According to the report, overall US rail freight shipment volumes, including carloads and intermodal containers/trailers, decreased by 2.2% through November compared with the first 11 months of 2007. The report notes, however, that the decline accelerated in the fourth quarter, with volumes down by 5.6% from the previous year. Fitch attributes the overall decline to pronounced drops in volumes related to the automotive and residential construction industries combined with a falloff in imported consumer goods.
Yet despite weakening volumes, Fitch emphasizes that pricing has held up, with Class I railroads generally reporting double-digit percentage yield increases in Q3. According to the report, the top four US railroads - Union Pacific Corp., Burlington Northern Santa Fe Corp., CSX Corp. and Norfolk Southern Corp.) all produced EBITDA margins in the 28% to 35% range during the 12 months ended Sept. 30.
The report says rail operators have been able to sustain price levels through a combination of effective capacity control, relative fuel efficiency and greater dependence on less cyclical commodities, such as coal and agricultural products, for which demand has held up. It predicts that continued demand for cyclical commodities will help the railroads compensate for lower volumes of autos and auto parts, wood products and international intermodal shipments, which it expects to remain weak.
Fitch researchers Stephen Brown and William Warlick say the trucking industry, on the other hand, faces a more precarious situation, with several major players facing the possibility of bankruptcy. Though the bankruptcies of a large number of small carriers have helped reduce capacity, they point out that the less-than-truckload (LTL) sector continues to struggle "with too many trucks chasing too little demand."
They note that the overcapacity situation has resulted decreased rates, while higher fuel prices have led to greater cost increases than they have in the rail industry. In addition, Brown and Warlick say the forecast for weakened consumer spending and further slowdown in the manufacturing sector threatens to generate even less demand in coming months, since trucking is closely tied to the shipment of retail goods and industrial components. However, they add, should the weak environment actually force a shutdown of some LTL operators, the pricing environment could improve dramatically.
In another boost for the rail industry, the report says its capital spending needs are not expected to increase this year and may even decline, which will help strengthen cash flow. According to Fitch, the railroads' ongoing capital markets access, as well as access to large unsecured revolving credit facilities, means liquidity is not a near-term concern.
By contrast, it says the trucking industry's weaker operating margins will put significant pressure on operating cash flow, though capital spending needs will be lower due to reduced demand. Fitch expects trucking companies to minimize vehicle replacement and hold off on facility capacity growth while the economy remains weak.
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