Railroads may have a tough time getting the volume and price increases in 2006 that they saw in 2005, but that doesn't mean 2006 will not be another strong year for an old-school industry continuing its resurgence.
Economists say 2005 was the peak of the economic recovery from the global recession of 2001-2003. Most primary markets for the railroads - coal, chemicals, metals, paper products and agriculture - are expected to feel the chill in 2006 as the U.S. economic engine cools off. If the housing bubble bursts, construction materials could take an even bigger hit.
It could all end up putting a dent in the amount of freight shippers load on the rails and could take away some of the railroads' ability to raise rates. "Looking toward 2006, pricing is expected to remain strong, but, like volumes, pricing growth will begin to moderate somewhat," said a report by Fitch Ratings, a credit rating service. "As fuel surcharges have become a larger component of the pricing structure, shipping customers are paying more attention to the effect it is having on their overall shipping costs, and will likely begin to more actively negotiate the surcharge along with the base rate. As a result, the distinction between base rates and surcharges may begin to blur. The continuation of a tight capacity environment, however, will likely mean that top line revenue growth will continue to outpace volume growth."
Intermodal business continued to be the name of the railroad game in 2005, after coming off the year that saw intermodal business top coal as the industry's No. 1 revenue generator. Intermodal volume continues to set records as well, with third-quarter 2005 volume seeing a 5.6 percent increase over the same period in 2004 - the 14th consecutive quarter of increased traffic.
Service issues continued to dog some railroads last year, namely Union Pacific Railroad and CSX. Despite predictions of a marked turnaround, both railroads struggled, as they had in 2004, to back up price increases with improved transit times and better equipment availability.
At the same time, Canadian National Railway and Norfolk Southern built upon impressive strides made in overall operating efficiency, reaping some of the fruit of scheduled railroad operations that were installed on their systems ahead of their competitors.
Security and hazardous materials transportation grabbed a larger share of rail industry headlines in 2005 as a result of a high-profile accident in Graniteville, S.C., on NS - a derailment that led to a deadly chemical spill. The accident renewed calls by local governments - notably the city council in the District of Columbia - to have the right to reroute hazmat shipments around cities. CSX, which is adamantly opposed to such policies, continues to battle the D.C. government in federal court in a case that's being watched closely by other Class 1 railroads and other cities looking to enact their own bans.
Despite the transportation disruptions on the Gulf Coast caused by two of the biggest hurricanes ever to hit the U.S., last year's peak shipping season was considered a significant improvement over the congestion, backups and delays that marked the 2004 peak season.
"After the past few years, it's a relief to know we've gotten through the peak of the shipping season without any serious incidents," said Erik Autor, vice president and international trade counsel for the National Retail Federation. "There were certainly some threats from Hurricane Katrina and the storm's effect on railroad capacity, but the ports themselves didn't see the problems we've seen in the past," he said. All in all, it's been a good year."
The good feeling will continue for the railroads' intermodal business in 2006. It's predicted to grow faster than their other lines of business but at a rate slightly slower than in 2005. Several analysts have predicted 2006 will show very healthy growth, possibly up to 8 percent.
Non-rail companies such as Swift, Schneider National and Pacer, which jumped into domestic intermodal transportation in a big way in 2005 by investing in people and equipment, will continue to gain traction in the domestic intermodal markets, putting more pressure on smaller intermodal marketers to cut costs to compete.
For NS, containers and trailers accounted for 13 percent of total revenue in 1998; it has grown to 21 percent today. "The primary driver of this increase has been robust international trade, particularly with China, as growth in Chinese exports to the U.S. are up 13 percent," said Donald Seale, executive vice president for sales and marketing at NS.
Trends in 2006 will be similar, he said, with projected increases of 10 to 15 percent. "In 2006, China is projected to be the origin point for 48 percent of import containers coming into the U.S," Seale said.
BNSF Railway is increasing freight capacity and productivity by moving more shipments per train on the domestic side and optimizing vessel alliances, running 24-hour operations and increasing yard utilization on the international side. It plans to open new intermodal facilities near the Port of Los Angeles and outside Chicago.
On the commodity side, coal will continue to be king. Coal volume and prices are expected to remain strong as utilities replenish stockpiles and natural gas prices remain high. Coal shippers are hopeful that UP and BNSF will have service back to normal levels on their joint line out of Wyoming's Powder River Basin after two major derailments in May slowed transit times and cut capacity limits.
The outlook for the railroads' automotive business, however, is not as bright. Stagnant growth over the last several years - a fallout of increasing competition faced by the Big Three auto manufacturers - could be hurt even more as a result of recently announced plant closings at Ford and General Motors. NS is looking to counteract the trend by working with manufacturers to identify new lanes for conversion of auto parts to rail.
With intermodal playing an increasing role on the railroads' balance sheets, commodity shippers that find it increasingly difficult to get unit train service, much less a single railcar, worry that they will see the bar continue to lower for what is considered "good" service.
Industry observers say customers will be on the losing end, and longtime shippers on the carload side may get taken a little more for granted. While that is not the railroads' official business strategy, it is the inevitable outcome of the competing daily internal tactical decisions on who gets the freight.
Roger Nober, chairman of the Surface Transportation Board, who plans to step down from the board post this week, agrees that shippers will continue to be frustrated with service. As a result, he predicts there will be more rate cases brought before the agency.
"Clearly, the carriers are increasing their prices with capacity-challenged service, and I see both large and small rate cases being filed as the railroads get more aggressive" on rates, he said. "But carriers have a once-in-a-generation opportunity to get over their financial hurdles and grow their business. It's going to be challenging not just for railroads but for all companies involved in transportation and logistics."