Railroads Benefit from Economy’s Doldrums

After a year’s worth of modest optimism regarding the economy, shippers again have a distinctly pessimistic expectation of economic growth. In the latest Freight Pulse study, conducted by equity research firm Morgan Stanley with MH&L, shippers’ view of the economy earned a score of 4.8 out of 10.0 (the higher the score, the stronger the economy, with 5.0 indicating “no change”). This is the lowest score in the Freight Pulse series since March 2008, during the height of the recession, when respondents gave the economic outlook a score of 4.7.

Back in March 2011, Morgan Stanley analyst William Greene reported that shippers were expecting “continued, robust volume growth,” but he now sees that “shippers across the board have tempered volume and pricing expectation on account of the softening economy.” The responses, from about 500 U.S. and Canadian shippers, point to higher fuel prices, tightening capacity, easing volume growth and rate increases. The Freight Pulse survey suggests, Greene notes, “that rails could gain market share from trucks throughout the year.”

As the most economical mode of motor carriage, truckload is also the mode most susceptible to tightening capacity. Naturally enough, then, shippers expect truckload rates to rise higher, on average, than any other mode, with the exception of rail, which costs less than truckload but is seen as somewhat less reliable in terms of service. In the current economic climate, however, shippers are more inclined to stick with the railroads no matter what.

Even as the railroads have increased their rates (and a hike of an additional 3.6% is expected from Freight Pulse 22 respondents), shippers nevertheless have done little to change their distribution networks in response. When asked, “What have you done in an effort to reduce railroad spend?” the most frequent responses were either “we have not made any changes and are paying the higher rail rates” or “we have moved our freight to another railroad.”

Rates Rise as Economy Sours Mode Rate Increase Volume Increase (large shippers/small shippers) (large shippers/small shippers) Intermodal 2.5%/3.0% 2.8%/2.6% Truckload 3.4%/3.1% 3.3%/1.6% Regional LTL 2.2%/3.0% 2.0%/1.2% National LTL 2.5%/3.0% 1.4%/5.0% Rail* 3.6 % 3.3 %

*large and small shippers combined

Source: Freight Pulse 22, conducted by Morgan Stanley with Material Handling & Logistics

Forecasts reflect expectations for freight rate and volume increases in the third and fourth quarters of 2011.