Western Railroad Discussion > American Railroads Are Already in Recession With No End in Sight

Interesting read, -Matt

https://www.bloomberg.com/news/articles/2019-10-07/american-railroads-are-already-in-recession-with-no-end-in-sight
 

Self inflicted.

Fits the Wall Street/MSM narrative that there will be a recession someday, never mind the unemployment rate is lowest is 50 years,  personal wages higher, etc. Buried deep in the article is the fact that the economy is good. Car loads are down compared to 2018 after they increased for two years. They have never go up continuously forever.

BB

Scrap metal is at it's lowest price since 2004  It's always the first thing to drop and the first thing to pick up when the economy gets going again.  Mark my words, things are about to get rough.

Dave

I think trucking is taking a bite out of intermodal.  I had to ship 130 handcar wheels last week from our contracted wheel factory in Illinois.  The cost to ship them was $825 for a cross country LTL truck, 5 day shipment. I could have saved $40 shipping by a consolidated intermodal rail carrier, but my broker said it would take an extra 5-7 days.  With this kind of competition I can't see how the railroads can compete.  Intermodal is being hammered, coal shipments down because of power plants are finding natural gas more cost effective than coal, and agricultural shipments down do to tariff and weather.  Then there is the ever declining carload business that has been dwindling for decades.

 

Todd Clark
Canyon Country, CA
Trainorders.com

Best quote I ever heard from someone in the industry-- "No one is shipping by rail because they want to."
 

It is, especially in the east.
https://www.freightwaves.com/news/intermodal-freight-continues-shift-to-east-coast-benefiting-trucking

webmaster Wrote:
-------------------------------------------------------
> I think trucking is taking a bite out of
> intermodal.  I had to ship 130 handcar wheels
> last week from our contracted wheel factory in
> Illinois.  The cost to ship them was $825 for a
> cross country LTL truck, 5 day shipment. I could
> have saved $40 shipping by a consolidated
> intermodal rail carrier, but my broker said it
> would take an extra 5-7 days.  With this kind of
> competition I can't see how the railroads can
> compete.  Intermodal is being hammered, coal
> shipments down because of power plants are finding
> natural gas more cost effective than coal, and
> agricultural shipments down do to tariff and
> weather.  Then there is the ever declining
> carload business that has been dwindling for
> decades.
>
>  

Captain Obvious.

ShortlinesUSA Wrote:
-------------------------------------------------------
> Best quote I ever heard from someone in the
> industry-- "No one is shipping by rail because
> they want to."
>  

Best quote of the day.

CS

Posted from Android

bmarti7 Wrote:
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> Fits the Wall Street/MSM narrative that there will be a recession someday

Why would Wall Street bad mouth the current president?  The got huge tax cuts from him.  They don't really think a Trillion dollar a year deficit is bad, do they?  Non of them will need Social Security when they retire.

Brian

The fact that railroads are, in what is a generally booming economy, losing market share can be attributed to three interrelated factors:

1.  Railroads, as they currently exist, are best-suited to carry bulk commodities--grain, coal, etc.  In that mix, coal and grain are both experiencing dowturns in traffic.  The reasons for the decline, especially in coal, have been beat to death on this forum.

2.  Railroad management has been steeped in "retrenchment mode" for most of the last three-quarters of a century.  The management mantra has been "We can't compete in that market (whatever that market might be) so we reduce capacity, don't spend money on marketing to that market, don't try to really serve it, and try to survive by cutting costs and eliminating 'excess' capacity."

3.  As I've posted about a hundred times before, it is nearly impossible for railroads to compete in markets where they have to go head-to-head with a trucking industry that receives massive indirect taxpayer subsidy.  Much of the competitive advantage enjoyed by the trucking industry in many markets would evaporate if the trucking industry was paying out the actual cost of providing its services.  To be sure, there are some markets where trucking can beat railroads on convenience and speed, but there are many where railroad would be competitive if their competition was not subsidized.

This gets to be a chicken vs. egg argument.  Railroads can't compete against a subsidized competitor, so they simply quit trying to offer the service.  Railroad management, faced with declining traffic, has to cut costs and cut capital expenditures to survive.  That "siege mentality" further impairs the railroad's  ability to offer quality services, which means it, over time, will become even less able to compete.  

People can bluster about politics, but they usually miss the main point.  It is this: the circumstances in which the railroads have found themselves in the last three-quarters of a century is a classic case of what happens when a private business is forced to try to compete against a semi-socialized business receiving a direct or indirect taxpayer subsidy.  Why this is so difficult for people to understand or accept escapes me.  In simple terms, imagine this:  Business X has to cover all of its expenses and pay a return of and return on its capital out of its revenues.  Its only source of revenue to do that comes from what price it can sell its product.  Now, Business Y comes along that has, say, 20% of its expenses subsidized by the taxpayers.  Business Y can choose to a) charge its customers less for its product, b) provide better product to its customer at the same price as Business X, c)  provide a better return on capital to its investors or invest more capital in growing its business or being more competitive.  One other dark side of this "closet socialism" is that, to the extent that Business Y captures more market share, employs more people, etc., it also becomes more politically powerful--that is, able to lobby more effectively to receive more subsidies and more favorable regulatory treatment.  That the railroads can even servive in this caustic environment of skewed transportation policy is a testament to the fact that they remain much more labor and energy-efficient than their trucking competition.

