For the first time in the 25 years since the mode was deregulated, North American railroads have true pricing power, says a recent market outlook by equity research firm, Morgan Stanley. One factor driving this is the best volume growth the railroads have seen in the last decade. The railroads were able to push a 3.5% rate increase in the fourth quarter of 2004, but rate increases should slow in 2005. Morgan Stanley expects industry-wide rates to increase 3% to 3.5% during the year.
It’s no surprise that the railroads with the best service will likely have the strongest rate increases. Coal remains a key factor for the railroads. Based on the metallurgical coal demand, Morgan Stanley expects Canadian Pacific (CP) to improve earnings significantly in 2005. Norfolk Southern (NS) will benefit from strong intermodal demand and increased coal markets.
Rail industry revenues increased 12.8% in the fourth quarter, compared with the prior-year period. Morgan Stanley commented that the 15% pay increase for long-haul truck drivers allowed rail rates some room to increase. But much of the strength in rate increases came from tight truckload capacity which drove more long-haul trucking to intermodal. Capacity should improve over the next 12 to 18months.
As truckload capacity improves, shippers will have more choices, says Morgan Stanley, and this could leave some of the rail pricing exposed – though the analysts don’t feel it will lead to any dramatic drop in pricing. The group sticks to its 3% to 3.5% rate inflation prediction for 2005 and moderates that to a 2% to 2.5% rise in 2006.