Key Growth Drivers in the Railroad Industry

Economic Factors Influencing Railroad Growth

Economic factors influencing railroad growth include disciplined capital spending, volume increases, and resilience to economic recovery. Companies emphasize the importance of investing in efficiency and technology, while external factors like government policies and global supply chain disruptions also play critical roles in shaping the industry's growth trajectory.

"Clearly, as we’re able to grow the business as well and do that at strong incrementals that’s going to help the margin, but the margin really isn’t the destination.The goal is to grow earnings, to grow economic profit, be disciplined around the way that we spend capital and look for opportunities to invest in things that have a high return, whether those are growth oriented projects or projects that help us to drive further efficiency gains, technology investments, capacity investments across the railroad." --- (CSX, earning call, 2024/Q2)

"So railroad growth is tied to volume. So we look at that and we'll see exactly where we end up and I don't want to get ahead to talk about this quarter, but for us a win is to be able to increase our revenue." --- (UNP, conference, 2024/06/25)

"And no one has made more progress in building a resilient railroad than NS, so that it will be able to handle the growth in traffic as the economy returns, which is inevitable in the foreseeable future..."To me, the best predictor of what a person will do in the future is what he has done in the past." --- (NSC, press release, 2024/05/06)

"governmental response to them, and technological changes; and the outbreak of a pandemic or contagious disease and the resulting effects on economic conditions, the demand environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains. The foregoing list of factors is not exhaustive." --- (CP, sec filing, 2024/Q1)

"Double-digit growth in international intermodal volume was the primary contributor to the negative mix dynamic and further compounded by an overall decline in our higher average revenue per car industrial business.Slightly positive volumes in the quarter added 50 basis points to freight revenue." --- (UNP, earning call, 2024/Q2)

Shifts in Freight Demand and Their Implications

Shifts in freight demand are significantly impacting the railroad industry, with companies like CSX and UNP noting increased conversion from highways to rail and changes in product mix affecting freight car velocity. Additionally, Norfolk Southern highlights declining volumes in the LTL market, while CSX sees growth in agriculture and chemicals despite headwinds.

"mentioned discrete headwinds, we expect it to increase over time as we efficiently convert freight off the highway while maintaining strong asset utilization and attractive returns on our capital spending. Now with that, let me turn it back to Joe for his closing remarks." --- (CSX, earning call, 2024/Q1)

"Sequentially, freight car velocity declined 6%, primarily due to shifts in product mix between our bulk, manifest and intermodal services." --- (UNP, earning call, 2024/Q1)

"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)

"It’s not guaranteed until we actually move the freight, but we’ve got a couple areas of strength between ag and food and minerals and chemicals continuing to show nice year-over-year growth. There’s some headwinds and some uncertainties out there as well." --- (CSX, earning call, 2024/Q2)

"Freight revenues from industrial shipments increased in the second quarter and six-month periods of 2024 compared to 2023 due to core pricing gains and positive mix of traffic from decreased short haul rock shipments and higher soda ash shipments, partially offset by lower fuel surcharge revenues and volume declines." --- (UNP, sec filing, 2024/Q2)

Infrastructure Investments and Expansion Opportunities

Railroad companies are prioritizing infrastructure investments and expansion opportunities to enhance safety, capacity, and operational efficiency. Union Pacific and CSX emphasize strategic investments and network improvements, while Canadian Pacific highlights significant growth from active projects in Mexico, indicating a robust outlook for the industry.

"We plan to continue to make investments to support our growth strategy, harden our infrastructure, replace older assets, and improve the safety and resiliency of the network." --- (UNP, sec filing, 2024/Q1)

"Overall, I’m satisfied we’re on the right trajectory. We have opportunities and plans in sight for our network infrastructure and as well our operations leaders’ ability to improve. Turning over to the next slide, we continue to work with Kevin and the sales and marketing team to align our operations with the needs of our customers." --- (CSX, 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)

"And with all the industrial development going on down in Mexico. We've got over 40 projects kind of active right now that will represent significant volume growth opportunities in intermodal over the next 2 to 3 years that will sort of fit right into that wheelhouse of that service into the Southeast U.S." --- (CP, earning call, 2024/Q1)

"This is a remarkable achievement by the team as they continue to generate mainline capacity for future growth. Wrapping up, it’s important to note, as we continue to implement new technology throughout our operation, we are also building new processes." --- (UNP, earning call, 2024/Q2)

Regulatory Changes Impacting the Railroad Sector

Regulatory changes are significantly impacting the railroad sector, as evidenced by improved safety metrics reported by Union Pacific, ongoing national agreements with rail unions at CSX, and discussions on regulatory panels at Norfolk Southern. Additionally, labor unrest at Canadian Pacific highlights the challenges posed by evolving labor regulations.