The Achilles heal of the trucking industry is labor costs and fuel costs.  Regarding the former, the trucking industry has balanced its books on labor costs by embracing independent truckers that often work for about minimum wage if they realistically account for their costs, and by squeezing salaries and benefits of trucking company employees (including non-union employees, many of them recent immigrants).  The current shortage of truck drivers is a good indication that the industry has gone about as far as it can in cutting labor costs.  In fuel costs, there aren't many fuel efficiency improvements that can be made--the easy stuff has all been done.  Far more so than the railroads, the trucking industry is very vulnerable to labor cost increases and very much more vulnerable to fuel cost increases.  We currently enjoy historically low diesel fuel prices when expressed in inflation-adjusted dollars.  That helps the economy in general, but it benefits the trucking industry much more than it does the railroads because of the trucking industry's fuel-inefficiency compared to rail.  Cheap diesel fuel prices won't last forever.  In fact, if current worldwide demand projections hold, at some point in the not-too-distant future, diesel fuel prices (and gasoline prices) will likely began to rise at a rate outpacing general inflation.  That, over time, will alter the transportation landscape, likely benefiting rail.  Long-term investors, like Warren Buffett, have figured this out. 

There is also a shortage of commercial truck drivers. How much of that is due to inferiority on the railroads part, or former drivers finding other, better work in the current economy probably warrants its own discussion thread. Some of the drivers I’ve interfaced with recently didn’t look like they were there because they wanted to, but more like their parole officers weren’t giving giving them much of a choice.

Desmond Praetzel, “4451 Puff”

4451Puff Wrote:
-------------------------------------------------------
> There is also a shortage of commercial truck
> drivers. How much of that is due to inferiority on
> the railroads part, or former drivers finding
> other, better work in the current economy probably
> warrants its own discussion thread. Some of the
> drivers I’ve interfaced with recently didn’t
> look like they were there because they wanted to,
> but more like their parole officers weren’t
> giving giving them much of a choice.
>
> Desmond Praetzel, “4451 Puff”

Pretty much proves my point.  There are trucking companies that pay their drivers well, but many others simply can't--the revenue just isn't there to support it.  Things are getting especially tough for the independents.  Everything that they have to buy to operate gets more expensive, and the amount that they can charge is usually pretty static, at best.  Not surprisingly, the quality of drivers is declining.  On the railroad side of things, train crews--for all of the privations that they must endure--are paid pretty well.  Railroads have a fairly high labor cost per employee, but they require far fewer employees per ton of freight moved.  Where the railroads get hammered is the fact that they usually have to pay nearly the full cost to maintain their right-of-way, while the truckers' "right-of-way" is maintained by the government, with the truckers only paying a fraction of the maintenance costs in taxes and fees--with numerous studies showing that the taxes and fees the trucking industry pays doesn't even cover the costs that the trucks themselves inflict on the roads.

It is my studied opinion that the US is headed for a serious transportation crisis, most likely not too many years in the future.  Our transportation system is structurally screwed up to the point that it will not be ultimately sustainable without major changes.  But no one even wants to talk about that . . .

I've said this in other related threads, and alluded to above, but I'm convinced that this is all intentional by the carrier's as we start national labor agreement negotiations (in November).

The carriers are using PSR, or in the case of BNSF, elements of it, as a vehicle to drive away "sacrificial lamb" business (mostly carload business), so they can claim depressed earnings and furlough employees to scare the crap out of the rank and file who fear for their jobs, with the goal of reducing resistance to whatever piece-of-crap contract they slap down in front of us that have tons of concessions by labor, and none from the carriers.

Then, if that doesn't work, Plan B will be to take it to arbitration, where with the current administration's right leaning, corporate-friendly judges, the carriers are confident in prevailing.

As usual, the labor unions are acting surprised and are being reactionary instead of learning from history preparing for all of this a long time ago. *sigh*

It's a game as old as the industry itself and it's going to get ugly.

If the railroads are so concerned about a recession etc, it would make sense for employees to seek warrants or options on company stock.

There's a reason why management pays itself in stock rather than cash.

Posted from Android

Thanks WW. Much useful info in your posts. d

trainjunkie Wrote:
-------------------------------------------------------
> I've said this in other related threads, and
> alluded to above, but I'm convinced that this is
> all intentional by the carrier's as we start
> national labor agreement negotiations (in
> November).
>
> The carriers are using PSR, or in the case of
> BNSF, elements of it, as a vehicle to drive away
> "sacrificial lamb" business (mostly carload
> business), so they can claim depressed earnings
> and furlough employees to scare the crap out of
> the rank and file who fear for their jobs, with
> the goal of reducing resistance to whatever
> piece-of-crap contract they slap down in front of
> us that have tons of concessions by labor, and
> none from the carriers.
>
> Then, if that doesn't work, Plan B will be to take
> it to arbitration, where with the current
> administration's right leaning, corporate-friendly
> judges, the carriers are confident in prevailing.
>
> As usual, the labor unions are acting surprised
> and are being reactionary instead of learning from
> history preparing for all of this a long time ago.
> *sigh*
>
> It's a game as old as the industry itself and it's
> going to get ugly.

I remember reading about the last contract and how many people were upset about it.  In a group I eavesdrop in they were talking about all the railroad unions banding together to fight what they believe the carrier is going to offer and how many of them would be willing to strike this time around if necessary.  They felt it was time to take a stand.  A now or never point.  They promised each other they would immediately begin to lay the ground work towards that goal.  I've been watching that group and nothing has been done by the rank and file that I can see.  I feel bad for them because nothing that I can see has changed.  It's right back to pointing fingers at each other (that's great solidarity right there!), blaming the unions (they have a few points there) and screeching about the politics of it all and when that starts the conversation is over except the shouting and fighting.  It's a head shaker to me.  Having said all this, it appears to me that this round of negotiations is going to be more of the same.  I have to wonder why and feel saddened at the loss of solidarity.  Most people out there working the job have never been on a strike, walked a picket line, been to a union meeting or had to look out for each other.  I wish them well and I hope they are successful in getting much of what they want.