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Commentary: What Is The Long-Term Outlook For Rail Carloads?

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Commentary: What Is The Long-Term Outlook For Rail Carloads?

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

Over the past decade, U.S. rail freight carload volume hasn't met strategic expectations. Railcar traffic appears to be declining as a competitive share of U.S. freight service.

Freight rail traffic grew significantly between 2000 and 2006, but then it plummeted during the Great Recession. And 2009 was a very bad year for the major North American railroads in terms of rail carloads. Coal, which at that time made up nearly half the railroads' carloads, was down 11.1%, and the second-largest category, chemicals, fell 11.2%.

Carload freight recovery started as the overall economy slowly recovered – but then coal led two declines in 2012 and again around 2015 and 2016.

Figure 1

Railroad data graph courtesy of the AAR.

Intermodal – which is not covered in this column – is the sort of glamorous rail mode to follow. However, hands down, carload traffic typically has higher traffic margins than intermodal. Here are the best yield carload units to watch:

  • Chemicals
  • Plastics
  • Hazardous materials
  • Liquified natural gas and crude oil
  • Metallurgical coal and certain types of thermal coal are still very profitable in selected markets
  • Automobiles and small trucks (moved on bi-level and tri-level side-shielded railcars)

Traffic like coal might continue to decline in annual volume. But the last coal shipments are decades from now. There is still a large mass being moved each year.

The history of past rail traffic shows, importantly, that railroad traffic can often be sustained profitably even as the volume and market shares drop. The real danger is that occasional unplanned and badly overlooked events like the Great Recession can result in significant downturns that last for several years.

A strategic volume decline can actually be sustained over perhaps a two- to three-decade period. In part, this is because even as traffic drops the track structure has a long physical life if prudent maintenance is performed.  

Few railroad economists see a repeat like the very sudden collapse of the mighty Penn Central five decades ago. Yet, considering logistics changes in our nation's economy, it is prudent to consider the outlook for rail carload traffic.

Evidence suggests that carload freight doesn't serve a lot of the changing economy.

That includes general merchandise products like:

  • Electronic components
  • Ecommerce and parcel and express traffic (more truck and intermodal)

This type of freight grew typically by more than one-third over the past decade. Carloads are not the usual mode.

On the bulk commodities level, recent volume losses included:

  • Metallic ores and concentrates
  • Waste and scrap
  • Printed products and paper products
  • Lumber

Some of these carload groups lost between 25% and almost 40% of volume. On the plus side, crude oil moved by rail tank cars increased significantly beginning a little over a decade ago.

Environmentalists and some public policy planners still ask – "Could there be a coming massive expansion away from trucking into carload rail?"

Physically, and financially, that might be impractical. Why? There are just too many places where industrial and heavy commercial land development has occurred over the past 50+ years that are not serviced by rail tracks. 

Furthermore, few railroads or governments are currently funding capital expenditure projects to build out those tracks. Such building runs about $4 million per track mile for what is often viewed as a speculative carload benefit.

Someone must sign the checks for such a track connectivity program.

Have they? The environmental benefits for society have been documented. Yes, some projects like Chicago CREATE and the Alameda Corridor have been built. But other proposed large-scale projects from the Houston urban rail restructuring at more than $3 billion to the I-95 Corridor recommended rail freight projects are not funded.

Table 1 shows both actual historical traffic volume changes (as ton-miles) and growth prospects for several projections out towards 2025. The growth rates are very small.

Table 1 – Comparison using 10-year growth outlooks for rail freight expressed in ton-miles 

SOURCE Period Actual or Forecast Ton-Mile % Change
Class 1 RR data 1990 – 2000 Actual 4.2%
Class 1 RR data 2000 – 2010 Actual 1.5%
FAF US government  (no Intermodal)  2015 – 2025  Forecast  1.5%
AEO (NEWS) Scenario 2015 – 2025 Forecast 1.0%

Despite some positive 2025 outlooks, the reality is that between 2003 and 2007, most rail industry outlooks expected rail ton-miles in the U.S. market to significantly expand; expand much more so than the 2015-2025 outlooks in Table 1.

