Will Rail Service Improve In 2nd Half Of 2022?

 

The second half of 2022 is underway, and freight rail stakeholders will be watching over the next several weeks and months how the railroads untangle service issues that seemed to be persisting through June, according to data submitted to the Surface Transportation Board from the four big U.S. Class I railroads: BNSF (NYSE: BRK-B), Union Pacific UNP, CSX CSX and Norfolk Southern NSC.

The rails have been under fire in recent months from regulators, shippers and even members of Congress for deteriorating rail service in the first and second quarters of this year. COVID-19-induced absences, along with spates of bad weather and port congestion, have contributed to the subpar service. Shippers and rail unions also say that deteriorating service occurred because the Class I railroads cut headcount and power resources too deeply while implementing precision scheduled railroading, a method that aims to streamline operations.

STB in April held a two-day hearing to examine potential root causes of this year's service issues, while members of both the House and Senate recently have urged the board to respond to ongoing service issues.

The graphs below illustrate how service issues show up in data. 

The chart shows the number of intermodal trains held per week on average. Train holding is a measure of delayed departures due to congestion or the lack of a critical resource, such as available crews or locomotives. 

For instance, the number of intermodal trains that were held per week on average appears to be higher than the pre-pandemic summer of 2019 and are roughly at level with June 2021 — another month of reported freight rail service issues

Meanwhile, the number of manifest trains that were held per week on average is roughly higher compared with the same time a year ago.

Manifest trains held per day on average by week.

The freight railroads have said they have been aggressively seeking to add more employees to support market demand and bolster operations, and they have been reporting to STB the changes to their headcount levels in response to the board's order to that data. 

Railroad executives expressed optimism during quarterly earnings calls in April that the second half of 2022 could result in rail service improvements because there will be more crews available to meet market demand. The railroads say they are also seeking to bolster headcount in order to make their networks more nimble and responsive to market changes.

But a number of unknowns could come into play in the second half of 2022. From a macroeconomic perspective, the last six months could see a potential drift into a recession. 

"I am not betting on an official recession in the near term, but the most recent research pegs the risk over the next year as about one in three and it will be touch and go in 2023," said Jack Kleinhenz, the National Retail Federation's chief economist, in a Thursday press release for the trade association's monthly economic review. "In the meantime, a contracting economy short of a recession is not out of the question."

NRF said it is seeing "softer" economic data, but there are still signs of economic growth. For instance, the U.S. unemployment rate in May remained at 3.6% for the third month in a row, while retail sales, as calculated by NRF, defied expectations of dropping between April and May. The figure remained unchanged between the two months. 

An economic contraction could actually benefit the freight railroads because a drop in consumer-driven volumes could help the railroads catch up, some have argued. Higher diesel prices could also prompt conversions to intermodal rail. 

However, at the ports, particularly those on the West Coast, there is a lack of chassis and equipment, while a lack of dray and warehousing capacity is hampering the railroads' efforts to reduce congestion. 

"The largest bottleneck over the coming weeks and months will be the rail network. The rails have struggled to keep up, particularly on the West Coast (despite a hiring frenzy), and both equipment and labor continue to challenge the network. This may come at the expense of near-term intermodal growth, in our view, as severe delays are putting shippers in a bind," said Jason Seidl, transportation director for investment firm Cowen, in a Monday research note.

UP has also contended that a lack of warehouse and drayage capacity has hampered its ability to move containers more efficiently from Southern California ports.

"The last miles of the supply chain must have the capacity to take the freight once it arrives at our inland facility. That means having the necessary truck drivers to get containers to distribution centers and warehouses and having the necessary labor and capacity at warehouses to unload those containers as soon as possible and get the empty container with the associated chassis returned to the terminals," UP executives said Thursday in an article on the company's website.

 

The Class I railroads will be reporting their second-quarter 2022 financial results in mid and late July, which will likely include an update on hiring efforts as well as a progress report on when they see service returning to pre-pandemic levels. But macroeconomic uncertainties could still weigh in the background.

"Regardless of the prospect of a downturn or whether it will meet the threshold of a recession, the consumer outlook over the next few months remains favorable," Kleinhenz said. "The economy is moving away from extremely strong growth toward moderate growth, but increased income from employment gains, rising wages and more hours worked is expected to support household spending. Policy issues will likely be the deciding factor shaping the economic outlook this year and next."

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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