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    December 06, 2019
    Updated On: Nov 25, 2019

    Freight rail seeks ways to stay afloat amid sinking rail volumes

    Joanna Marsh 1 day ago

    As the freight rail industry looks ahead to 2020, the leaders of several Class I railroads and railroad lessors said a return to volume growth isn'™t likely to appear until the second half of next year.  While the consumer economy appears to be stable amid factors such as low unemployment rates in the U.S., the industrial economy hasn'™t shown the same magnitude of strength, rail executives said at transportation conferences held by investment firms throughout November. 

    I think our assumption is that it [the freight market gets better.  It may not get better just flipping the calendar to 2020. It may be more of a back half [of 2020] in terms of as the year progresses, that it improves through the year, but we do look for it to get better next year, said incoming Union Pacific (NYSE: UNP) Chief Financial Officer Jennifer Hamann at a conference sponsored by investment firm Stephens on Nov. 15. Janet Drysdale, vice president of financial planning at Canadian National (NYSE: CNI), echoed Hamann'™s sentiments at that same event on Nov. 13.  We're expecting a soft landing in 2020 and not a recession, Drysdale said.

    To cope with potentially lower volumes in the first half of 2020, executives laid out several short-term initiatives, although they deferred any comments about 2020 guidance to when they announce their fourth-quarter results in January.  Those initiatives include growing merchandise volumes, which is the bulk of the volumes that the Class I railroads carry.  Opportunities to haul more plastics, grain and refined products are some areas where the railroads are seeking to increase their business, while domestic coal volumes appear likely to continue to decline. And although the rail prices can be about 10% to 15% cheaper compared with truck for hauling merchandise volumes, the railroads need to improve their service product to gain more business, according to CSX (NASDAQ: CSX) CEO Jim Foote at the Baird Industrial Conference on Nov. 6. CSX will get merchandise business when our service is reliable enough, Foote said.

    To boost its merchandise network, Norfolk Southern (NYSE: NSC) said it is trying to develop a more homogenous railcar strategy by limiting the car types it utilizes. Doing so improves asset utilization and makes better use of returning empty railcars, according to chief marketing officer Alan Shaw. Layer that strategy with technology to provide more visibility and transparency to the shipper, and that'™s when it becomes truck-like, Shaw said, referring to the competition that the railroads have with the trucking industry over freight volumes.

    Intermodal volumes, in contrast, can face more competition from trucking because intermodal moves typically involve trucks at some point when they travel along the supply chain. But the railroads said they are continuing to eye opportunities there so long as they can improve on their service product. Domestic intermodal volumes are vastly under-penetrated by rails and certainly by Union Pacific, Hamann said. Yet despite the competition from trucks, the railroads may be hesitant to lower their pricing to attract more businesses.

    We'™ve seen several of these cycles play out over the years. I think we're better off holding on the pricing and letting the trucking market fight over the remaining freight with prices, Kansas City Southern (NYSE: KSU) Chief Financial Officer Mike Upchurch said at the Stephens conference on Nov. 13.

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