of the economy today than they were three months ago, a 12% increase from last quarter, an encouraging sequential increase but acknowledge that fears from the banking turmoil (which was around our 1Q survey) may have faded.

Shippers Less Concerned About Rail Capacity: 40% of shippers answered that they are concerned about rail capacity, another noteworthy drop of 14 percentage points sequentially following last quarter’s 17 percentage point drop. Results solidify the material ease of the rail network that continues to track over 9% below 2019 levels on a carloadings basis. In terms of positive service ratings, while CSX and NSC stayed ~flat sequentially, UNP saw material improvement, with 57% of participants have positive ratings for its rail service measures, up 14 percentage points sequentially.