The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
The strategic outlook for rail freight is mixed based on data and competition hurdles. Some challenges are not in rail management’s hands.
For example, is the long rail freight market trend upward, static or downward?
There is uncertainty.
Briefly, here is the long-term outlook.
Note that the numbers shown here are rounded.
The quick take is that over the past four years, rail traffic growth was stalled. There has not been significant growth if we use 2017 as our baseline.
Disturbing to railroad backers is that trucker volumes have been growing faster.
Here are the basic numbers.
Admittedly these carload numbers would look better if we filtered out the coal decline.
Instead, the rail carriers have to adapt to the fact that the coal loss has economic consequences.
Even in the intermodal traffic sector (more than half of all railroad units moved) the U.S. units were down close to 2% as 2020 closed versus 2017.
Yes, U.S. intermodal recovered during the latter half of 2020 to end up, despite the pandemic “economic hit,” down only 2% versus 2019. But 2019 was a poor comparison year.
Intermodal container volume started 2021 above prior years’ levels following a robust 2H20, but the sustainability of that y/y growth is uncertain
Here is what the overall trending loss of network volume means: an overall network loss of traffic density.
Regardless of the underlying reasons, loss of network density fundamentally changes the economics of parts of the railroad track network.
Traffic density matters because it helps managers decide which rail track routes shift from main lines to possibly less viable branch lines.
It also can impact some customers whose plants are suddenly no longer on a main line route.
It can negatively impact state rail and local economic development plans.
So, is traffic growing the railroad’s market share?
“No” appears to be the logical answer.
Rail market share volume in many commodities is likely declining. And declining over once-busy main line rail routes.
What’s the early outlook into 2021?
Carload rail freight is not yet in a high slope recovery. The exception might be for exported rail grains.
Overall, by year’s end 2020, carloads had not recovered to either the 2019 or the superior 2018 levels.
In early 2021, rail carload volume remains below recent years
Intermodal rail volume might look like it is witnessing a roaring recovery as 2020 ended and 2021 began.
But if we check other sources, like the data from the Intermodal Association of North America and analyst work by Larry Gross, we might conclude that the rebirth thrust in the second half of 2020 may not look so secure into all of 2021.
Consider this benchmark by Gross. The compounded annual growth rate (CAGR) for U.S. maritime intermodal has been an anemic -1.1% versus 2017.
For domestic intermodal, 2020 versus prior year CAGR was just +1.8%.
Translation? All of the weekly high-variability year-over-year week increases and drops? They are data noise to a long-range market analyst.
Thinking about these patterns, and checking with other sources, this rail economist concludes that the intermodal outlook toward full-year 2021 and 2022 is optimistically cloudy at best.
Projecting intermodal traffic is therefore sort of a pick your poison forecasting business.
Yes, 2021 rail profits should improve. But not long-range market share.
Rail carriers have chosen to exit certain lower-margin markets.
Is their exit strategy over? That is unclear.
Neither rail carload nor rail intermodal is likely to grow and take mode share from trucks unless the following challenges are met:
1) Highway diesel fuel prices need to rise to above $4 a gallon street price. Higher truck fuels favor rail.
2) A mechanical engineer needs to discover how to manufacture a semi-trailer TOFC-capable fast load/unload rail car that can be built at a capital price of less than about $110,000 per equivalent 53-foot load length.
3) The cash flow-rich rail carriers determine how to share their precision scheduled railroading financial operating ratio wealth with shippers as lower rail prices.
4) Railroad cargo visibility improves to a performance range of near-real-time continuous digital feeds to rail customers.
5) Rail final delivery failures will eventually become less than 10%-12% for carload. Intermodal best-of-class performance will hit about a 2% or less failure rate.
These kinds of improvements should then signify growth and share taking.
Which rail executives will attain that best-of-class service and price mix first?
As always, what’s your view?