The most recent evidence shows that actual ton-miles are dropping.

Table 2 – Selected years – changes in railroad U.S. freight in trillions of ton-miles  

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1.777 1.532 1.691 1.729 1.713 1.741 1.851 1.738 1.585 1.675

Source: U.S. government BTS data tables  

Without returni+ng coal traffic, the outlook for rail ton-miles is a continuing gradual decline in ton-miles instead of the decade-ago increasing pattern above two trillion ton-miles.

The economic challenges of intermodal growth via short-haul distances between traffic markets less than 500 miles apart were previously covered:  https://www.freightwaves.com/news/commentary-will-short-haul-intermodal-rail-ever-work and are not repeated here.

Wrap up market view and challenges/opportunities

Given the carload uncertainty, it is possible that between 2025 and 2030 that all-in intermodal market forms might reach near 60% or better of total revenues as well as units.

The impact on ton-miles is harder to calculate. Overall rail ton-miles are expected to decline. Environmental goals that expect rail ton-miles to reach towards 2.5 to 3 trillion ton-miles are not realistic without breakthrough traffic change. 

However, there are still some in public agencies that have an outlook for rail ton-mile growth (shown in the following graph): 

Figure 2 – Actual and projected long-range freight ton-miles by mode and selected rail commodities. The outlook needs to be reassessed.

Source: TRB report – 2015. See references at end of this commentary

Figure 2 shows that railroad freight ton-miles were projected to increase at a rate of just 1.3%. In contrast, truck ton-miles were expected to increase at a rate of 2.6%.  Hybrid intermodal, or transloading, was projected to grow at a rate of 2.9%.

Regardless of which outlook one favors, at these rates rail carloads will lag badly compared with trucking growth.

Of strategic importance, we are not seeing evidence of a large enough traffic drop to suggest a "going out of business" pattern for rail carload volume. Railroads still move a lot of cargo.

Table 3 – Year-to-date as of December units moved in U.S. market (in millions) & % changes 

   2015  2016  2017  2018  2019  % 18-19 2019% versus 2015
Total Carloads 14.20 13.03 13.40 13.64 12.97 -4.9% -8.7%
Carloads excluding coal  9.07  8.93  8.99  9.23  8.97  -2.8%  -1.1%
 Total carloads & intermodal   27.62   26.24   27.12   28.11   26. 71   -5.0%   -3.3%

  Source: AAR January 10th Rail Indicators

Fred Frailey, a retired Trains Magazine investigative reporter, pointed out recently what a critical step function traffic loss might look like. He selected Union Pacific routes for his comparison.

Table 4 – Estimated changes on selected UP main line routes – not all corridors shown here

 Example Corridor  Previous Daily Trains High  Reduced Daily Trains % Market Demand Change
Chicago – Clinton, Iowa   58 41 -29%
Nebraska 3-track coal region 137 77 -44%
Central California 14 14 Same
LA – El Paso, Texas 44 39 -11%
Denver – Salt Lake via Moffat 18 2 >85%

Source: Trains Magazine Rail Blog in 2019

This data speaks in an easier to understand business language of trains per day changes. If there is to be rail growth, track capacity isn't as big of a hurdle as once thought.

Carloads are still good business, but only selectively growth-prone. Be observant about the challenges please. 

As always, what is your rail carload outlook? 

Selected references:

  • Transportation Research Board – Special Report #318 – Modernizing Freight Rail Regulation – Washington, D.C., 2015.
  • For projections of national rail freight traffic, consult: eight Analysis Framework (FAF); http://faf.ornl.gov/fafweb/Extraction1.
  • Image Sourced from Pixabay

Posted-In: Freight Freightwaves Logistics Railroads IndustryNews Commodities Markets General

 

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