FreightWaves is providing a forum – Market Voices – for a number of market experts.
Jim Blaze is a railroad career economist with an engineering background and a strategic analysis outlook. Jim’s career spans 21 years with Consolidated Rail Corporation (CONRAIL), 17 years with the rail engineering firm Zeta Tech Associates, 7 years with the State of Illinois Department of Transportation in Chicago urban goods movement research, and two years studying what to do with the seven bankrupt and unrecognizable Northeast railroads at the federal agency USRA. Now primarily a teacher and writer, Jim likes to focus on contrarian aspects of the railroad industry.
Here is this week’s strategic rail freight market view question for FreightWaves readers. Is rail freight growing in the U.S. market; or is it declining?
The answer is complex.
Economists can measure growth or decline in multiple ways. Therefore, the answer depends upon the market perspective.
The overall answer as an economist comes down to a mixture of shipment volume trends, ton-miles of work performed (the classical definition of foot-pounds of physical movement executed), revenues earned and strength or weakness of pricing leverage, commodity segmentation of rail freight being moved, profitability, capital expenditures (capital investment to grow), and the railroads’ changing market share.
Essential patterns of growth are translated in part by measuring over different periods of time how the slope of change shifts from high- to low-shaped curves. Don’t look for just one average slope number. It is best to measure slope shift over different periods.
From 1840 until about 2007
Prior to the U.S. Civil War, the railroad network from 1840 to 1860 grew, adding miles of rail line. But the pace of track expansion significantly accelerated after the Civil War until about 1910. The track network reached its zenith of total miles and cities and towns served in the period between 1910 and 1920. Competing against the horse and buggy and water barge transport, railroads were the kings of both freight and passenger transportation.
During World War II, the railroads’ freight ton-miles and geographic coverage peaked at about 75 percent. But both factors began slipping after World War II. By the 1960-70 era, the percentage of freight carried by rail (rail ton-miles) was down to approximately 38 percent. However, rail’s share of intercity freight revenues paid by shippers had fallen even further – to about 15 percent. The expansion/improvement of state highways and the interstate system, as well improvements in trucks’ performance and increased weight capacities were major reasons for the decline of the railroads’ share of freight.
Changes in railway regulation and implementation of engineering improvements like axles that allowed freight cars to carry heavier loads, as well as longer trains then appeared and they helped improve railway freight traffic volumes. Long distance moves of low-sulfur coal out of the Powder River region of Wyoming and Montana boosted carload and ton-mile metrics. The invention of the double-stacked container freight car and its introduction starting in the mid-1980s also boosted rail freight volume compared with general cargo freight volume carried by trucks.
Between the early 1980s and the record rail freight year in 2006, there was a significant “Renaissance period” of increased rail freight volume. In this case, Renaissance means a new growth spurt instead of a return to the old classical ways.
2007 to 2018
Rail freight growth turned negative year-over-year globally during the “Great Recession.” All of the basic rail traffic measures turned downward.
Recovery in the U.S. rail market began for certain commodities in 2009. Growth for most rail commodities slowly recovered during the 2012 to 2014 period.
But the rate of rail freight traffic was changing. Growth year-over-year slowed. Conversely, the profitability of the freight railroads improved. In fact, rail profitability (financial margins) were dramatically increasing.
There were a few large traffic route corridor decreases for coal beginning around 2012 – and continuing into 2018. Metals and mineral traffic volumes remained relatively negative. Commodities like chemicals returned to a nominal positive growth pattern. Yes, crude oil traffic came in unexpectedly strong in the 2010 to 2013 period – then dipped. Yes, crude oil by rail is now increasing again. Aside from the small volume niche of crude oil, rail Intermodal traffic showed the strongest upward slope of year-over-year growth between 2006 and 2018.
Some claimed that intermodal containers and trailers on rail flat cars (TOFC) would replace coal lost. But entering 2019, that upbeat outlook needs to be re-examined.
2019 scorecard from a rail economist’s view of the market
Looking forward with a long-range view, here is a due diligence outlook at U.S. rail freight market economics.
General Merchandise commodities today and likely through the 2025/2035 period will be dominated by trucking. General Merchandise railcar traffic that competes with trucking simply isn’t keeping pace with trucking’s annual growth rate. Rail carloads of General Goods (excludes grains and coal) might see only a long-term growth rate of zero to two percent year-over-year.
General Merchandise commodities that are carried via intermodal rail likely will be competitive and continue to grow – at a year-over-year rate in the 2 percent to 5 percent range. To some economists, this would be significantly slower growth than expected a decade ago.
However, if a short-haul market and a semi-trailer platform railcar enter the market as new services at attractive price levels, intermodal growth may again see the return of market share gains versus highway truck growth. Warning – this is a “what-if statement” – and not a prediction.
Coal growth is clearly slowing. Unless there is a breakthrough combination of regulatory, engineering and alternative fuel pricing patterns, no major U.S. railroad is projecting long-term growth in the coal segment in their business plans.
Crude oil by rail tanker is at best viewed as a medium-term growth commodity – subject to projections of new pipeline construction as the cheaper alternative.
Overall, rail ton-miles will likely continue to shrink noticeably. The previous predictions by many of the 2035 outlook – of high rail ton-mile growth patterns – are unlikely when predictions from a decade ago are reconsidered in light of revised economic conditions.
The size of the railcar fleet as monitored by Railinc is expected to continue at its current 1.6+ million level; replacement units will be added as fleet aging continues, but the fleet will not grow. The composition of the railcar fleet will change over time; different types of railcars will grow (chemical tank cars) or shrink (boxcars) as market demand changes. As noted above, a possible shift towards short-haul and semi-trailer intermodal (instead of containers) would, if it occurs, be the railcar type for highest mid- to long-term growth.
This forecast ignores the financial/accounting outlook for rail freight. Why? Because Wall Street observers are more adept at examining those kinds of market changes than is this observer.
Readers are encouraged to consider other sources for traffic and commodity growth and risks – Fred Frailey, Roy Blanchard and Ron Sucik have noticed and reported on the market growth and decline rates for selective traffic types.
Also, please check the Association of American Railroads (AAR) for its excellent annual and monthly statistics.
As always, FreightWaves reader opinions are sought.