TD Cowen: NEARS Conference Key Takeaways

We attended the NEARS (Northeast Association of Rail Shippers) Conference, where shippers discussed the current state of the rail industry. Rail service and safety was center stage, with panelist consensus embracing a challenged rail network to start 2023. In our view, decelerating rail volumes and excess capacity over the road may lead the rails to revise outlook during Q123 earnings.

Rail safety was a recurring theme at the conference on account of the Ohio derailment. A hazardous materials shipper which moved ~10,000 cars in 2022 detailed the safety procedures they implement before handing over to the railroads and noted that regulations on the shippers’ side are relatively strict. This shipper transitioned from manual procedures to Cloud-enabled ones in 2015 and has reportedly not suffered a single non-accident release in the years since.

The commentary was in line with findings from our analysis of rail accident data, which showed an improvement in rail safety over the past decade. Nonetheless, shippers expect inspection procedures to become stricter in response to the recent derailment and scrutiny.

Shippers discussed their rail service wish list. According to one short line, the industry can better address customer needs by using shipper-oriented metrics such as origin-destination trip plan compliance rather than assessing these metrics per the Class I rail network. This speaks to a desire commonly emphasized among rail shippers that better coordination among Class I’s should lead to materially improved service and better route optimization for shippers. Participants acknowledged that service has improved following the congestion of last year (if gradually), in line with results of our recent shippers’ survey.

The tech imperative in the rail industry was highlighted repeatedly. According to a third-party analytics vendor for the rail industry, the eventual (if gradual) advent of autonomous trucks by 2030 promises to suppress long-term TL rates and offer stiff competition to rail. Rail has already lost share to truck, with the data suggesting that rail would have moved an additional 450 billion ton-miles in 2020 if it had preserved its 2014 share of the freight markets.

Participants concurred that tech enhancement will be critical to withstand competitive pressures from OTR transport going forward. This will include automated invoice auditing, workflow management as well as RailPulse (or similar) telematics technologies offering visibility on temperature and safety at the car level. An industry expert expects tech uptake to face roadblocks from regulators and rail unions on the grounds that such measures would negatively impact labor.

Labor shortages are expected to persist beyond the near term and place general inflationary pressures in the freight markets. According to a participant, only 19% of the increase in labor force participation for the 2021-2031 period will be in the prime working age group, meaning labor supply constraints are unlikely to ease going forward. A railcar manufacturer cited similar pressures, noting that lead times could reach 24 months if demand for cars picks up as the ability to flex up manufacturing is constrained by labor availability. A Pan Am representative from CSX pointed out that although crew shortages have largely eased on aggregate, tightness persists in some pockets, particularly in the New England region.

A major transportation management system executive shared his bearish outlook on the trucking market and was very skeptical of a second-half rebound. Results of our recent carriers’ survey also suggested that a recovery could be pushed further out than widely anticipated during 1Q23. Carriers are living up to all commitments, given capacity has been so loose and there is downward pressure across all modes of equipment combinations.