"The railroad reduced year-over-year serious injuries by 15% from 2022. The reportable derailment rate declined 6% compared with 2022, and over the past 10 years, track-related derailments declined 28%." --- (UNP, press release, 2024/04/29)

"As of December 2, 2022, all 12 rail unions at CSX that participated in national bargaining were covered by national agreements with the Class I railroads and CSX-specific agreements that will remain in effect through December 31, 2024." --- (CSX, sec filing, 2024/Q1)

"But I think we've got today, I think the agenda, we've got a lot of we're going to conclude with we've got a bunch of the rails, we've got our rail regulatory panel." --- (NSC, conference, 2024/05/22)

"So undeniably, fast forward to this, you have both railroads shutdown. At some point, customers as much as they need our products in Canada, they're going to get labor unrest fatigue." --- (CP, earning call, 2024/Q2)

"It takes all of us working together to impact change. Every month is Rail Safety Month. In 2009, the California State Legislature proclaimed and presented the September Rail Safety Month proclamation to California Operation Lifesaver and its rail safety partners." --- (UNP, press release, 2024/08/28)

Technological Innovations Driving Industry Efficiency

Technological innovations are pivotal in enhancing efficiency within the railroad industry. Companies like GE are introducing advanced engine technologies to reduce emissions and improve fuel efficiency, while CSX and UNP focus on operational changes and network efficiencies to drive productivity and financial returns.

"The Open Fan is the most promising engine technology to help the industry reduce emissions, designed to meet or exceed customer expectations for durability and deliver a step change in fuel efficiency.Turning to some of the key takeaways on our second quarter performance." --- (GE, earning call, 2024/Q2)

"First is Mike and the team making changes to the operating plan. Right? And a lot of those changes are driving efficiency gains, improving locomotive productivity, improving crew productivity." --- (CSX, conference, 2024/05/22)

"We are mitigating those challenges by driving efficiency in the network, which is driving stronger financial returns, and this provides confidence to start repurchasing shares in the second quarter." --- (UNP, earning call, 2024/Q1)

"This positions Norfolk Southern to become a more productive, resilient, and efficient railroad, and drive long-term value creation. Accelerating Operational Performance Operations Reporting Changes: Intermodal and Automotive Operations, previously under the company's Marketing division, is now reporting to Orr." --- (NSC, press release, 2024/04/04)

"On the merchandise side, given our service, given the value we’re providing to customers, given the efficiency we’re driving for them, we’re having really good discussions around there. And, you’re right." --- (CSX, earning call, 2024/Q2)

Sustainability Initiatives Shaping Future Growth

Sustainability initiatives are central to future growth in the railroad industry, as highlighted by Norfolk Southern's commitment to sustainable targets and Union Pacific's philanthropic focus on environmental sustainability. Both companies emphasize integrating sustainability into their operations and service offerings, reflecting a broader industry trend towards eco-friendly practices.

"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)

"Millions of people will benefit from these awards given to organizations and projects aligned with the railroad's giving priorities: safety, workforce development, community vitality and environmental sustainability." --- (UNP, press release, 2024/09/17)

"🚂🇺🇸 On #NationalTrainDay, we celebrate the power and resilience of these locomotives, our railroaders who operate them daily, and the role they play in creating a more sustainable future!" --- (NSC, Twitter, 2024/05/11)

"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)

"This recognition reflects our commitment to providing excellent service to our customers, including on-time delivery, ease of doing business, shipment integrity, sustainability, and more." --- (NSC, Twitter, 2024/05/20)

Competitive Landscape and Market Dynamics

The competitive landscape in the railroad industry is shaped by strategies focused on service enhancement and market share recovery, as seen in Norfolk Southern's approach. CSX emphasizes customer retention to maintain competitiveness, while Union Pacific highlights alliances affecting competition. Additionally, external factors like exchange rates influence market dynamics.

"Our strategy will restore service to competitive levels and use that competitive offering as a foundation to recover lost market share and deliver sustainable growth, with every 18-22 new carloads translating into a new job at the railroad." --- (NSC, press release, 2024/04/22)

"Our goal is to keep the ones we serve around for as long as we can and make them competitive into the market." --- (CSX, conference, 2024/05/14)

"Please proceed with your question. Walter Spracklin: So, I want to take a little bit of a bigger picture on the competitive environment and how you interact with your competitors, both East and West and when we were attending a recent session with the Nordic Southern campaign, they called out the CP-KCS CSX as an actual alliance." --- (UNP, earning call, 2024/Q1)

"In addition, changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar and Mexican peso) make the goods transported by the Company more or less competitive in the world marketplace and may in turn positively or negatively affect revenues." --- (CP, sec filing, 2024/Q2)

"So understanding how we interchange and how we're influenced by the Western lines and our own Eastern competitive landscape was important." --- (NSC, event transcript, 2024/04/29)