Rail shippers “are more confident in the economy, and the new Trump Administration is providing a degree of both hopeful optimism and uncertainty,” according to Cowen and Company’s 4Q16 Rail Shipper Survey. “Overall, the survey is positive for the rails, in our view.”
“Railroad shippers anticipate an average base rate increase of 2.7% over the next 6-12 months, which is up 60 bps sequentially and 50 bps below the prior-year 4Q rate,” says Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Last quarter's 2.1% was the lowest rate we’ve seen in nearly eight years. While the freight markets are not robust, they did finish the year on a strong note based on what we’ve seen in industry data. We also heard a similar tone from the participants on our recent private trucking/3PL conference call.
“Total North American carloads were up 1.3% y/y in 4Q16 and finished the year down 5.0% y/y. And while fuel prices are well off their lows, shippers continue to feel as though they have the upper hand in negotiations (or as much of an upper hand as you can have with the Class I railroads), as expectations for rail price increases remain well below the long term 3.8% average we’ve seen in this survey.
“Rail service has improved a bit according to our respondents. On average, 80% of shippers said that service was either excellent or good at the Class I’s in 4Q16. That compares to 73% in 3Q16. Reliable service and therefore network fluidity should help support rails’ operating ratios as volumes ticked up 1.3% in 4Q16. However, that reliability is in part due to excess capacity available on the rails. Fewer shippers are concerned about capacity relative to our prior survey, which is consistent with what we heard from BNSF CEO Carl Ice last week.
“Interestingly, expectations for business growth over the next 12 months remained flat at 2.1%, while the percentage of respondents more confident in the economy today increased substantially to 74% from 22% in our prior survey. Nearly 40% of shippers expect to increase their employee count over the next 12 months compared to 29% in the last survey.
“We included questions about the President-Elect and the results indicate a sense of hopeful optimism. 43% are positive on the Trump Administration, while another 43% are uncertain. Only 4% feel negatively, while the rest have mixed opinions. Lower corporate taxes and [higher] infrastructure spending seem to be the two areas of most interest for shippers. A shipper indicated it was hopeful ‘that the Trump administration would rein in the EPA and reduce other business stifling regulations.’ However, another shipper said, ‘There have been no credible plans on anything at all put forward. Trump does not appear to understand how the bulky business of governing is conducted.’
“Overall, we view the results of this survey as positive for the railroads. The 2.7% price increase expectation leaves a bit more breathing room from the all-important 2% rate. 2% is important because rail-cost inflation typically hovers in that area, and pricing will need to remain above that level in order for the rails to improve their operating ratios. We continue to prefer Norfolk Southern and Genesee & Wyoming as our top rail picks.”
More cars on the way?
About 50% of shippers said they will or may order railcars in the next 12 months, according to the survey. “This is up from 37% in our 3Q16 survey, 42% in our 2Q16 survey, and 48% in our 1Q16 survey,” says Seild. As such, not only is the result an improvement from last quarter but it also represents a reversal of two consecutive quarterly drops in this metric.
“The 4Q16 results on a same-shipper basis represented the third consecutive quarterly improvement. In this case, roughly 56% of shippers said they will or may order railcars in the next 12 months, compared to 50% in our 3Q16 survey, which in turn represented an improvement from 2Q16. However, within this 56% of same shippers in the fourth quarter, the dynamic has shifted toward a somewhat decreased level of certainty about placing orders. Order size expectations improved modestly, with more shippers now expecting to order over 500 railcars than in our prior survey.”