Railways Looking to Cash In Next Year

The economic slump has proven to be a boon for the railroads.

Warren Buffett caused a lot of head-scratching when he agreed to purchase Burlington Northern Santa Fe Corp. (BNSF), the biggest railroad in the United States, for $26.3 billion. His company, Berkshire Hathaway Inc., broke from its usual pattern of acquiring companies that offer quick, double-digit returns. A railroad is seen more as a steady if unspectacular investment. However, Buffett sees the acquisition as "an all-in wager on the economic future of the United States. I love these bets."

And well he should, based on a projection of expected transportation spend developed by equity research firm Morgan Stanley. According to the firm's latest "Freight Pulse" survey of preferred transportation modes, while manufacturers expect volumes to decline on all four transportation modes studied (rail, truckload, regional less-than-truckload and national LTL), the only mode where they expect a rate increase is rail. What's more, the railroads are helping to sustain their rate hikes by offering better service, although the overall rating slipped a bit in the recent survey from the 6.5 rating (on a scale from 1-10) earned in April 2009 -- the highest service rating for rail in the survey's eight-year history -- to 6.2 in the October 2009 survey.

Indicating that the economic recovery will be long in coming, survey respondents predict that freight volumes -- the amount of raw and finished goods being shipped -- will continue to decline for at least the next six months. What's more, some companies (especially large companies) are shifting their freight from trucking to rail transportation to realize savings, according to Morgan Stanley analysts William Greene and Adam Longson, since shipping goods by rail is far less expensive than by motor freight. However, larger companies "are also looking to move some rail moves back to truck given large truckload discounts and more aggressive rail pricing," they observe. In fact, companies expect to see one of the largest declines in pricing for truckload carriers in the "Freight Pulse" survey's history, dating back to 2001.

Rail rates will increase in 2010 while trucking rates decline

Mode

Rate Change

Volume Change

Rail

1.2%

-1.5%

Truckload

-2.4%

-1.0%

Regional LTL*

-1.4%

-1.0%

National LTL

-1.5%

-1.9%

*Less-than-truckload
'Freight Pulse 17,' conducted by Morgan Stanley with Logistics Today. Forecasts reflect expectations for 2010 freight rate and volume increases.

Manufacturers continue to monitor the financial health of LTL giant YRC Worldwide, which has had a rough go of it combining the assets of Yellow Transportation and Roadway. The percentage of respondents who indicated they plan to shift volumes away from YRC jumped 8% since the previous survey, conducted six months ago. The size of the company doesn't seem to matter, since 39% of large companies and 36% of small companies say they plan to shift away from YRC.

One happy, though certainly temporary, effect of the recession is that manufacturers have been able to negotiate lower fuel surcharge rates with their main truckload carriers. Morgan Stanley reports that over 70% of large companies have obtained either a more favorable fuel surcharge or a price reduction.

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