Rail Performance Continues Strong

Railroads are performing beyond expectations, and the future looks bright, says John Larkin of Stifel Nicolaus.

In a recent report issued by the equity analyst firm, said the hurdles faced by the rail industry in 2008 may be less daunting going forward.

Addressing an often expressed concern that rials would be overwhelmed with traffic that would clog their networks as the economy improves, Larkin said “Our sense is that the railroads will not succumb to this alluring volume/efficiency trap again.” Expressing some of the highest optimism in the US domestic transport market, Larkin said, “In our view, the fundamental outlook for the railroad industry hasn't been this good since the Union Pacific and the Central Pacific were joined together at Promontory Summit in 1869 to form the nation's first transcontinental railroad.”
If there is a risk going forward, what is it? Economic re-regulation, says Larkin.

Shippers have faced sizable rate increases over the past several years, and some have been lobbying in Washington for economic re-regulation and elimination of anti-trust exemptions for the rail industry. The railroads counter arguments that rate increases have been astronomical and profits in excess of the cost of capital saying “they are entitled on behalf of shareholders to earn a rate of return in excess of their cost of capital and that they would de facto eliminate all capital projects aimed at expanding capacity if the industry were to once again become economically regulated,” says the report. The railroads further point out that increasing highway congestion, deteriorating driver demographics and lack of further productivity-enhancing alternatives suggest the trucking industry would be ill equipped to handle increased flows in coming decades.

A number of major decisions that would affect the rail industry are expected from the Surface Transportation Board over the next year or so, the report continues.

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