Trends across the rail industry appear positive, although ongoing congestion is an issue for inland ramps, according to leaders at our recent “Suds with Seidl” event.
An employee shortage was among the themes of the Cowen & Company call. One panelist cited 250-300 unfilled jobs a day due an inability to find talent. We view this as largely neutral for railroads and continue to favor Norfolk Southern (NS).
• Consensus among the panelists is that volumes continue to be robust, with particular strength across the commodities and intermodal segments, which is in line with the carload data we track. For one panelist in the New England area, biodiesel has significant upside, as a push in Massachusetts to reduce sulfur as part of home heating has allowed the energy segment to outperform. Another panelist in the South highlighted a continued weak energy market, as well as automobiles, which are more than offset by strength in other categories.
• While recently we heard that congestion at the ports is starting to abate, inland congestion continues to be an issue across the supply chain, particularly the intermodal market, according to one panelist. Inland ramps are employing embargoes as they do not have the capability to take in more cargo. One panelist cited that logistics is their limiting factor in growth.
— All panelists shared the viewpoint that the Class I railroads are able to handle the increased volumes, but are not properly staffed. This is coming at the expense of poor rail service across all aspects of the business: customer service, marketing, sales. —
• Another panelist in northeast Pennsylvania highlighted continued strong intermodal volumes, and noted that J.B. Hunt is increasing its presence. All the warehousing space popping up—the millions of square feet consistently being built, driven in part by tax incentives—has brought in more traffic to the area and is a positive sign for intermodal. All of this increase in capacity should translate to more carloads.
• All panelists shared the viewpoint that the Class I railroads are able to handle the increased volumes, but are not properly staffed. This is coming at the expense of poor rail service across all aspects of the business: customer service, marketing, sales. Inadequate staffing is making it difficult for the railroads to handle the surge in volumes, especially since the COVID-19 pandemic has stripped out a lot of resources. (See “What’s Really Going On in Memphis?” and “STB to Class I’s: Are You Prepared?”) One panelist who works in rail operations training provided an anecdote of a client in Virginia who was not able to retain employees, despite offering a $90,000 salary and strong benefits package; drivers, conductors, etc., are choosing not to work due to a number of industry challenges, including higher unemployment benefits and the use of drug testing, among others. Another panelist said that in any one day, they have between 250-300 jobs that they cannot fill. It is not because of poor compensation/benefits; it is the inability to find talent. Pre-COVID, there were fewer than 50 unfilled jobs.
• On the equipment side, pricing is up 20%-30%, with customers looking to find alternatives and ultimately unable to find any. Components are an issue and have held up lead times. Historically, lead times for new equipment are 6-12 months, but customers are pushing out to 12 months, given the challenges and associated costs. Anything tied to steel has a significant premium right now. One panelist highlighted the high level of demand for gondolas. Additionally, some larger companies are starting to lean into implications of an infrastructure bill, acknowledging that the commodities associated with any bill will likely move by rail.
Kansas City Southern (KCS)-CN Merger Insight:
• One call participant was bearish that the CN deal will go through, and said they could think of five shippers who would be forced to a 2:1 if there is a merger. As just one account manager within the organization, this panelist believes CN has an uphill battle, although it is risky for some shippers to stand up publicly against it, given the rail industry’s “long memory.” We did have one panelist who believed the highest price offer for KCS would end up winning in the end.
• Shippers are reporting that they are having a hard time supporting a CN merger when the service is already bad. Over the past 30 years, almost all rail mergers have been a catastrophe, according to one panelist, and any “drastic improvements” in the network are likely because operations are just getting back to pre-merger levels.
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.
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.