Coronavirus Takes Aim At North American Rail Traffic

North American rail traffic continues to tumble, pressured by significant drops in consumer activity as the COVID-19 pandemic takes hold globally.

North American rail volume for the week ending last Saturday slipped 16.1% to 596,710 carloads and intermodal units, compared with the same period in 2019, the Association of American Railroads (AAR) said on Wednesday. On a year-to-date basis, rail volumes were down 6.7% to nearly 9.1 million carloads and intermodal units.

Meanwhile, U.S. rail volumes fell 15.9% on a weekly basis to 429,095 carloads and intermodal units, and they slipped 8.1% for the first 14 weeks of 2020 to 6.6 million carloads and intermodal units.

U.S. rail carloads (RTOTC.USA) are down by double-digit percentages from a year ago, as are U.S. intermodal containers (RTOIC.CLASSI) and trailers (RTOIT.CLASSI). Source: SONAR/AAR

"The impact of the novel coronavirus on railroads is growing," said AAR Senior Vice President John T. Gray. "Since 1988, when our data began, total U.S. rail carloads were lower than they were last week only during a few Christmas and New Year's weeks, when rail operations are seasonally low. Part of the problem now is sustained weakness in coal carloads, but even excluding coal, carloads last week were down 13.1%. We haven't seen sustained declines of that magnitude since the Great Recession. 

With many consumers staying at home because of COVID-19, carloads for a number of commodities have dropped significantly, either because of the evaporation of consumer demand or because of slowing industrial activity.

Weekly carloads of motor vehicles and parts tumbled 82.6% last week to 4,867, with caloads down 84% from just three weeks ago. These declines made carloads of autos and auto parts  the "worst performing commodity category" of the week, according to AAR. But other commodities fell as well, including a 17.6% drop for nonmetallic minerals and a 13.7% decline for petroleum and petroleum products.

"Based on rail data, it's clear that many sectors of U.S. industry are beginning to feel the impact of coronavirus disruptions," Gray said.

Source: AAR

What's going to happen to rail volumes and equipment in the second quarter?

The Class I railroads will be kicking off earnings season next week, with Kansas City Southern KSU being the first to announce its first-quarter earnings on April 17. How the railroads will adjust their sales guidance for 2020 in light of the COVID-19 pandemic remains to be seen, but CSX Corporation CSX, Norfolk Southern NSC and Union Pacific Corporation UNP have warned the Securities and Exchange Commission that the outbreak may materially affect their financial results.

How rail volumes fare over these next several months also affects rail equipment manufacturers since they also must adjust production to projected volumes.

"Greenbrier is focused on two primary goals: protecting the safety and health of employees and preserving the economic well-being of our enterprise in this challenging environment. We are executing on the latter by increasing liquidity and sizing the organization properly in the current business environment," said Greenbrier Companies, Inc. GBX Chairman and CEO William A. Furman on Tuesday. Greenbrier announced its results for its fiscal second quarter that ended on Feb. 29.

During its earnings call, Greenbrier said it has implemented a new round of cost initiatives in response to the downturn in railcar demand that is likely to be worsened by the COVID-19 outbreak. It reduced headcount, largely in Mexico, has eliminated "nonessential" capital expenditures (capex) and is "aggressively" reducing operating expenses. Those plans include corporate travel restrictions, a hiring freeze and executive pay cuts.

Greenbrier has reduced its manufacturing footprint by idling excess capacity throughout North America, including its aftermarket wheels, repair and parts locations, FreightWaves reported. The company has slowed production rates at some facilities to keep those production lines active versus idling.

Expect intermodal volumes to fall this spring

U.S. intermodal volumes tumbled 15.7% last week to 218,184 intermodal containers and trailers as consumer spending dried up amid shelter-in-place orders across many U.S. states.

Year-to-date U.S. intermodal volume is down 9.1% to nearly 3.4 million intermodal units.

Intermodal volumes in the U.S. (RTOIC.USA), Canada (RTOIC.CAN) and Mexico (RTOIC.MEX) over the past year. Source: SONAR/AAR

"With China in the very early stages of its own recovery, whether intermodal volumes will continue to fall — and if they do continue to fall, how far — will now depend to a large extent on what happens with consumer spending in North America," Gray said.

"That, in turn, will depend on how long social distancing steps must remain in place; how well and how quickly federal and state unemployment insurance and other programs fill gaps in household cash flows; and how much the current situation causes consumers to lose long-term confidence and remain in retrench mode not just when health concerns begin to recede but, more importantly, when they have been largely resolved," Gray continued.

Other groups have expressed similar sentiments. The National Retail Federation (NRF) said on Tuesday that imports at the major U.S. retail container ports fell to their lowest level in five years in March, and that lower level is expected to continue through the early summer as the pandemic ripples across the globe and through the North American supply chain. 

"Even as factories in China have begun to get back to work, we are seeing far fewer imports coming into the United States than previously expected," NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. NRF produces a monthly report on port volumes, Global Port Tracker, with Hackett Associates.

"Many stores are closed, and consumer demand has been impacted with millions of Americans out of work. However, there are still many essential items that are badly needed, and because of store closures cargo may sit longer than usual and cause other supply chain impacts," Gold continued.

NRF and Hackett Associates warned that even though the drop in port volumes will be deeper in the first half of the year, prospects for a sustained volume recovery in the second half of the year are still largely uncertain.

"The COVID-19 pandemic is unraveling the economy nationally and globally as most of the world moves toward a lockdown that entails the closure of significant portions of both the service and manufacturing industries," Hackett Associates Founder Ben Hackett said. "The largest drop is forecast for the first half of this year, but with uncertainty about the length of the lockdown and extent of the pandemic, the second half may not be in better shape."

According to their Global Port Tracker, U.S. ports handled 1.51 million twenty-foot equivalents units (TEUs) in February, down 17% from January and 6.8% lower than February 2019. February's volumes are typically lower because of the Lunar New Year celebrations in China, although the coronavirus outbreak there extended factory shutdowns.

Global Port Tracker estimates that imports in March will be 21.3% lower year-over-year to 1.27 million TEUs. That would be the lowest level since February 2015, which is when labor disputes at the West Coast ports slowed operations. The report also forecasts port volumes to be 8.93 million TEUs for the first half of 2020, which is 15.1% lower than the same period in 2019. In contrast, earlier forecasts before the pandemic put volumes at 10.47 million TEUs.

Image: Flickr/Joe Wolf