(The Associated Press circulated the following article on April 3.)
NEW YORK — After posting impressive results over the last several quarters, it appears railroad operators will finally show the affects of a slowing economy as the sector begins to report quarterly earnings.
Production cuts by automakers and a slowdown in home construction clipped returns from trucking companies late last year, and even high-flying parcel carrier FedEx Corp., which reported a fiscal third-quarter profit decline on March 21, said the economy grew slower than expected over the winter.
Railroads previously offset weaker freight demand with higher prices, and while analysts expect that will happen again this quarter, they also warned that more shippers are returning to trucking, where pricing weakened as companies bought additional equipment ahead of new emissions regulations.
“Slowing economic growth, weaker freight demand and excess capacity in the truckload and less-than-truckload industry are also contributing to slower rail volume growth, in our view, especially in domestic intermodal,” said Scott Flower, an analyst at Banc of America Securities, in a March 23 research note.
Intermodal involves moving freight from one form of transportation to another, such as containers from ships to railroads or trucks for final delivery.
Flower, who recently lowered 2007 earnings estimates on the six major railroads by an average of 2 percent, expects a “mixed bag” of results from the sector.
But inclement weather also dragged on the earnings of some carriers in the quarter, especially compared with the remarkably mild winter of the same period a year earlier. Fred Green, chief executive at Canadian Pacific Railway Ltd., called weather this winter in British Columbia “frustrating” and “the worst I’ve seen.”
“We have seen our operations start and stop,” Green lamented at a conference in New York on March 22. Green still backed the company’s profit outlook for the quarter, supported by grain and coal volumes.
The weather situation, however, is not exclusive to railroads operating in the Northwest. Winter storms hammered the Northeast in February, likely slowing operations at eastern railroads CSX Corp. and Norfolk Southern Corp., according to John Larkin, an analyst at Stifel Nicolaus & Co.
“Severe weather this winter has had an unusually large impact on carload volumes quarter-to-date,” Larkin said in a note to clients on March 26. “As expected, volumes have rebounded some as spring has drawn near.”
CSX Chairman and Chief Executive Michael J. Ward, who spoke alongside Green in New York, estimated that the mild winter of 2006 boosted revenue in last year’s quarter by $25 million. Freight volumes at CSX this quarter were off by 4.5 percent, as of March 22.
At the same time, freight volumes industrywide, as a measured by carloads, are down 4.7 percent, according to the Association of American Railroads. Most strength lies in coal, chemicals (including ethanol) and petroleum products. The total carload number excludes intermodal loadings, which are up 0.7 percent. Although intermodal volumes remain ahead of last year, a later-than-usual Chinese New Year may have softened volume by the end of the quarter, analysts said.
CSX will open the sector’s first-quarter earnings season on April 18 ahead of the bell.