Recession triggered by virus expected to take toll on rail traffic

Uncertainty reigns in economic forecasts, but significant volume drops likely
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A westbound Norfolk Southern intermodal train passes through Goshen, Ind., in March 2018. Norfolk Southern stock has dropped 45% since Feb. 19 as part of the general market selloff triggered by the coronavirus pandemic.
TRAINS: David Lassen

Railroads should brace for sharp traffic and revenue declines this year as the coronavirus pandemic plunges the global economy into recession, economists and analysts say.

The big question is how deep the recession will be and how long it will last. “There’s a lot of uncertainty … a lot of guesswork still going on,” Canadian Pacific CEO Keith Creel told investors this week, adding that it was unclear whether the economic disruption caused by the pandemic will last two months, three months, six months – or even longer.

Highlighting the uncertainty, forecasts for U.S. economic output in the second quarter ranged from declines of 3% to 30%, according to a March 23 survey of 14 Wall Street firms. Most of the job losses and economic damage was expected to be in the service sector, including restaurants, retail, and tourism-related industries.

But that is expected to translate into significant reductions in rail traffic as consumer spending drops and industrial production slows.    

“Carload volumes are likely to move much weaker in the coming months than initially expected as the carload sector deals with headwinds in almost every major commodity sector. The previous expectation was for flat to slightly weaker volumes in 2020 and that is now likely to be down 8% to 10% from 2019’s low levels,” says Todd Tranausky, a rail and intermodal analyst at FTR Transportation Intelligence, a freight forecasting firm.

The outlook for intermodal isn’t much better, with FTR now projecting a decline of between 6% and 8%.

Global container traffic could fall 10% this year, says Lars Jensen, a maritime trade expert who is CEO of SeaIntelligence Consulting. International intermodal volumes were the first to feel the impact of coronavirus as Chinese exports all but dried up in February amid quarantines in China.

“We are already 12% down year-over-year, so maybe another 12% downward leg is reasonable and perhaps that is the optimistic case,” intermodal analyst Larry Gross says. “The key question is how long our shutdown lasts.”

International intermodal volume may get a boost in the next few weeks as shipments from China arrive at North American ports, Gross says.

Railroads could cushion the blow of domestic intermodal declines by using pricing to gain volume from the highway. “In recessionary times, folks are more willing than ever to compromise to save a buck,” Gross says. “With operating ratios in the 60’s, the rails have plenty of room to lower price if they choose to. While previously the hands of the pricing managers may have been handcuffed by the organizations’ unwillingness to compromise operating ratio due to the fear of affecting the stock price, now that share prices have tanked and with volume ... perhaps looming larger in Wall Street’s eyes, maybe the handcuffs will come off.”

The Class I railroads may see revenue declines of between 5% and 25% this year, depending on the severity of the pandemic and its economic consequences, Credit Suisse analyst Allison Landry wrote in a research note this week.

Since Feb. 19, Class I railroad stock prices have fallen between 27% (Canadian National) and 45% (Norfolk Southern) amid the broad market selloff, Landry notes.

Analysts expect the Class I systems – which are more profitable than ever and able to quickly cut costs – to hold up well financially

Kansas City Southern executives said on Wednesday that half of the railroad’s costs are variable and can be reduced as volume falls.

“Class I railroads’ ability to reduce variable costs in periods of declining volume has historically allowed them to weather downturns better than other transportation modes,” says Lee Klaskow, Bloomberg Intelligence senior transportation analyst

That likely will mean more layoffs in an industry that saw overall employment levels fall by more than 10% last year in the U.S., driven by traffic declines and the implementation of precision scheduled railroading operating models at four of the five U.S.-based Class I systems.

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