8/10/2010
By David Silver, Research Analyst

Remember way back when (like a few weeks ago), a lot of economists were calling for a double-dip recession in the economy?  One of the data points they used was the drop in rail traffic (and trucking tonnage), however, both have rebounded over the pas t few weeks, with the most recent week (ended July 31) marking a record for both carloads and intermodal shipments for 2010.  Year over year, total shipments increased 9.4% year over year, but was still down 10.6% from the same week of 2008.  Shipments during 2008 were shaping up to rival traffic from the record years of 2006 and 2007, then the financial crisis hit and shipments fell through the floor.  For comparison purposes, the Association of American Railroads (AAR) reports weekly traffic compared to 2009 and 2008. 

• Intermodal traffic totaled 232,895 trailers and containers, up 20.2% from the same week in 2009, and up 0.9% compared with 2008. Compared with the same week in 2009, container volume increased 21.9% and trailer volume rose 11.7%. Compared with the same week in 2008, container volume increased 9% and trailer volume dropped 28.9%.
• Eighteen of the nineteen carload commodity groups increased from the comparable week in 2009 with only waste and scrap, down 1.9%, posting a decline. Metallic ores, up 73%, and metals and products, up 35.2%, were the commodities posting the most significant increases. In comparison to 2008, all nineteen commodity groups posted declines.

Rail traffic is thought to be a bellwether for the strength of the overall economy, and if the latest trends are used, then the next few months, while not the type of recovery that many would want to see, should still continue.  So we are through the second quarter earnings season for the big freight railroads (and even most of the regional lines) and it was overall an extremely strong quarter with volumes increasing on average approximately 15% compared to the second quarter of 2009.  Many of the larger companies even reported record volumes for some commodities for the second quarter. On average, revenue ton miles and gross ton miles for the entire industry improved approximately 15%. 

Fuel prices are inching higher and again acted to restrict earnings growth, however, one of the biggest positives for the industry as a whole was pricing power, which is measured by revenue per unit (RPU). Pricing was one of the reasons the industry remained so strong during the volume downturn in 2009.  RPU growth on average improved mid single digits compared to last year. 

However, with all the talk about high speed rail, is high speed freight railroad a future potential?  The cost of upgrading the nation's railroad infrastructure to be able to handle trains fumbling along at speeds of 80 miles per hour and more would be an extremely expensive endeavor.  A potential environmental benefit would be that by decreasing the travel time, it would take more trucks off the roads (and maybe even allow Amtrak to be on time sometimes).  There are high speed rail corridor plans that are currently in the works (connecting San Diego to Sacramento by way of Los Angeles and San Francisco; Albany to NYC, and Orlando to Tampa), but it doesn't seem that passenger traffic will be enough to make high speed rail profitable.  However, if there was a way to increase the speed of freight traffic as well as allow passenger traffic to move faster on the freight tracks, it would seem to kill two birds with one stone. 

The rail industry has invested approximately $6 billion over the past two years on infrastructure improvements (rail replacement and growth) and that would barely make a dent in what needs to be done.  While we are hopeful that eventually freight will be able to move quicker through the nation's corridors, which would greatly reduce costs for both shippers and consumers, we aren't going to hold our breath.  That being said, the freight railroad industry has weathered the economic storm of 2008 and 2009 and is poised to perform extremely well no matter what the future economic winds blow our way. 

David Silver
Wall Street Strategies