(Bloomberg News circulated the following article on October 6.)
FORT WORTH, Texas — North American railroad freight rates, already at unprecedented levels, may rise faster in the next six months, helping companies such as Union Pacific Corp. increase profit, according to a Morgan Stanley survey.
The survey of 300 customers showed that shippers of coal, grain and other cargo expect an average 5.6 percent increase, excluding fuel surcharges, Morgan Stanley analyst James Valentine said in a report Wednesday.
In surveys for two prior periods, the customers said they expected an average 4.4 percent increase.
“Strong pricing will continue into 2006, as over a third of shippers said their railroad contracts haven’t rolled over yet in this robust pricing environment,” Mr. Valentine said in the report.
“We had assumed that pricing gains would moderate over the next year, given the significant price increases implemented over the past 18 months.”
Union Pacific, the largest U.S. railroad, may increase rates by an average 6.6 percent, the most in the survey, Mr. Valentine said.
Rates are rising now as railroads with little capacity to add more freight boost profit with higher prices.
As recently as two years ago, the companies were cutting rates to attract business, he said.
Price increases including fuel fees because of higher diesel costs have been almost 9 percent this year, according to railroads’ earnings reports.
The Morgan Stanley survey didn’t include the fuel surcharges of 3 percent to 4 percent that have been added as diesel prices have risen at least 50 percent in the past 12 months.
“Railroads have had a taste of the good life for the first time in their history,” Morgan Stanley’s Mr. Valentine said.
“These managements know that the fastest way to go back to the old world is to go back to discounts,” he said. “Unless we have an outright recession, I don’t see these prices decelerating.”
Because of the prospect of more rate increases, Mr. Valentine raised his 2006 profit estimates for the six largest North American railroads – Union Pacific, Burlington Northern Santa Fe Corp., CSX Corp., Norfolk Southern Corp., Canadian Pacific Railway Co. and Canadian Pacific Railway Ltd.
In a separate report on the railroads, Standard & Poor’s analyst Philip Baggaley said: “Strong demand, tight capacity and improved pricing power should lead to healthy increases in earnings and cash flow for companies over the coming year.
“Strong demand has created the best pricing environment for railroads in some time.”
The Morgan Stanley survey also showed that the customers expect rail-shipment growth to slow to 0.9 percent in the next six months, from about 1.5 percent in the previous period.