(The following story by Dave Hannon appeared at Purchasing.com on May 21, 2009.)
Railroad executives and industry experts are in a tricky spot these days. Amid the continuing freight demand slump, railroad executives continue to try to take an optimistic tone and prepare for the time when demand for freight will come back.
“The fundamentals of our business are very strong,” said Wick Moorman, CEO of railroad Norfolk Southern, striking a somewhat optimistic tone. “Rail’s future and our potential to help solve our nation’s transportation crisis are as promising today as they have ever been.”
But in the present, demand for rail continues to wane and its price advantage over trucking shrinks. The American Association of Railroads reports this week that shipments on U.S. rails are down 18.8% compared with the same period in 2008. “Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see green shoots–it may still just be weeds,” AAR Senior Vice President John T. Gray said in a statement.
“Our outlook for the year, quite honestly, is it’s going to be pretty tough,” said Union Pacific CEO Jim Young, speaking during a Wolfe Research conference, adding that he didn’t expect a recovery to come until 2010. But “with inventories as low as they are today, I think all we need is a little pick-up in consumer confidence,” he said. “All it takes is a little bit of confidence and I think we’ll see a pick-up in business here.”
And when that uptick comes, UP will be ready to ride it. Currently, almost a third of its 5,000 furloughed workers are operating on a retainer, with full benefits and partial wages, at a cost to UP of $50 million a year, so they will be ready to come back when needed. Young told the Wall Street Journal that, in past demand slumps, “We just flat-out cut too far” and was caught without enough capacity to ride the recovery. “This thing could snap back pretty quickly, and in our business we don’t have the luxury of telling a customer no. ”
And those customers are planning for rail rate increases in 2010. A recent survey from Wolfe Research shows shippers expect to see a 1.6% average rail rate increase next year. Only 11% of those polled expect a rail rate decrease next year.