Class Is say a number of notes are behind the rail traffic blues

But rail executives sound upbeat about potential volume rebound
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A number of factors are behind the broad decline in North American rail traffic this year, Class I railroad executives say.

But they expect traffic to rebound in the second half of the year, the executives told investor conferences this week even as two railroads lowered their volume outlooks for the year.

Among the factors behind the 1.6% decline in North American rail traffic this year through June 1:
● Railroads say harsh winter weather, followed by record flooding in the Midwest, hurt operations and volume while also affecting customer production.
● The economy has slowed somewhat from last year’s more robust growth.
● The trade dispute between the U.S. and China hurt American exports and caused a surge in Chinese imports late last year that resulted in higher than normal retail inventories, putting a damper on international intermodal volume this year.
● Truck capacity has loosened from historically tight levels last year, sending some domestic intermodal volumes to the highway.

The traffic slowdown prompted Canadian National and Kansas City Southern to slightly ratchet back their growth outlooks for the year, although their financial targets remain intact. All of the Class I systems expect traffic to rebound in the last six months of the year.

U.S. rail traffic volume is down 2.4% this year, Canadian rail traffic is up 2.2%, and Mexican volume is down 4.4%, according to Association of American Railroads data.

Norfolk Southern CEO Jim Squires says there are a number of crosscurrents behind the volume slowdown.

“On balance, we think we’re still in a growth environment,” Squires says.

NS traffic is down 0.8%.

Union Pacific’s traffic was down 2% in the first quarter, largely due to the impact of record flooding that shut its Overland Route for nearly two weeks. UP’s first-quarter volumes likely would have been up a couple of points had it not been for the flooding and harsh winter weather that affected operations and customer production, Chief Financial Officer Rob Knight says.

UP now is dealing with flooding that has shut routes in Kansas, Oklahoma, Nebraska, and Texas, Knight says, and second-quarter volume is down 3% to date.

Nonetheless, UP still has a positive view of the economy, Knight says, and is still forecasting volume growth in the low single-digit range this year.

CSX Transportation and its customers expected economic growth and freight volume to slow compared to 2018, CEO Jim Foote says.

“It’s softer than what we had hoped for but still on the positive side of things,” he says.

Overall, CSX traffic is down 1.5%. CSX’s merchandise volumes are up due to the railroad’s improved service, Foote says. Intermodal volumes are down mostly because of the railroad’s planned exit from lower-volume, lower-margin lanes, he says.

Canadian Pacific has a “lukewarm, not negative” view of the economy, Chief Financial Officer Nadeem Velani says.

CP is an exception to the industry downturn: Its traffic is up 1.8% so far this year on a carload basis, with only U.S. grain down and Canadian coal volumes flat. CP remains confident it will grow faster than the industry average as it handles growing volumes of finished vehicles, intermodal, crude oil, and other energy-related products.

CN’s traffic is up 1.2% on a carload basis, and like the other railroads, it expects a stronger second half of the year.

Kansas City Southern sees traffic growth softening. At the end of the first quarter KCS had a favorable outlook for 70% of its volume, a flat outlook for 20% of traffic, and a negative outlook on just 10% of its book of business. Today it has a favorable outlook on 25% of traffic, a flat outlook for 45% of volume, and a negative outlook for 30% of volume.

Separately, KCS is facing the prospect of a 5% U.S. tariff slapped on imports from Mexico beginning next week. The tariffs, which the Trump administration is imposing to put pressure on Mexico to stem the flow of migrants to the U.S. border, would increase by 5% every month thereafter until they hit 25% in October.

“Hopefully calmer heads prevail,” Chief Operating Officer Jeff Songer says.

A 5% tariff wouldn’t likely affect cross-border volumes much, but higher tariffs would, Songer says.

The tariffs would affect northbound cross-border volume, which represents 16% of KCS’s overall traffic. If Mexico were to retaliate, the tariffs could affect 40% of KCS’s total volume when Union Pacific interchange at Laredo is included.

KCS did run a couple of extra automotive unit trains from Mexico to the U.S. to beat the potential start of tariffs, Songer says.

Last month BNSF Railway CEO Carl Ice told a shipper conference that the economy remains positive this year, just not as strong as last year.

BNSF volumes, which are down 4% year-to-date, were affected by harsh winter weather and subsequent flooding, but just how much of an impact the weather had is hard to tell, Ice says.

The AAR concurred with the executives’ assessment of the traffic doldrums.

“The current weakness in the rail traffic numbers is due to a combination of factors,” says John T. Gray, AAR senior vice president of policy and economics. “These include flooding in the Midwest that’s been hindering the operations of railroads and many of their customers. More important is heightened economic uncertainty that’s being made worse by increased trade-related tensions; higher tariffs leading to reductions or disruptions of international trade, and lower industrial output. In addition, some rail markets are undergoing rapid change. For example, locally sourced frac sand in Texas is displacing sand that used to be shipped in by rail. Just by themselves, these reduced sand movements are having a material negative impact on total rail carloads.”

NEWSWIRETrains News Wire

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