About once a year, someone pens a North American rail merger column. Why not one from a rail economist? This is not a “will happen” projection. It’s a strategic scenario question.
Ever check out the list prices of brand-new main line diesel-electric locomotives? They are expensive, about $3 million each. Are you mesmerized by the horsepower quoted? Nah! You want tractive effort. Hauling heavy, long freight trains is the North American business model. You need to purchase tractive effort.
On May 12, IANA (Intermodal Association of North America) offered an interesting look at the North American rail intermodal sector. The webinar featured technical slides shared by Bloomberg Senior Analyst Transportation & Logistics Lee Klaskow and TTX Vice President Fleet Management Company Pat Casey. TTX market development experts John Woodcock and Peter Wolff also participated.
North American rail managers are good at managing costs, but 2020 might be their ultimate challenge. Let’s say you are in charge at a freight railroad. What do you do in such hard times with so many fixed costs? You can ratchet down variable costs. That’s easy. The tougher part is twisting a large part of those fixed costs into segments of variable costs. How do you do that? Let’s start by defining what these railroad costs are.
This is not a forecast. It’s a prudent warning. The continuing COVID-19 pandemic and our social reaction so far are driving our business culture toward a high-risk economic impact. Stay-in-place warnings and increasingly mandated government requirements will drive down income and gross domestic product (GDP). Fundamentally, the American economy will likely face choosing survival spending tactics.
There are multiple contrasting intermodal market outlooks for 2020. Intermodal volume growth is illusive in 2020. One thing is certain: Fewer new intermodal cars are needed.
There is a great deal of confidence in the North American railway freight business model. This is because rail freight profitability is huge compared to the low returns in trucking. Rail enjoys margins close to 40% of gross revenues to operating income. While trucking unquestionably commands the largest modal freight business share, its operating profitability lags well behind railroading at a range of 8% to 12%.
After each major crude oil train or hazardous commodity freight train accident anywhere in Canada or the United States, there is a rush of safety-related outcries. Quite a bit of fear is expressed. The poster children for rail freight safety are hazardous materials like crude oil and liquefied natural gas (LNG), which has been proposed. Yet to those who examine the evidence, rail freight is unquestionably the safest mode to ship these materials.
True or false: Freight rail growth might require fewer cars in the future. As Class I railroads reported their 1Q2020 and full-year 2019 quarterly financial results, the expectation set by the individual railroads was that returning customers will help spur volume growth. Though 2020 is starting out slowly, most senior railroad executives and shipper logistics managers are talking about a possible recovery in the second half of the year. However, there is little statistical economic data published yet to support that optimistic outlook.
Since railroad freight is often bulk or shipments of large goods, changes in the economy or in global trade can impact the flow of railroad traffic in large up and down movements. Translation: There will often be cyclicality.
