(The following article by Andrew Ward was posted on the Financial Times website on January 27.)
ATLANTA — US railroad operators are forecasting another year of strong growth in 2006, after surging freight volumes and rising prices helped the industry achieve record profits last year.
All the main US rail companies – Union Pacific, Burlington Northern Santa Fe, CSX and Norfolk Southern – have reported double or triple-digit increases in fourth quarter earnings over the past week and expressed confidence about the year ahead.
The industry has been performing strongly for two years as steady growth in the domestic economy has fuelled demand for freight transportation. Goods have been shifting from road to rail because of a shortage of long-haul truck drivers in the US but capacity is also tight on the railways, allowing operators to increase prices.
Rail companies are considered an important barometer for the wider economy because they carry goods ranging from coal, chemicals and grain to cars, consumer products and construction materials.
Jim Young, chief executive of Union Pacific, the largest US rail operator, was optimistic about the prospects for 2006, after the company more than tripled its net profits in the fourth quarter. “We expect demand will continue to be strong,” he said.
The performance has boosted US rail companies shares as investors, traditionally leery of the industry’s low returns on capital, have reappraised the stocks.
Union Pacific’s fourth quarter results showed how most of the industry’s growth is coming from increased pricing as capacity constraints limit the amount of additional freight they can accept. The total number of railcar loads moved by Union Pacific rose just 1 per cent but the average revenues per car grew 11 per cent to a record $1,428.
Higher rail prices have combined with record fuel prices and congestion over the past two years to cause a spike in supply chain costs for US manufacturers and retailers. Thomas Wadewitz, analyst at JPMorgan, says the rail industry should expect “continued strong pricing gains” in 2006.
Rail customers have complained bitterly that higher prices have coincided with a sharp deterioration in service over recent years, as increased freight traffic has worsened congestion. Critics accuse the rail industry of having made too many cuts in rolling stock, infrastructure and workforce during the last economic downtown, leaving them unable to cope when demand recovered.
There have been signs, however, that service is starting to improve as the record profits give operators confidence to increase investment. The average time spent by goods stationary in Union Pacific terminals – a key measurement of network fluidity – fell by 4 per cent to 29.8 hours in the fourth quarter.
BNSF, the second-largest operator, announced plans this week to increase its capital expenditure by 10 per cent to $2.4bn in 2006, including $400m for capacity expansion and $550m for new locomotives.
Matthew Rose, chief executive, said the increased investment signalled confidence that returns on investment would continue to improve. Last year, the company’s return on invested capital was 10.1 per cent compared with 7.9 per cent the year before.
“Demand for rail transportation was strong throughout the year,” said Wick Moorman, Norfolk Southern chief executive. “All our commodity groups set revenue records.”