Global Economic Trends and Their Impact on the Railroad Industry

Impact of global trade on freight volumes

Global trade significantly impacts freight volumes, as evidenced by mixed trends across the industry. While some companies like UNP report revenue growth from increased volumes, others like NSC face declines due to market pressures. Adaptability in export capacity remains crucial for maintaining volume levels amid fluctuating demand.

"Additionally, we expect volumes in our domestic premium business to fall as challenging LTL market forces reduce freight demand for parcel shipments." --- (NSC, earning call, 2024/Q1)

"and Alberta to the U.S. Midwest, and higher freight rates. This increase was partially offset by lower volumes of wood pulp from Ontario to the U.S. Midwest and the unfavourable impact of lower fuel prices on fuel surcharge revenue." --- (CP, sec filing, 2024/Q1)

"Freight revenues totaled $5.6 billion for the quarter, which was up 2% excluding fuel surcharges due to strong core pricing and a slight increase in volume." --- (UNP, earning call, 2024/Q2)

"The temporary idling of a recently opened export mine on our network should have little impact on our export volumes as we see strong production offsets at other CSX served mines. Just as we did this last quarter, the team is already finding some creative ways to pivot towards other opportunities in the marketplace where we see strong demand for export capacity at our Curtis Bay terminal." --- (CSX, earning call, 2024/Q2)

"During that time our annual freight volumes have increased thirty-fold, and we are looking to doubling that in the next twelve months." --- (NSC, press release, 2024/05/07)

Effects of fuel price fluctuations on operations

Fuel price fluctuations significantly impact railroad operations, as evidenced by CSX and UNP reporting decreased fuel expenses due to lower prices. CSX noted a $11 million reduction in fuel costs, while UNP highlighted a 14% decline in fuel expenses, underscoring the operational benefits of reduced fuel prices.

"Fuel costs decreased $11 million primarily resulting from a 4% decrease in locomotive fuel prices, as efficiency gains were largely offset by the impact of higher volume." --- (CSX, sec filing, 2024/Q2)

"Excluding last year’s one-time labor payment, cost per employee in the second quarter increased 4% as we continue to drive for better overall efficiency. Fuel expense in the quarter declined 6% on a 5% decrease in fuel prices from $2.86 per gallon to $2.73 per gallon." --- (UNP, earning call, 2024/Q2)

"Railway operating revenues declined due to a decrease in average revenue per unit, driven by lower fuel surcharge revenue, adverse mix of traffic, lower intermodal storage revenues, and decreased pricing, partially offset by higher volumes." --- (NSC, sec filing, 2024/Q1)

"CSX Q2 2024 Form 10-Q p.36 CSX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Results of Operations Revenue decreased $23 million primarily due to lower fuel recovery, decreases in other revenue, pricing declines in export coal due to the impact of lower benchmark rates and lower trucking revenue." --- (CSX, sec filing, 2024/Q2)

"Fuel expense in the quarter declined 14% on a 13% decrease in fuel prices from $3.22 per gallon to $2.81 per gallon." --- (UNP, earning call, 2024/Q1)

Government infrastructure investments and railroad capacity

Government infrastructure investments are driving railroad companies to enhance capacity through strategic investments. Norfolk Southern and Union Pacific are focusing on infrastructure projects and modernization to support growth, while CSX emphasizes service enhancements. These initiatives are crucial for meeting increasing demand and improving operational efficiency.

