I recently sifted through each of the publicly traded Class I railroads’ third-quarter earnings webcasts to get a consensus on revenue and volume expectations headed into the New Year [see “What Wall Street analysts are asking …,” Trains News Wire, Dec. 6, 2024]. A consistent theme is railroads are pricing above inflation. This means that freight rates are above current inflation rates. In October, that rate was 2.6%.
Protecting the operating margin and hedging against inflation through price is understandable. Railroads are also keeping the house clean and finding productivity across crafts and processes. This, combined with improved service, bolstered headcounts, and resiliency are all commendable efforts. For the first time since I’ve been in the business, I feel like railroads are ready for new volume and can ramp up easier than before.
But new volume is key. Freight and especially truck markets are soft. There’s nearshoring and manufacturing optimism associated with the new administration, but it won’t happen quickly. Will proposed new tariffs cause inflation to increase? Can railroads outrun inflation to protect the operating ratio if inflation returns to 4-5%? Can the U.S. manufacturing sector maintain its output at sustained levels of higher inflation? And will running ahead of inflation entice new rail business, given all of the truck capacity?
My biggest concern is railroads will price above a higher inflation rate to protect the margin in a volume-soft environment. I’m concerned higher-for-longer inflation could lead to volume erosion if truck capacity remains robust. I’m certain railroads are asking these same questions.
These are all questions that I’m seeking the answers to as we head into 2025. I want railroads to get it right. I want to see railroads capture meaningful amounts of new volume. Volume should be the reward for the hard work railroads have achieved in cleaning up their networks and hiring for growth.
With a lot of large union agreements now ratified, railroads can better predict labor costs in the near term. Fuel is also trending downward. The four big Class I railroads have all saved more than $100 million in fuel this year compared to last, and Union Pacific’s fuel cost is down $239 million year over year. This correlates to fewer fuel surcharge revenues, but overall, this is a major savings.
And while railroads have touted that price dollars are outrunning inflation dollars, I do want to recognize that railroads’ average revenues per unit (RPU) have increased modestly year over year. Outside of declining index-based coal pricing and softer intermodal rates, the big four Class I railroads have priced conservatively in 2024.
Union Pacific’s industrial rates are up 4%; CSX Transportation merchandise rates up 2%; Norfolk Southern merchandise up 1%; and BNSF Railway’s industrial rates are flat. U.S. inflation has decreased more than 1% since last year. Railroad rates do seem to be moving in tandem with inflation, which is encouraging.
But, honestly, all of this talk about inflation is getting old. As far as railroads are concerned, I want the conversation to shift from inflation to the benefits of a reliable rail supply chain. Railroads’ operating performance is the best it’s been in a while — and while you can price for reliable service to some extent, a stronger economy in a deflationary environment could win the railroads great volume success.
And perhaps railroads can still win in a high inflationary environment. I’m definitely no economist. But the idea of pricing above inflation, especially if it increases again, with so much truck capacity doesn’t feel like a winning solution for carload growth.
Does no one in any industry understand the simple fact that if you keep your prices the same while your customer raises theirs that unless people are stupid(which some admittedley are) they will switch to the product or service who’s price as NOT increased thereby increasing your revenue through volume. Anyone that wants to argue this would never work for railroading or anywhere else is full of themselves.
A simple example would be a food(any food will do). Both companies sell at 1 per unit, company A then raises their price to 1.25 per unit, company B does not( costs increased for both companies). I contend that the additional volume sold by company B would more than make up the increased costs while also increasing overall profit due to the increased volume of product sold. Freight could be sold the same way…and it used to be, a couple of decades+ ago.
As for Wall Street, that is easier tamed than most of you think, and it would be the STB that could do it…but simply setting a minimum OR that RR’s must maintain of 65. Then to get the SEC involved eliminate the quarterly financial reports turning instead to 2, 5 and 10 year projections, with only annual reports needing the be filed. Of course you could drop the 2 year projections and try to force Wall Street to look at long term returns vs short term…without taking draconian measures to do so(though I actually prefer the draconian measures myself).
Seems to me it is just another “inflation item”.
“Pricing above Inflation” is an interesting term for what it does not cover. Anyone who has bought groceries, gas for the car, electricity, pretty much anything has seen more inflation than what is the government number so which is the real inflation?
Then there are transport related costs. With Russian oil cut off from the world market prices have shot up globally. Wonder if diesel fuel is a major cost for Railroads? Then there is the cost of new regulations that we really don’t hear much about so it’s hard to put a number to it but some seem very expensive to meet. We really don’t know if they’re just racking up the costs or offering the best price they can while covering the costs they have.
” I want railroads to get it right. I want to see railroads capture meaningful amounts of new volume.”
Railroads will only be able to get it right when Wall Street gives up its fascination with Operating Ratio in numbers so low that the only people who make money are the short term investors who take profit and get out. (I am speaking of you Ancora and others like you like the so called Children’s Fund, all activist for profit at all costs…) Improvements in volume will only result from the elimination of the worst parts of PST, namely Extreme length Trains that when they are not blocking off rail road ways and local commerce are derailing all over the place and are not on time, to boot. When Shippers and customers (The reason Railroads should exist in the first place!) deem the system is reliable and reliably efficient, the volumes will materialize and pricing can return to normal. But as long as publicly traded railroads have to “hedge their bets” that the next hostile revolt by some Wall Street money hedge hog isn’t just around the corner what else can they do but hedge. That is the real problem and I don’t see it getting any better under the current financial system. Only BNSF doesn’t have to worry since they are privately owned…err… partnered with J B Hunt .
There is no correlation between the CPI and a railroads thousands of price negotiations.
Monopolies or colluding oligopolies price above inflation because customers essentially have no choice. Higher transportation costs are not “eaten” by shippers, they are passed through to consumers.
In the absence of regulation they will continue this anti-social behavior. Amtrak Joe and Mayo Pete gave a wink and nod, and so will Trump and his billionaire cabinet. Public be d*****.
Well, unless the government steps in and nationalizes the railroad plant (all rail lines) so open access like in Europe can occur (and I don’t think anybody really wants that!) then it is what it is. And you want more regulation? Railroads have been regulated to the point of little profit and even when they make one, Wall Street is screaming it is not enough. That is what has to change and no one has answers that are any good… just opinions and we all know what they are like.