Rail capacity tight, rates up

By Tom Stundza, Executive Editor -- Purchasing, 5/5/2006

Demand for rail services remains strong, with carriers reporting record financial results and increased per shipment revenue. Canadian Pacific Railway reported a 6.8% increase in revenue per shipment, including fuel surcharges. Company officials and market experts see the trucking issues in North America putting more shipments on the rails. And its main rival on the rails up North, Canadian National, raised prices an average of 8.5% a shipment. “The whole industry is realizing a very powerful combination that more than offsets weak volume growth,'' said Bear Stearns analyst Edward Wolfe. Also, Edward Jones & Co. analyst Dan Ortwerth agrees, saying: “Railroads in general are benefiting from pricing power.” Tight capacity and surging fuel costs pushed rail rates up 10% in 2005, according to analyst Kenneth Kremar at market researcher Global Insight.

Service levels at rail carriers leave much to be desired in the current environment. A spokesman for the Edison Electric Institute trade association representing electric companies tells the Reuters News Service: "With the peak summer season for electricity approaching and rail deliveries of coal still not where we would like them to be, we are monitoring this situation carefully."Burlington Northern Santa Fe Railway on-time average had fallen in recent months from above 90% to around 80%. Average train speeds system-wide have dipped below 20 mph, indicating that traffic on the railway’s 32,000 mile system that extends from Florida to the Pacific Ocean has slowed. That;s why the BNSF’s chairman, Matthew Rose, recently tells reporters: "Frankly, our service isn't what we want it to be.” Union Pacific CEO Jim Young adds: "Although we made progress in the quarter with our operating initiatives, we have a long way to go before we are satisfied with our service, velocity and returns."

Tight capacity and surging fuel costs pushed rail rates up 10% in 2005. Rail rates will be boosted further during 2006 as traffic growth accelerates and pressure remains from sky-high fuel costs, forecasts analyst Kenneth Kremar at market researcher Global Insight. He and other market economists estimate that buyers spent almost 6% more on rail equipment last year and will maintain that rate of growth in spending this year. Kremar notes that “the recovery in rail equipment continues with freight car builders reporting a year-end 2005 order backlog of 69,408 units.” That’s more than a full year of production at the 2005 rate of assembly since “freight car builders outdid themselves in 2005, delivering 68,612 units,” Kremar says.In 2004, 46,871 freight car units had been delivered, up from 32,184 units in 2003 and only 17,714 units in 2002. “Traffic growth, rail service problems, and the pressure to replace older and smaller fleet units are the driving forces behind the current equipment-buying spree,” writes Global Insight economist Frantz R. Price. “These pressures will remain in play in the near term, keeping growth in railroad equipment strong for a while longer.”