Rail investors hope for better 2nd half of 2022

The second half of the year could be the time when the Class I railroads rebound from their service challenges and see performance improvements because of the railroads’ springtime efforts to bolster train and engine employee ranks, investors and industry observers told FreightWaves.

The additional conductors and train engineers who will be working for the railroads in the second half of the year will “help tremendously with some of the [railroads’] ability to preserve efficiencies within the networks,” said Jeff Windau, a transportation analyst with financial advisory firm Edward Jones.

Rail service issues and the Surface Transportation Board’s response to them were prominent themes during this most recent earnings season as the Class I railroads presented their financial results for the first quarter of 2022.

“I think [the Class I railroads] showed progress through the [first] quarter but not enough to be demonstrable, so I’m not sure the second quarter is going to be lovely. … [But] I’m really hopeful for the second half,” said Tony Hatch, a transportation analyst and consultant for ABH Consulting. 

Although service issues dominated the discussion of results, the first quarter appeared to show some stabilization sequentially between the fourth quarter of 2021 and the first quarter of 2022 despite some deterioration in the railroads’ operating ratios, observers said.

“What I really hope is they can establish and show to us on a consistent level, not just once … that their trip plan compliance numbers have improved and that they’ve improved in the second quarter, not only sequentially but within the quarter, month to month. Those are the numbers that I will be looking for, that we’ll have to wait until July to see,” Hatch said. Trip plan compliance is a metric that compares the time it takes for customers’ railcars to travel end to end with an estimated time of arrival commitment. 

Other issues that affected first-quarter results were out of the control of the railroads. Those included inflation and higher fuel costs, both of which were influenced by the conflict between Russia and Ukraine. 

The automotive industry was also struggling to return to normal production levels, they said. 

“The whole Russia-Ukraine conflict has really impacted supply chains and we see some potential rerouting of supply chains for a lot of the commodities that the rails haul, whether it’s fertilizers or grains,” Windau said. “That’s going to take some time to flow through the system, but we do believe we’re going to start to see improvements [for the railroads] throughout the year.”

Although “there were no real bright spots in the earnings,” the tone of the calls was more optimistic and hopeful, with questions from Wall Street transportation analysts properly focusing on service and growth opportunities, Hatch said. 

“I saw some green shoots out there that I hope we’ll look back on and say that’s when [the railroads] began to flower,” such as growth opportunities for domestic intermodal, some industrial products and, for the short term, coal, Hatch stated. 

The movement toward supporting environmental, social and governance principles could also eventually become a revenue enhancer for the railroads as shippers seek to use rail to support shippers’ ESG initiatives, Hatch continued. The railroads have also begun to shift away from focusing on lowering OR and toward supporting growing their operations, and that move will benefit both the railroads and shippers.

While investors are hopeful that the second half of year will be an improvement from the first half of the year in terms of service and financial performance, a number of headwinds could still come into play, such as the ones seen in the first quarter: the ongoing conflict between Russia and Ukraine, inflation and high fuel costs.

But regulatory uncertainties also loom. The STB could act on some shipper-friendly proposals before the board that address rail service, such as reciprocal switching.

However, other powers within the federal government, such as the Democrat-controlled U.S. House Committee on Transportation & Infrastructure (T&I), are questioning whether STB should be given more power to address rail service concerns.

The House committee is holding a hearing Thursday during which it will interview each of the five members of the STB on how the board should respond to rail service issues. 

The concern by some within the rail industry is that the board could be given more power than what’s warranted, since the railroads don’t carry the majority of U.S. freight volumes, and the trucking and barge modes of transportation don’t face the same level of scrutiny that the railroads do.

“If you’re the railroad industry, play your usual Washington defense. Y’know, all the guys attack each other, then go have a scotch at the Capital Grille afterwards. Do that,” Hatch said. “But at the same time, you’ve got to improve your service. I mean, everything comes from that. If you don’t do that, not only do you have an annoyed House T&I committee, an annoyed STB, annoyed shippers, but you also don’t have business that your shareholders have been told is going to be coming in this new growth phase for rail.”

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