Shippers are upbeat on the economy, feel rail pricing is definitely going higher, and vehemently oppose any Class I consolidation, according to responses to questions posed by Cowen and Company Managing Director and Railway Age Contributing Editor Jason Seidl at the North East Association of Rail Shippers (NEARS) 2015 Spring Convention in Newport, R.I., on April 24.
“This year’s event marked a milestone for NEARS, with attendance approaching nearly 300 rail related professionals (railroads, rail shippers, lessors, transloaders, etc.), says Seidl, who during his presentation posed several questions to the audience “that yielded interesting results.”
Seidl asked the audience to predict the direction of the economy based on what they are seeing in their respective businesses. “Surprisingly, not one person was looking for the economy to turn negative,” he says. “About 26% said they thought the outlook would remain flat, and 74% said they were projecting growth.”
Seidl asked if anyone would expect rail rates, including intermodal, to decline on an absolute basis, “and no one said yes,” he notes. He then moved on to the pace of rate increases, vs. the past year. “Responses were relatively split, with 28% stating they expected the rate pace to slow, 40% expecting it to stay the same, and 32% believing it would accelerate.”
Seidl’s final question was whether the attendees would support Class I mergers. “It was a fairly decisive response, with just one person vowing support and one person undecided,” Seidl says. “The rest of the audience was opposed. I asked several attendees after the poll if they were surprised by the overwhelming opposition to mergers, and all said no. This could be just one of the reasons why Canadian Pacific CEO Hunter Harrison appears to have had a change of heart regarding mergers.”
“Our views on the rail industry have not changed after attending the NEARS conference,” Seidl says. “While the earnings bar has been reset lower for many of the railroads’ post-1Q earnings, difficult traffic comparisons in the months to come could create enough headline risk to keep many of the stocks from appreciating materially. On the surface, it appears that future M&A (mergers and acquisitions) will be met by stiff opposition from the shipping community at large, which could prove problematic for Surface Transportation Board approval. That said, some investors and rail leaders are calling for activists to get involved in a push for some management change and/or M&A in the sector.”