"Clearly, their plan is to install a CEO ordered to reverse Norfolk Southern's recently instituted corporate strategy to maintain a resilient workforce and to invest more in infrastructure to grow the railroad's capacity long term." --- (NSC, press release, 2024/04/02)

"And then as far as capacity is the railroads built and other than maybe in a very few small areas, we will continue to invest like we have because of what we see in growth and new plants coming in place over the next couple of years that we have to get ahead and a lot of that is in that crescent from New." --- (UNP, conference, 2024/06/25)

"In addition, management is committed to investments that promote profitable growth, including projects supporting service enhancements and productivity initiatives, which includes investments in locomotives and freight cars." --- (CSX, sec filing, 2024/Q1)

"Investing strategic capital to support regions of our network with economic growth is also in motion. The State of Alabama is an example where our investments include terminal and mainline infrastructure projects that support customers as they invest and expand their businesses." --- (NSC, earning call, 2024/Q2)

"In addition, the plan includes investments in growth-related projects to drive more carloads to the network, certain ramps to efficiently handle volumes from new and existing intermodal customers, continued modernization of our locomotive fleet, and projects intended to improve operational efficiency." --- (UNP, sec filing, 2024/Q1)

Technological advancements in railroad operations

Technological advancements in the railroad industry are driving operational efficiency, safety, and modernization. Leaders from Norfolk Southern and Union Pacific emphasize the importance of implementing new technologies and enhancing collaboration to meet growing demand and improve reliability and productivity.

"Accelerating Performance with Operations Expert John Orr As he has demonstrated many times throughout his nearly 40-year career in the railroad industry, John's leadership will enhance execution and accelerate the implementation of our operating plan." --- (NSC, press release, 2024/04/02)

""The Big Boy locomotive symbolizes the pivotal role railroads played in shaping our nation's history, and the technological advances we have witnessed within our industry," said Union Pacific CEO Jim Vena." --- (UNP, press release, 2024/04/10)

"As we look forward, we continue to see significant opportunities across the globe in demand for new locomotives, modernizations, and digital technologies as our customers invest in solutions that continue to drive reliability, productivity, safety, and fuel efficiency." --- (WAB, earning call, 2024/Q1)

"We share the commitment and over the last 16 months have implemented many enhancements and technologies to make our railroad even safer." --- (NSC, press release, 2024/06/25)

"You need that the more efficient you can be and the more you look at how you work those customers in the both railroads in an efficient manner and you collaborate on bringing on business that we're able to grow, Ken, makes a whole bunch of sense." --- (UNP, conference, 2024/06/25)

Environmental regulations and sustainability trends

Railroad companies are increasingly prioritizing sustainability in response to environmental regulations. Norfolk Southern aims for a sub-60% operating ratio while ensuring safe, sustainable practices. CSX has been recognized for emissions reduction, highlighting the industry's shift towards integrating environmental, social, and governance factors into operations.

"We will close that margin gap with peers. We will deliver a sub-60% operating ratio in the next three to four years, and we will do it at a safe, sustainable manner that recognizes our current operating environment and brings key constituents, including our shareholders, customers, employees, and regulators, along with us on our mission." --- (NSC, earning call, 2024/Q1)

"particularly in areas such as PT, which you have alluded to as well as the rents -- and can you maybe talk to some of the sustainability of the current trend line because it was quite a bit of a delta versus what we've seen lately as we move forward from here?" --- (UNP, earning call, 2024/Q1)

"Being named by USA TODAY as a leader in emissions reduction is the latest in a growing list of recognitions earned by CSX for its sustainability programs and environmental performance." --- (CSX, press release, 2024/05/30)

"plan into the meet the commercial needs of today. I am highly confident, highly confident that we’ll achieve the targets and we will do it in a way that’s sustainable and we will do it in a way that fosters growth and we are on the path today. We are well underway. So, that increases my confidence." --- (NSC, earning call, 2024/Q1)

"The analysis includes environmental, social and governance factors, such as renewable energy usage, community impacts, and brownfield site reuse." --- (CSX, press release, 2024/04/15)

Future outlook on global economic trends and implications

The future outlook for the railroad industry remains cautiously optimistic, with companies like Union Pacific and CSX noting no immediate adverse trends affecting operations. However, concerns about economic conditions persist, emphasizing the need for strategic resource allocation to capitalize on emerging market opportunities.

"Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets, as of the date of this filing, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity." --- (UNP, sec filing, 2024/Q2)

"• future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity." --- (CSX, sec filing, 2024/Q1)

"First, in the past, is there any way to quantify, if there was any, any potential volume impact from the distraction, if you will, of the last several months, any customers who maybe had some negative muscle memory from cutting to bone and putting in contingency plans ahead of final certainty. And then the second part of it would be for the future." --- (NSC, earning call, 2024/Q2)

"Given the hazy economic outlook, can operating ratio improve sequentially? Operator: Our next question is from the line of Tom Wadewitz with UBS." --- (UNP, earning call, 2024/Q2)

"It's underpinned by the value of safety and it creates growth opportunities because you're as you have your resources properly allocated, if you responsibly deploy them, you're able to then respond to marketplaces like emerging opportunities either in a spot or a growing market." --- (NSC, event transcript, 2024/04/10)

Global supply chain disruptions and their effects on rail

Global supply chain disruptions have prompted rail companies like Union Pacific and CSX to adapt by enhancing service metrics and optimizing network efficiency. Both companies see opportunities to regain lost business and improve rail-centric solutions, indicating a proactive approach to navigating these challenges.

"And then in terms of coming back to the rail, your service metrics are up. And clearly, there's a flywheel effect there, but what are your customers telling you they need to see those that maybe took business away before they would bring that business back." --- (UNP, earning call, 2024/Q1)

"I think we’re well-positioned to adjust as we have in the past, when these events happen, temporarily. But, like you mentioned, there’s opportunities probably for some longer haul, business should, we see a disruption on the East Coast and some more volumes that would traditionally move east local." --- (CSX, earning call, 2024/Q2)

"In fact, there’s a recent customer where we’re kind of bundling that opportunity together and allows us for us to work together in a white boarding session to really look at their total network and how we can make that real more rail centric over time. So, those are exciting things." --- (CSX, earning call, 2024/Q2)

"We’re eliminating these unproductive handlings even though in some cases it will result in higher overall dwell. On the flip side, we’re spending a considerable amount of time evaluating our network infrastructure to identify opportunities that will increase the efficiency of certain yards and reduce the dwell going forward." --- (CSX, earning call, 2024/Q2)

Labor market trends and workforce challenges in railroads

Labor market trends in the railroad industry are characterized by significant union representation, with approximately 17,800 of CSX's 23,400 employees being union members. Recent collective bargaining agreements by Norfolk Southern cover 55% of its workforce, while Union Pacific reports improved productivity despite a 5% reduction in employees, highlighting ongoing workforce challenges.

"Early agreements made with nine unions over the past two weeks cover approximately 55% of railroad's total union workforce ATLANTA, Aug. 30, 2024 /PRNewswire/ -- Ahead of the Labor Day holiday, which celebrates the achievements of American workers, Norfolk Southern Corporation (NYSE:NSC) is proud to announce it has reached tentative, five-year collective bargaining agreements with five labor unions in addition to the four announced last week." --- (NSC, press release, 2024/08/30)

"LABOR AGREEMENTS Approximately 17,800 of the Company's approximately 23,400 employees are members of a rail labor union." --- (CSX, sec filing, 2024/Q1)

"Workforce productivity improved 5% and 3% in the second quarter and six-month periods of 2024, respectively, as average daily car miles remained relatively flat and employees decreased 5% and 3%, respectively, compared to 2023." --- (UNP, sec filing, 2024/Q2)

"Looking at it from a holistic perspective, but a very laser focused approach to operations is how we're going to get there and building a team of capable railroaders, 1st and second layer capable next generation railroaders to be able to sustain it is why it's so important to do it at the right pace to take on assessment, fine tune as we go, make pivotal changes as we need, but ultimately aligned to creating more growth opportunities, better service and high accountability for how we use resource." --- (NSC, event transcript, 2024/04/10)

"And so you're going to see a clear return to headcount labor productivity in the second half of the year." --- (CSX, earning call, 2024/Q1)